A guide to demerging a company

A guide to demergers

Restructuring a company is a common practice in business.

You may find that you have outgrown your shareholders or owners and want to change your company structure, or protect your assets as your business grows. While there are many reasons why you might find yourself considering a demerger, there are plenty of steps to consider from tax implications the practicalities and legal work as part of the transaction.

In this guide, we delve deep into the ins and outs of demerging a company, providing a guide to planning a demerger, sharing demerger examples and the legal work involved to create a demerger.

What is a demerger?

A demerger is when a business that is operating as a single company decides to split and sell off parts of the business to operate independently. Parts of the company’s business, whether that’s product or service, can be transferred to another company as part of a sale transaction.

With any demerger, these transactions can be time-consuming, especially as the company and tax rules are complicated when it comes to restructuring a business. Read on to find out more.

Reasons for a demerger

There can be a number of reasons why a company decides to split up a company. From financial benefits to resolving a relationship and preparing for a sale, here are some of the reasons why you might want to demerge your company.

To refocus your business

You may want to refocus your business or capitalise on a product or service that is performing well. A demerger will help the business to concentrate on one area/department and become more productive and effective.

To separate from your team

Whether you want to separate from a business partner or shareholders because of a breakdown in relationships, or you want to work independently, a demerger gives you the opportunity to run different companies and generate your own profit from a separate business.

To reduce costs

Demerging a company is an effective way to reduce overheads and increase savings by combining resources and running the business more efficiently.

To protect investments

A demerger is a sensible option for protecting investments from trading risks. You may choose to demerge a company to put those investments into a separate company.

To prepare for a sale

Preparing for a sale of part of the business is also another reason why a demerger might happen. You may choose to sell off part of the business that is demerged so that it’s available in a separate company for someone to buy.

What are the risks of a demerger?

Demerging a company takes time and effort to ensure that all aspects are considered to avoid any potential risks. Restructuring assets or different parts of a company, as well as changing shareholders or ownership come with tax issues. While there are tax exemptions when a demerger is implemented, there are tax consequences when assets are moved around.

Demergers are prone to risk when shareholders and third-parties are involved. As the chain gets complicated, there are steps for shareholders and owners to take, as well as paperwork to confirm their approval. If the right steps aren’t taken, then the demerger can be at risk of falling through. This can also happen when third-parties aren’t involved in the process and don’t approve the paperwork in time.

Going your own way

There are several ways in which a company might decide to sell assets or parts of the business to new owners or their respective shareholders. As all businesses are unique, there isn’t a standard demerger process and there are various challenges to overcome. However, there are steps to consider to create a demerger and ensure the legal work is covered.

The first step is to outline a plan for the demerger. At this stage, it’s important to ensure that you have considered and planned for the inevitable paperwork that’s involved, including tax forms and HMRC clearance applications. A demerger involves a lot of forms and ensuring the groundworks are completed to comply with the tax laws is crucial.

Secondly, a new holding company and subsidiaries will need to be created for the demerger to actually be implemented. After this, a lot of reorganising the shareholdings and completing the filings at Companies House will need to be done to consolidate subsidiaries and transfer assets appropriately.

Other considerations include completing the Stamp Duty clearance application and finally, transferring assets to a new subsidiary. The paperwork will depend on what assets are being transferred.

Turning to the experts

At Arbor Law, our experienced team can take care of the legal work that’s involved with demerging a company. We support you through the entire process of creating a demerger. We have a team of corporate lawyers with a wealth of experience and knowledge of the legalities involved in a demerger of a company and ensuring the relevant steps and paperwork are completed to avoid being at risk against legal and tax issues.

Get in touch for legal advice and support with demerging a company. Alternatively, you can learn more about the corporate services our senior lawyers provide.