Small and medium size enterprises (SMEs) can often end up with a corporate structure by chance rather than design. This can be for a whole host of reasons including as a result of acquisition, growth, and diversification. It is also possible that a structure that has always been adequate ceases to be so.
Taking advice on an appropriate corporate structure can have real benefits for a small or medium size enterprise and help streamline operations, protect valuable assets, serve to allow staff to be incentivised without the founders feeling they are risking value, improve tax efficiency, allow strategic diversification, and plan for exit.
Once a business has a trading history with value any structural changes require specialist tax and legal advice to ensure compliance with rules and tax efficiency.
What does the term ‘de-merger’ mean?
A demerger is a corporate restructuring process by which a company can split off one or more of its business units or divisions into separate, independent entities. This leads to the creation of new businesses that can (if required) have distinct management teams, operations, and assets.
Why do SMEs carry out de-mergers?
- Focus on core business and shed non-core or underperforming units.
- Protecting assets where there is significant value to protect.
- Unlock value for shareholders by separating companies that have different growth expectations or market valuations.
- Simplification of over-complex corporate structures.
- Strategic rearrangement to better represent aims and long term plans.
- Tax planning perhaps in preparation for an exit.
What are the different types of de-mergers?
It is possible to undertake a Partial or Complete de-merger.
- Partial de-merger: where only a portion of the business’s divisions, assets, or subsidiaries is divided into a separate entity. This means the original company will still have ownership over the remaining assets and business operations. A partial demerger can benefit the parent company as it allows focus on its core business while separating non-core or underperforming business units.
- Complete de-merger: This is the separation of a complete business unit or division from the parent company to create an entirely new and independent business. This type of demerger is usually used when the parent decides to completely divest itself from that particular division or business.
A common method for a de-merger is one by way of capital reduction – this type of merger involves the parent company decreasing its capital, in consideration for which the de-merged business is signed over to a new holding company that in turn issues shares to the shareholders.
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It’s important to note that de-mergers can be quite complex and require legal expertise as well as specialist tax advice to avoid delays and pitfalls. At Nelsons, we work alongside other tax and accountancy professionals to ensure a compliant and properly documented de-merger can take place.
How can we help?
Alice Rees is a Partner at Nelsons, specialising in corporate law services, including acquisitions, disposals and mergers, and company formations and reorganisations.
For further advice relating to business succession planning, please get in touch with Alice or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form.
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