There are many reasons why shareholders or directors may want to split up a company or a group of companies. Some of the most common reasons for splitting a business are:

• A breakdown of relationships between shareholders
• To allow the business to diversify into new areas
• As a precursor to a sale of one part of the business
• To de-risk part of the business where one part is high risk
• To decrease the costs and administrative burdens of operating a complex group structure

Some well-known businesses have recently considered separation for various commercial reasons.

Reasons for splitting a business

Wickes & Travis Perkins: Wickes demerged from the Travis Perkins group earlier this year. The motivation behind this was to allow Travis Perkins to focus on a distinct part of its business (construction) and to cut down operating costs associated with the group structure. In the months following, both companies have reported a significant rise in their revenues.

GlaxoSmithKline: GSK has recently announced plans to spin off its consumer healthcare division and retaining the pharmaceuticals division. The goal is to unlock value for the GSK’s investors by increasing profits in both divisions.

Although, both of the examples are public companies, demergers and other types of separation are equally well suited to private limited companies.

Demerging a Company

Splitting a company is often referred to as a “demerger” although there are various ways to achieve a separation. In order to identify which route works best for your company, we would recommend taking both legal and tax advice before embarking on a separation. If the separation is not structured correctly from both a tax and legal perspective, this could result in a hefty tax bill or other unintended liabilities down the line.

If you are thinking about preparing for a separation of your business, you will need to think about the business as a whole. Some questions you will need to consider, include:

• What will happen to any valuable assets such as intellectual property, property and machinery? Will these remain with one part of the business or will both parts need to use them?
• What will happen to customers and suppliers of the business?
• Will the two new companies be able to compete with one another?
• Does the company have any outstanding bank loans or other liabilities that will need to be paid off or restructured?
• Will any of the management team or employees transfer to the new company?

How can we help with your demerger or company split?

Our Corporate team regularly assist clients with separating their businesses, via demergers and other forms of corporate reorganisation. Our experience allows us to advise businesses on the best options for them, taking into account legal, tax and commercial considerations.

If you are considering splitting your business, please contact:

> Yavan Brar on 01189 899713 or
> Matthew Lea on 01189 898155 

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to your own particular matter before action is taken.