Mergers and Acquisitions (M&A) are common practice in the business world and can have some major benefits for companies looking to join forces.
But what if one or more of the shareholders in a company or companies in a group want to part ways and demerge?
In this article, Paul Longland, the latest addition to our growing Corporate & Commercial Team, outlines the demerger process; discussing the pros and cons.
What happens when a company is demerged?
One important issue which quite often arises nowadays for limited companies is the need to reconstruct or ‘demerge’ part of the company.
Demergers result in part of a business and assets being held in a separate company. This might have as its owners all the shareholders of the original company.
Alternatively, the business could also be divided between several new companies owned by different groups of shareholders.
Why do firms choose to demerge?
There are various reasons that a company may choose to demerge, including the following:
Fallings out
If the shareholders of a company have fallen out or no longer want to work together, they may choose to demerge.
This would involve the division of the business or assets into separate companies each one owned by different groups of the shareholders.
Protecting its assets
A company may want to protect its valuable investment assets against trading risks.
A demerger would allow the company to put those investments in a completely separate company.
Prepare for sale
To prepare for a sale of the part of the business that is demerged so that it is available in a separate company as required by a potential buyer.
What are the tax implications of a demerger?
A demerger can have positive tax implications for a company.
Different types of businesses or assets will be separated out as part of the demerger, making a company more tax efficient and/or compliant with regulatory rules.
What are the advantages of a demerger?
- Share prices or values can rise in both companies
- A company can focus on its own growth
- Greater control over monies and assets, as it there won’t be any sharing of money between companies or any shared pots
- A company can dissociate from the other company which may have a damaged reputation
- The company will have its own management team and board of directors, rather than have a joint/shared board
What are the disadvantages of a demerger?
- The company could, potentially, receive less favourable rates with suppliers
- A demerged company will likely have less resources than the larger merged company, so production of goods may cost more
- Demergers can, if not planned carefully, have costly tax implications for the companies or shareholders, you’ll need a legal expert to advise you and keep your costs down
Demergers - our advice
Experienced Corporate & Commercial Solicitor Paul Longland, says: “The company and tax rules are quite complicated but in recent years the laws and regulations have been simplified to facilitate these types of reconstructions, which have become relatively common.
There are various methods of achieving the required outcomes and an initial tax clearance from HMRC is often needed.
At Frettens, our specialist Corporate & Commercial Team is one of the largest in the area; and we’d be happy to assist you and your company.”
Specialist demerger solicitors & lawyers
If you have any questions following this article, or would just like to speak to an expert, you can get in touch with us here.
We offer a free initial chat for all new clients, where we can speak with directors or shareholders to discuss reconstructions of this kind.
Call us on 01202 499255, or fill out the form at the top of this page.
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