Demergers

Question 1

What are the main two types of demergers that we can have & briefly explain only how these would look

Answer 1

This would be a Statutory demerger and could take place in the form of a direct or indirect merger:

Direct merger - this would be where the shareholders of the company now have DIRECT ownership of the subsidiary company - being mindful that the typical group structure would be linear i.e. the group would go shareholder > Company X > Company Y

Indirect merger - in this case, we would be looking where the group is going to be setting up a new company of which either the shares or the trade & assets will be transferred to

Question 2

What nuances would we want to consider in respect of the decision making for whether a direct or indirect demerger is done.

Answer 2

We want to be mindful that for demerging purposes, there is not a lot of tax shelters for a direct merger outwith the normal SSE rules

However, with indirect transfers, this would be beneficial when we are only thinking about removing a trade or where we are conscious that SSE might not be applicable as we can benefit from various restructuring provisions

Question 3

What would be some of the things that we would need to consider if we have been told that we are making a direct demerger

Answer 3

1. The company which will be disposing of the shares and effectively giving it to the shareholders, needs to have enough distributable reserves in order to make the dividend in specie
2. The shareholders may be charged on this distribution unless they meet the conditions setout in CTA2010 s.1076
3. The company disposing of the shares may be charged on the gain of the disposal of shares unless they meet the conditions for SSE to apply
4. The company of which the shares are being disposed of, will be deemed to be leaving the group and therefore a de grouping charge may arise(unless the SSE applies)
5. As this will be deemed to be an intragroup transfer and not a disposal, it will be chargeable under stamp duty taxes

Question 4

If we have been told that an indirect demerger was to be taking place, what would be some of the factors that we would need to consider

Answer 4

1. The shareholders would be receiving a distribution in the form of shares in a company (being the new holding company) but will be treated as exempt if the conditions under CTA2010 S.1077 are met
2. The company which is disposing of the shares or trade & assets will not be charged on the transfer as it will be deemed to be a no gain no loss transfer under the TCGA 1992 s.139 restructuring provisions.
3. As the company will be leaving the group, they would normally be charged under a de grouping charge. however they will be treated as exempt under the statutory demerger provisions TCGA1992 s.192.
4. The company Newco which has been setup, will not be subject to stamp duty on the purchase of new shares under the restructuring provisions nor will they be charged under VAT as it will be a transfer of going concern (TOGC)