Question

Under what circumstances would you expect a corporation to perform a:

Split-off

Spin-off

Split-up

Discuss several advantages and disadvantages for each type of D reorganization and potential issues for each transaction that Company Management may discuss in approving each reorganization.

Answer 1

Solution

A spin-off can be defined as a type of divestiture in which the part of a business is dissociated and created as a separate firm, by issuing new shares. This form of corporate divestiture is also known by the name spin-out or starburst.

The term ‘split-off’ is used to mean a method of corporate restructuring, in which the shares of a company’s subsidiary or unit are transferred to the shareholders, in return for the equity of the parent concern. Hence, it is similar to stock repurchase, wherein the parent company buys back its own shares.

In a split up, basically all the stock gets disbursed to the controlled company and the distributing company is liquidated. The distribution that happens from the controlled company to the distributing company can be either pro rata or non pro rata. If none pro rata occurs, then basically two separate corporations are created whereas if it was pro rata then a brother sister relationship is created between the two subsidiaries.

A split-off differs from a spin-off in that the shareholders in a split-off must relinquish their shares of stock in the parent corporation in order to receive shares of the subsidiary corporation whereas the shareholders in a spin-off need not do so.

To qualify for tax-free treatment, the transaction must meet the conditions of Section 355 described above. Additionally, Section 355(e), known as the anti-Morris Trust rule, limits the sponsor's investment to less than 50% of the vote and value of Spin Co's outstanding stock when the investment is made in connection with the spin-off.

A split-off is viewed as a sale for accounting purposes with a recognized gain or loss equal to the difference between the market price of the new Split Co stock issued and Parent Co's inside basis in Split Co's assets. Because the split-off is tax-free, provided that it meets the requirements set forth by Section 355, there is no corresponding gain or loss recognized for tax purposes.

A debt-for-equity swap is mechanically similar to a debt-for-debt swap, except that Parent Co swaps its Spin Co notes for Parent Co stock. Thus, the debt-for-equity swap resembles a stock repurchase rather than debt retirement.

From the announcement of the spin-off until the date it is completed, the parent accounts for the disposition of its subsidiary in a single line item on its balance sheet called Net Assets of Discontinued Operations, or similar. The parent also segregates the net income attributable to the subsidiary on its income statement in an account called Income from Discontinued Operations, or similar.