Types of exempt demerger
An exempt demerger can be either:
(a) direct (ie the parent company pays a dividend in specie of the shares of the subsidiary that is to be demerged), or
(b) indirect (ie the parent company declares a dividend which is satisfied by the transfer of a 75% subsidiary (or the assets of a trade) to a Newco). In consideration for the receipt of the shares in the subsidiary (or the trading assets) Newco issues shares to the shareholders of the parent company
It is not possible to transfer a trade directly to the shareholders of the distributing company: it must remain within a company and if the intention is to demerge a trade or division, the indirect route must be followed.
The direct demerger is the most straightforward means of effecting a demerger.
Assume we have a holding company with two subsidiaries. We also have two separate groups of shareholders. The plan is to take the two subsidiaries out from under the holding company so that Subsidiary 1 is held by shareholder group 1 and Subsidiary 2 is held by shareholder group 2.
The structure before any demerger is as follows:
A direct demerger will involve the parent company paying a dividend in specie of the shares of the subsidiary that is to be demerged, resulting in a structure like this:
An indirect demerger involves a parent company (Holdco) declaring a dividend which is satisfied by the transfer of one of the subsidiaries