For anyone with questions about a spinoff transaction, I found some very good information unbiased to FITX. It cleared a few things up for me.
Spin-off transactions at a glance
January 11, 2011
By Jeralin Cardoso
Spin-off transactions can take on many forms, but the end result is the same: a corporation takes a subsidiary, division, or part of its business and separates it from the parent company by creating a new, independent, free-standing entity. In the classic spin-off transaction, a publicly held corporation distributes the stock of a subsidiary to its stockholders in the form of a pro rata dividend. Following such distribution, the stockholders will own stock in two publicly held corporations.
Some of the key reasons why a corporation may decide to engage in a spin-off transaction include:
•Improve management’s focus on the corporation’s core business while allowing the non-core organizations to obtain the resources and management attention needed to develop and realize full stockholder value.
•Shed businesses that are no longer wanted and no longer fit within the parent corporation’s business plan.
•Obtain separate financing and independently develop capital expenditure and liquidity plans.
• Eliminate competition and conflict problems that plague conglomerates operating several different businesses.
• Incentivize officers and employees of disparate business lines by allowing management of those divisions to implement appropriate employee compensation packages without the friction and administrative burden created by having differing employee compensation metrics within the same organization.
Spin-off transactions are just one of the many ways a corporation can dispose of a business unit or subsidiary. The main advantage is that it may qualify for tax-free treatment under Internal Revenue Code Section 355, which is the only way to divest assets on a tax-free basis. If a spin-off transaction is tax-free under Section 355, neither the parent corporation nor the parent’s stockholders will recognize a gain or a loss in the transaction. In addition, many times a spin-off transaction is conditioned upon the corporation receiving a tax-free ruling from the Internal Revenue Service. Another advantage is that stockholder approval is generally not required under applicable state laws.
While there are several benefits of engaging in a spin-off transaction, it’s also important to understand that it’s not a capital-raising transaction and it could result in one or both of the new corporations becoming financially weaker in the beginning. Additionally, before a parent corporation can complete a spin-off distribution, the organizations must engage in reorganization transactions to ensure that both corporations have the assets needed to conduct business after the separation. The parent corporation is responsible for deciding how to allocate liabilities between the two corporations and determine which employees will stay with the parent and which will be assigned to the spun-off corporation. Lastly, the parent corporation is tasked with choosing the directors and officers for both entities.
Before a spin-off transaction is complete, there are several securities law requirements that must be satisfied, including filing a Form 10 to register the subsidiary’s stock under the Securities Exchange Act of 1934, as amended, and the filing of an information statement with the Securities and Exchange Commission, the "SEC". The filed Form 10 needs to be declared effective by the SEC and the spun-off corporation’s stock must be approved for listing on a securities exchange. Additionally, charter documents and corporate governance documents that are appropriate for a public corporation will need to be in place for the spun-off corporation prior to the completion of the transaction.
From start to finish, a typical spin-off transaction is likely to take at least six months. The parent corporation needs approximately two to three months to plan for the transaction, solve structuring problems, seek a tax-free ruling from the Internal Revenue Service, and prepare the SEC filings. In a complex transaction, the planning process is likely to take much longer. Once the Form 10 is substantially complete, it can take the SEC approximately two months to review and provide comments. Once the SEC reviews the filings and the corporation responds, the SEC rules require at least twenty days to pass between the mailing and distribution of the information statement and the completion of the transaction. A spin-off transaction is complete upon the mailing of the stock certificates representing the stock in the spun-off corporation to the stockholders of the parent corporation.
Despite a corporation’s best intentions, spin-off transactions and other alternative business separation transactions are not always successful. If one of the corporations subsequently collapses, prolonged and acrimonious litigation is a real possibility. Making decisions about whether to go forward with a spin-off transaction requires careful consideration of the economic underpinnings of the transaction and the reorganization transactions that are required to ensure both corporations are equipped with the necessary resources to thrive as independent entities upon the completion of the deal.
Ms. Cardoso is an associate at the Del Mar Office of Sheppard Mullin Richter & Hampton LLP and works as a public securities attorney. jcardoso@sheppardmullin.com
Spin-off transactions at a glance
January 11, 2011
By Jeralin Cardoso
Spin-off transactions can take on many forms, but the end result is the same: a corporation takes a subsidiary, division, or part of its business and separates it from the parent company by creating a new, independent, free-standing entity. In the classic spin-off transaction, a publicly held corporation distributes the stock of a subsidiary to its stockholders in the form of a pro rata dividend. Following such distribution, the stockholders will own stock in two publicly held corporations.
Some of the key reasons why a corporation may decide to engage in a spin-off transaction include:
•Improve management’s focus on the corporation’s core business while allowing the non-core organizations to obtain the resources and management attention needed to develop and realize full stockholder value.
•Shed businesses that are no longer wanted and no longer fit within the parent corporation’s business plan.
•Obtain separate financing and independently develop capital expenditure and liquidity plans.
• Eliminate competition and conflict problems that plague conglomerates operating several different businesses.
• Incentivize officers and employees of disparate business lines by allowing management of those divisions to implement appropriate employee compensation packages without the friction and administrative burden created by having differing employee compensation metrics within the same organization.
Spin-off transactions are just one of the many ways a corporation can dispose of a business unit or subsidiary. The main advantage is that it may qualify for tax-free treatment under Internal Revenue Code Section 355, which is the only way to divest assets on a tax-free basis. If a spin-off transaction is tax-free under Section 355, neither the parent corporation nor the parent’s stockholders will recognize a gain or a loss in the transaction. In addition, many times a spin-off transaction is conditioned upon the corporation receiving a tax-free ruling from the Internal Revenue Service. Another advantage is that stockholder approval is generally not required under applicable state laws.
While there are several benefits of engaging in a spin-off transaction, it’s also important to understand that it’s not a capital-raising transaction and it could result in one or both of the new corporations becoming financially weaker in the beginning. Additionally, before a parent corporation can complete a spin-off distribution, the organizations must engage in reorganization transactions to ensure that both corporations have the assets needed to conduct business after the separation. The parent corporation is responsible for deciding how to allocate liabilities between the two corporations and determine which employees will stay with the parent and which will be assigned to the spun-off corporation. Lastly, the parent corporation is tasked with choosing the directors and officers for both entities.
Before a spin-off transaction is complete, there are several securities law requirements that must be satisfied, including filing a Form 10 to register the subsidiary’s stock under the Securities Exchange Act of 1934, as amended, and the filing of an information statement with the Securities and Exchange Commission, the "SEC". The filed Form 10 needs to be declared effective by the SEC and the spun-off corporation’s stock must be approved for listing on a securities exchange. Additionally, charter documents and corporate governance documents that are appropriate for a public corporation will need to be in place for the spun-off corporation prior to the completion of the transaction.
From start to finish, a typical spin-off transaction is likely to take at least six months. The parent corporation needs approximately two to three months to plan for the transaction, solve structuring problems, seek a tax-free ruling from the Internal Revenue Service, and prepare the SEC filings. In a complex transaction, the planning process is likely to take much longer. Once the Form 10 is substantially complete, it can take the SEC approximately two months to review and provide comments. Once the SEC reviews the filings and the corporation responds, the SEC rules require at least twenty days to pass between the mailing and distribution of the information statement and the completion of the transaction. A spin-off transaction is complete upon the mailing of the stock certificates representing the stock in the spun-off corporation to the stockholders of the parent corporation.
Despite a corporation’s best intentions, spin-off transactions and other alternative business separation transactions are not always successful. If one of the corporations subsequently collapses, prolonged and acrimonious litigation is a real possibility. Making decisions about whether to go forward with a spin-off transaction requires careful consideration of the economic underpinnings of the transaction and the reorganization transactions that are required to ensure both corporations are equipped with the necessary resources to thrive as independent entities upon the completion of the deal.
Ms. Cardoso is an associate at the Del Mar Office of Sheppard Mullin Richter & Hampton LLP and works as a public securities attorney. jcardoso@sheppardmullin.com
