Breaking Up is Always Hard to Do

Transcription

1 24 April 2013 Breaking Up is Always Hard to Do Corporate demergers and divestments Glafkos Tombolis, Michael Cashman, Paul Garland

2 Why divest? Dispose of non-core/low value operations Pay down debt Create distributable reserves Regulatory imperative (e.g. antitrust, capital requirements for financial institutions) Internal divestment where none of the normal demerger mechanisms are available, but tax will determine feasibility 1

3 Why demerge? Intermediate step to divestment, but watch tax To facilitate tax optimal divestment Inability to divest Corporate group simplification Demerged business more valuable on standalone basis Regulatory drag Unbundling joint acquisitions 2

4 Key features Divestments Shareholders forfeit claim to future economic benefit of divested business (unless directly/indirectly receiving purchaser paper) Highly-negotiated definitive agreements in private M&A deals (warranties, tax indemnity, closing accounts, working cap adjustments) Internal due diligence and possible reorganisation - including demerger - of group prior to sale May give rise to a tax charge, unless losses are available to offset any gain or relief is available (SSE if a share sale) 3

5 Key features, cont d Demergers Shareholders continue to enjoy economic benefit of demerged business (usually on same terms as non-demerged businesses) Demerger documentation more functional than negotiated, but beware directors duties apply primarily on a per entity, not group, basis Technical company law processes risk of impugning transaction Internal due diligence of group prior to sale Important to structure demerger to avoid a current tax charge 4

6 Threshold issues Identify assets to be demerged/sold, liabilities to be retained Structuring in contemplation of a particular buyer, or type of buyer Gathering financial information Dealing with management team Contractual issues 5

7 Intellectual Property issues Identifying the IP: registered (TM, patents) and unregistered (, database). Assigning all IP used in business? Consider and held for use. Shared IP: who gets ownership? licences protecting the asset. assigning all IP exclusively used beware alternatives. Documents and know-how. Making copies? Right to request more. Removal of branding Insert footer text by selecting 'Insert - Header & Footer' / page numbers may also be taken off with this function 6

8 Threshold issues, cont d Effect on group debt financing arrangements Shareholder approval Rights of pre-emption Post-deal transition support Consider structuring to eliminate/reduce any potential tax charges 7

9 Types of demerger Direct dividend demerger Three cornered demerger Dividend Reduction of capital Section 110 liquidation demerger Part 26 (scheme of arrangement) demerger 8

10 Direct dividend demerger Shareholders Parent company Dividend of shares Non-core subsidiary The direct route involves the transfer by a company to its shareholder of shares in a 75% trading subsidiary 9

11 Direct dividend demerger, cont d Normally only works if demerging a company, not individual assets or whole businesses Distributable reserves necessary: s845 CA 2006 and residual common law May be an exempt distribution and not taxable in the hands of the shareholders No CGT as reorganisation of share capital No degrouping charge if exempt distribution Transfer of the shares is a disposal for CGT purposes unless: SSE applies Relevant losses available 10

12 Three-cornered demerger Shareholders Parent Core subsidiary Non-core subsidiary 11

13 Three-cornered demerger, cont d Shareholders (1) Dividend satisfied by transfer of sub/trade to Newco (2) Issue of shares Parent Newco Distribution agreement Transfer Core subsidiary Non-core subsidiary 12

14 Three-cornered demerger, cont d Shareholders Parent Newco Core subsidiary Non-core subsidiary 13

15 Three-cornered demerger, cont d Can demerge a business Distributable reserves again Should be treated as a tax-free share reorganisation if: the demerger is done for the benefit of the demerging activities; and is not done for tax avoidance purposes or to cease or sell the trade post demerger 14

16 Distributable reserves problem What are distributable reserves? ICAEW Tech 02/10 guidance How to create them: Sub(s) to pay dividend(s) Sell assets Reduce capital to create distributable reserves Capital contribution from other group companies Release of provision for liability/loss or impairment previously treated as realised Trade more profitably If distributable reserves still insufficient: Three-cornered reduction of capital Liquidation demerger Internal sale at market value 15

17 Three-cornered reduction of capital What is it? When used? When parent has insufficient or no distributable reserves or doesn t want to use them When demerger purpose is to facilitate sale When parent or demerging sub are not trading companies When demerging subs are not 75% subs or resident in Member State When liquidation demerger undesirable Company law: s654(1) CA 2006, The Companies (Reduction of Share Capital) Order 2008 and Tech 02/10 para 2.8B Demerger mechanism explained 16

18 Three-cornered reduction of capital, cont d Original structure Shareholders Parent Non-core Core 17

19 Three-cornered reduction of capital, cont d Incorporation of New Parent Shareholders New Parent Parent Non-core Core 18

20 Three-cornered reduction of capital, cont d Transfer of core subsidiary Shareholders New Parent Parent Core Non-core 19

21 Three-cornered reduction of capital, cont d Demerged structure - before Shareholders New Parent New Holdco Parent Core Non-core 20

22 Three-cornered reduction of capital, cont d Demerged structure - after Shareholders New Holdco New Parent Parent Core Non-core 21

23 Liquidation demerger Shareholders Issue shares Issue shares Newco 1 Parent company Newco 2 Transfer assets Transfer assets Business 1 Business 2 22

24 Liquidation demerger, cont d Complex process Costs of liquidator Scope for shareholders and creditors to object Directors statutory declaration of solvency Effect on group contracts and debt financing arrangements 23

25 Liquidation demerger, cont d No distribution for income tax purposes If liquidation is a scheme of reconstruction: No gain on transfer of assets No tax charge on shareholders SSE may be available on a share transfer Watch for potential degrouping charges 24

26 Scheme of arrangement Used to facilitate in specie, reduction of capital and liquidation demergers; not in and of itself a demerger route. Examples of use: To facilitate interposition of holdco to effect a three-cornered demerger by reduction of capital Interposing liquidation holdco in a s110 liquidation demerger where existing parent has significant actual or contingent creditors To effect partition demerger To cram down dissentient creditors or shareholders in the parent company To effect a flip over of share options into holdco 25

27 Scheme of arrangement, cont d Considerable flexibility Costs associated with court process Mitigation of implementation risk 75% approval of each class No specific tax reliefs apply, so generally structured as three-cornered demerger or combined with liquidation 26

28 Glafkos Tombolis Partner, Corporate Group dd +44 (0) Mike Cashman Head of Tax Group dd +44 (0)

29 Kemp Little LLP Solicitors Cheapside House 138 Cheapside London EC2V 6BJ Tel: Fax: Kemp Little LLP is a limited liability partnership. Registered number OC England. Registered office as shown

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