Demergers refer to the transferring of one or more undertakings of the company to another company. The company to which the undertakings are transferred is called as the resulting company while the company whose undertakings are transferred is named as the demerged company.
The demergers may be of two types – split-up and spin-off. Though, technically the split-ups and spin-offs are different, the economic substance of the two is same.
In case of the split-up demergers, the company is split into two or more than two independent companies. In this case no trace of the parent company as a corporate entity is left and its place is taken by two or more independent companies.
In case of the spin-off demergers, a unit or a division of the company is spun off into another independent company.
Following the spin-off demerger, the spun off company and the parent company form two different corporate entities. Both the split-up demergers and spin-off demergers are considered as the measures to improve the corporate value of the parent and new companies by raising performance and efficiency.
The two prime reasons for gaining efficiency and improving performance by the demergers are – improved incentives and accountability and sharper focus. When a company goes for spin offs, it actually make the managerial incentives stronger and this raises the accountability. While, after going for a spin-off demerger, the parent company may focus on the business more effectively by removing the poor fit unit.
In order to attain the tax concession, the demerger has to fulfill some conditions that are:
The liabilities that are related to the undertaking that is being transferred should become the resulting company’s liabilities.
The properties of the undertaking that is being transferred should become the resulting company’s properties.
The shareholders of the demerged company who are holding the shares of value of not less than three-fourth of the company will become the resulting company’s shareholders.
The resulting company should issue shares on the proportionate basis to the demerged company’s shareholders considering the demerger.
The liabilities and properties of the undertaking that is being transferred must be transferred at the same value that appears in the account books just before the demerger.
Last Updated on : 27th June 2013