Demergers—an introduction for corporate lawyers
Demergers—an introduction for corporate lawyers

The following Corporate guidance note provides comprehensive and up to date legal information covering:

  • Demergers—an introduction for corporate lawyers
  • Key features of a demerger
  • Why carry out a demerger?
  • Types of demerger
  • Statutory demerger—dividend in specie
  • Liquidation demerger
  • Capital reduction demerger
  • Scheme of arrangement demerger
  • Reasons for choosing a particular demerger structure
  • Meaning of demerger terms used

A demerger is a transaction whereby a business carried on by a company within a group is taken out of that group and run under separate management but with all or some of the same shareholders as previously.

The specific features that distinguish a demerger from other types of transaction are:

  1. preservation of the business

  2. preservation of shareholders, and

  3. no consideration paid

These attributes are considered separately in more detail below.

Key features of a demerger

Preservation of business

As noted above, a demerger is the separation of the activities of a company (or group) into two or more companies or groups. For example, a trading company might be demerged so that, after the transaction, the trading activities are carried out in two different companies. An example was the demerger of the old British Gas group into Centrica, a domestic gas supply company, and an exploration and production group, BG Group plc.

Preservation of shareholders

A shareholder (X) may own a company that carries on two very different activities and decide that the activities should be carried on in separate companies. A demerger can be effected in order to achieve this (Figure 1), so that after the demerger X is the shareholder of two companies, having previously been the shareholder of one company.

$1

Alternatively, two shareholders, X and Y, might own a company and