When the going gets tough, the tough get restructuring

Tougher economic environments often see a greater amount of restructuring within businesses, including a demerger. There are a number of reasons why a company may want to demerge:
- to unlock shareholder value (sometimes enabling an exit by one party);
- to separate business divisions that operate in different markets or that lack a common  strategy;
- to divide a business between shareholders or in preparation for a sale out of the  group; or
- to demerge part of a business which is subject to regulatory requirements that may  hinder the operation of the remainder of the business

Current economic conditions are placing increasing pressure on companies to review their activities and, where appropriate, to restructure their businesses.  Recent months have seen us assisting clients with various types of restructuring and this is a trend we expect to continue, given economic forecasts for the medium term.  There are four main types of demerger structure:
- Direct demerger (direct dividend). This is effected by the distributing company paying a dividend to its members of shares in the subsidiary company to be demerged
- Indirect demerger - a variation on the direct dividend route: the distributing company declares a dividend which is satisfied by the transfer of the subsidiary to be demerged to a newly formed company (Newco), in consideration for which Newco issues shares to the distributing company's shareholders
- A demerger involving the voluntary winding up of one or more companies in the group, using a process permitted by section 110 of the Insolvency Act
- A scheme of arrangement under section 895 of the Companies Act 2006 (statutory demerger)

There are a number of practical considerations to be taken into account in identifying the appropriate method of restructuring and to ensure it is available and appropriate for the particular company in question.  Which route to choose will usually be determined by the tax implications involved in implementing the restructuring.  The tax costs of a demerger could be prohibitive but important tax reliefs exist if the demerger qualifies as a statutory demerger or "scheme of reconstruction" under the relevant tax legislation.  Equally a demerger is
likely to have an impact on share awards and options held by employees.  Exactly how such share schemes will be affected will vary depending on the terms of the share schemes and the details of the demerger and will need to be considered if the company has such a scheme.

A key feature of many demergers is the payment of a dividend by the "distributing" company, which gives rise to a number of technical issues that need to be addressed:
- Distributable profits. The distributable profits position of relevant group companies will need to be checked.  Whether or not there are distributable profits must be determined by reference to "relevant accounts" (usually the last audited accounts of the distributing company) which must comply with specified requirements under the Companies Act 2006 (“2006 Act”). Failure to follow the 2006 Act requirements can leave a member liable to repay the distribution (or the offending part) if he knows, or has reasonable grounds to believe, that the distribution contravenes the statutory rules
- Distributions in kind.  If a company wants to distribute a non-cash asset to shareholders (for instance shares in a subsidiary in a demerger), the passing of these assets constitutes a distribution and can only be made if the company has sufficient distributable profits.  It has always been clear that the transfer of an asset for market value is permitted. The 2006 Act clarified the position regarding the transfer of assets for consideration that is below market value
- Shareholder approval.  If the demerger involves a dividend in specie, shareholder approval will invariably be required under the distributing company's articles of association

Demergers can be a useful tool to enable companies to restructure their business and, as always, early advice from your trusted legal adviser will enable you to make use of these schemes with confidence. 

For advice and assistance on demergers and restructuring contact Tracey Dickens 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.