There are many reasons a large company may decide to divest itself of a subsidiary or division. Perhaps the subsidiary or division is underperforming, and shedding it is a way to make the company more profitable and elevate valuation and stock prices. Perhaps a subsidiary is simply too diverse from other operations and is creating a drain on management and other resources because of those disparities. Or, in some cases, there is no problem with the division or subsidiary, but the parent company is in need of additional cash resources, either to recover from a downturn or to pursue development in an area that is higher priority than the subsidiary.
Whether you are seeking to shed a subsidiary or division or you are considering purchasing one that is being offered by its parent company, an experienced commercial lawyer can help ensure that you fully understand the impact of the purchase or sale, negotiate on your behalf, protect your rights and ensure that the final agreement reflects your intentions.
Considerations for Companies Divesting Themselves of Subsidiaries and Divisions
The first consideration for a company that is planning to shed a subsidiary or division is whether it makes more sense to sell that unit or to spin it off. In a spin-off, the shareholders of the parent company retain ownership of the subsidiary, but it is established as a separate legal entity. One advantage to this approach is that since the same shareholders retain ownership in the same proportion, there is no “income” for tax purposes.
An outright sale may result in capital gains tax, greatly reducing the return on the sale. Similarly, the sale of some or all of a corporation’s assets may result in negative tax consequences, depending on the structure of the parent company.
That is, however, just one consideration among many when it comes to making the best decision about divesting your company of a sub-unit. When the parent company is a publicly-traded corporation, the decision-making process also requires consideration of the impact of each possible course of action on public perception and valuation of the parent company’s stock.
There are also practical considerations relating to the operation of the subsidiary or division and how those operations interact with the parent company and other divisions.
Shared Resources Among Divisions
One key consideration when breaking out a division for sale is the degree to which the operations of that division are intertwined with the larger business and/or other divisions. Some commonly shared resources include:
- Intellectual Property
- Management and Staff
- Physical Space
When shared resources are significant, the seller must thoroughly assess those resources, how they will be allocated upon separation, and the cost of any necessary replacements.
Services Provided by or to the Subsidiary
Similar to shared resources, different divisions or subsidiaries of a larger company often provide products or services to one another. When this is the case, it is important that those areas are identified before sale, and that the agreement includes provision for a continued relationship or transition period to avoid disruption of the operations of either entity.
Considerations for Companies Purchasing Subsidiaries or Divisions
The concerns set forth above are equally relevant to the purchasing party, although from a different perspective. For example, if a division that is to be sold shares leadership with another division or with the company as a whole, it will be important for the purchasing entity to know who among the leadership team will stay with the larger company and who will be attached to the acquired company.
Similarly, the purchaser will need not only a complete inventory of equipment, licenses and other resources included in the acquisition, but will also want to compare that list with the resources currently in use to determine whether the unit will be fully functional upon sale or whether certain elements will have to be replaced after the separation.
Work With an Attorney Experienced in Acquisitions and Sales
An attorney who is well versed in the various means of acquiring and/or divesting entities can be an invaluable resource if you are considering either selling off a subdivision of a company or acquiring a subsidiary or division being offered by another corporation. With the numerous and complex issues to be considered, weighed and negotiated, there is no substitute for a knowledgeable guide and advocate like the commercial attorneys in our superior firm. Contact KPPB LAW today.