CTM17280 - Distributions: demergers: methods of demerging

CTA10/PART23/CHAPTER5 provides for two methods of demerging:

• the ‘direct’ route, CTA10/S1076, and
• the ‘indirect’ route, CTA10/S1077.

In the ‘direct’ route, the trading activities that are to be the subject of the demerger are those of a 75 per cent subsidiary. A company is a 75 per cent subsidiary of another company if at least 75 per cent of its ordinary share capital is directly or indirectly owned by that company. The parent company (the distributing company) simply distributes its shares in the subsidiary to its own ordinary shareholders. This breaks the group relationship. The shareholders of the parent become direct owners of the subsidiary.

In the ‘indirect’ or ‘three-cornered route’, the distributing company transfers either:

• a trade, or
• shares in a 75 per cent subsidiary,

to another company (usually a new company). In return, that other company issues shares to the shareholders of the distributing company.

There are special rules for groups of companies where the subsidiary that is the subject of the demerger is further down the group family tree.

Conditions to be satisfied

To be within the scope of CHAPTER5, a demerger must satisfy certain conditions. These seek to ensure that:

• there is a genuine division of trading activities, and
• the demerger is not a device for facilitating a partition of trading activity from investment, a change of control of a company, or tax avoidance.

Officers need to be aware of these conditions only in general terms.