De-mergers

Notes

De-mergers

As a company or group grows they sometimes diversify into other areas. This can cause problems.

For example:

  1. If each division has a different risk profile it could be commercially desirable to reduce the overall risk profile.

  2. If different shareholders/managers are involved in different areas of the business they may wish to split the business (sometimes known as a partition) so that they each own only the business area they are involved in.

Shareholders cannot just divide up a company or group and set up separate enterprises without incurring significant tax liabilities unless the separation falls within the conditions for either:

  • A statutory demerger, or

  • A company reconstruction using a members’ voluntary liquidation.

A statutory demerger

is the simpler of the two alternatives but the circumstances in which they can be used are limited and the conditions which need to be met are more stringent.

It can only be used to split two or more trades. It cannot be used to split out a trade from, say, a property investment business.

How it works

The mechanics of a statutory demerger are relatively straightforward, either:

  1. the shares in a subsidiary are distributed out to the members or

  2. the trade is transferred to a new company and shares in the new company are issued to the members of the old company.

Notes