Sec Requirements for Spin off

A related consideration is whether to seek a decision from the IRS on the tax exemption of the split or rather rely on the lawyer`s opinion. While in the past most public companies sought decisions, the trend in recent years has been to rely on the lawyer`s opinion (eliminating the time variable of waiting for an IRS decision). The current transaction-making environment includes significant spin-offs of established companies such as Time Warner and News Corp. This is in stark contrast to the transactions that were fashionable when the SEC issued its guidelines in the late 1990s. Most older spin-offs involved insignificant business units with few or no assets. One consequence of such projections not being disclosed to research analysts as part of a derivative transaction is that some research analysts, including analysts who already cover ParentCo, may take some time after closing before they begin reporting on SpinCo. Meanwhile, analysts will examine SpinCo, wait for SpinCo to lead the way, and create their own proprietary models. In a traditional spin-off transaction, the board of directors of the parent company (ParentCo) approves and declares a distribution to its shareholders of the shares of the company that owns the assets and liabilities of the company to be created (SpinCo) to its shareholders on a pro rata basis to form a stand-alone and independent publicly traded company. A division is exempt if the shares of the division are distributed on a pro rata basis to the shareholders of the subsidiary, which means that the founding shareholders must hold the same percentage of the parent company and the subsidiary after the split. If a division is not proportionate, the proportional stock of shareholders changes and a registration statement under the Securities Act is required. The advantages of a trading market for the issue are that it can display demand for shares of SpinCo and RemainCo and attract investors who do not own shares of ParentCo by allowing them to begin the right to receive shares of the spin-off on an issued basis.

The trading market for the issue may also reduce the volatility of SpinCo and RemainCo shares once the shares are traded regularly, and may provide liquidity for the sale of SpinCo shares by the transfer agent prior to the distribution date. In addition to identifying and transferring SpinCo`s business, ParentCo must consider SpinCo`s appropriate initial capital structure. In particular, ParentCo must determine both the nature and amount of the debt owed to SpinCo at the time of the SpinCo, which largely depends on the nature of SpinCo`s business and the reasons why ParentCo wishes to proceed with the SpinCo. For example, if ParentCo attempts to spin off its debts, it may attempt to either transfer the debt to SpinCo or get SpinCo to incur new debt and distribute the loans to ParentCo. Whether SpinCo`s new debt takes the form of a credit facility, newly issued bonds or ParentCo`s assumed debt also depends on SpinCo`s ability to access new markets for bank debt or debt capital at the time of the spin-off. Although companies must provide complete information in their filings, the SEC is not responsible for assessing the value or merits of the spin-off as an investment. As with any investment, it is the investor`s responsibility to do their due diligence before investing in a spin-off. The tax treaty has two fundamental functions. The first is to govern the respective rights, responsibilities and obligations of ParentCo and SpinCo after separation and distribution with respect to tax liabilities and benefits arising from the ordinary course of business in the period prior to the combination, including the allocation of tax attributes, the preparation and filing of tax returns, control of audits and other tax matters. The second is to ensure the tax-free treatment of the division and to assign responsibility for the resulting taxes if the division is ultimately found to be taxable. In particular, the tax agreement typically lists a number of post-rotation transactions (e.g., sale of assets, acquisition or issuance of shares of SpinCo) that SpinCo cannot complete within two years of the spin-off without first obtaining legal advice acceptable to ParentCo.

The cartel also imposes a compensation obligation on SpinCo if it results in the imposition of the spin-off, whether or not the spin-off requests an opinion. The agreement generally does not include symmetrical restrictions on ParentCo because ParentCo already has an incentive not to make the split taxable because ParentCo is liable to the IRS for the tax liabilities arising from the split. For most derivative transactions, SpinCo`s management often waits for SpinCo`s first quarterly results after the transaction closes before issuing an annual guidance. This schedule allows SpinCo`s management to review its forecasting policy and actual guidance with SpinCo`s Board of Directors, which will be replenished upon closing of the transaction. Alternatively, some SpinCos choose to publish their forecasts immediately prior to the closing of the transaction so that they can discuss the forecasts with investors on no-deal roadshows. These no-deal roadshows typically take place a few weeks before closing and during the “upon issuance” trading period (see below). It is common for ParentCo and SpinCo to file the investor file for use in such no-deal roadshows in a recent Report on Form 8-K to meet FD regulatory requirements. A traditional spin-off transaction is a distribution or dividend under state law, and the dividend declaration must comply with the requirements of the law of the state in which the parent company is organized. For Delaware companies, boards must determine that ParentCo has a sufficient “surplus” (the excess of net worth over capital) to pay the dividend. In the event of a spin-off, the dividend consists of the value of the distributed shares of SpinCo.

♦ the parent company has a valid business purpose for the division; and In a spin-off, a parent company distributes shares of a subsidiary to the shareholders of the parent company. There are many good reasons to create a business unit. For example, a spin-off could allow parent and subsidiary management to better focus on core business and more closely link equity-based incentives to employee performance. Divestitures can also facilitate financing or give a subsidiary more freedom to do business with its parent company`s competitors. Unlike IPOs, one of the advantages of a spin-off transaction is that ParentCo does not have to time “market windows” because a spin-off is a distribution of shares as opposed to a capital increase. As a result, ParentCo is able to dictate the schedule and has greater security in execution. From a governance perspective, in accordance with the registration requirements, SpinCo must have at least one independent director on its audit committee at the time of commencement of trading. Since SpinCo`s board of directors is generally not incorporated prior to the distribution date, companies should be aware of this requirement to appoint an audit committee member prior to the closing of the transaction.

As part of a traditional IPO, companies host an analyst day to share management`s financial model (including detailed long-term forecasts (i.e., three-year forecasts)) with the research analyst of each of its major investment banks so that the research analyst can create their proprietary model for the company before the investor tour begins and the transaction closes. However, in a derivative transaction, companies are not permitted to share management`s model and projections with research analysts, as sharing this information would violate the FD Regulations, which largely prohibit public companies from selectively disclosing material non-public information (NPM). ParentCo is a public company subject to FD regulation and, in most spin-off transactions, the division or spin-off segment represents a significant portion of ParentCo`s business, so the projections for that division or segment represent MNPI.