Business Demerger 101

Over time the circumstances of a company or group of companies can change. Trading companies may acquire multiple trades or investment activities, the relationships between shareholders may deteriorate, or the shareholders may wish to sell part of the business, but retain another.

These varied and changing circumstances can often give rise to the need to separate the activities of a company or group of companies. It is this process of separation that is widely known as a demerger.

A demerger may result in the separated businesses being held by the same owners as the original business, or they may take the form of a partition demerger, whereby each demerged business may be owned by only some of the original shareholders.

The decision to demerge does not necessarily have its roots in acrimonious relations between shareholders. It is often undertaken as a precursor to a sale to a party, as a means for shareholders to go their separate ways, each retaining the part of the business that is of interest to them, or simply as part of a wider estate planning activity.

Business Demerger Methodology

It is usually necessary to undertake various transactions in advance of the demerger in order to structure the business’ affairs in a manner that facilitates the actual transaction.

There are, broadly, three methods of demerging a business:

A statutory demerger

This is often the simplest form of demerger, but it requires that the company has sufficient distributable reserves.

A reduction of capital demerger

Under this method the company reduces its share capital and distributes assets of equivalent value to the shareholders. If it is organised correctly it can be highly tax efficient.

A liquidation demerger

This is also known as a “section 110 demerger”. In this instance a company is wound up and its assets are distributed. There are various advantages to this type of business demerger, particularly in relation to stamp duty land tax degrouping charges. It is necessary to appoint a liquidator in order to achieve this type of demerger.

The Importance Of Planning

In the absence of careful planning in advance of the transaction(s), a business demerger can give rise to significant tax costs. However, there are various methods of demerging which can, if carefully structured, reduce or remove the tax burden altogether. It is therefore important to take informed tax advice in advance of any intended business demerger.

In particular it is not only necessary to consider what will be split and who will own each section of the business, but also to have regard for any inter-group asset transfers that have occurred in the years leading up to the business demerger.

Furthermore, the different business demerger routes will not be available in every circumstance and it is therefore important to consider the applicability of the underlying legislation to the intended transactions in detail.

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