Spin Off Split Off Split On Essay

586 WordsMar 26, 20123 Pages
17-24: NOTE: All of these are called Type D Reorganizations: Spin Off: In a spin-off, the parent company distributes to its existing shareholders new shares in a subsidiary, thereby creating a separate legal entity with its own management team and board of directors. The distribution is conducted in a way such that each existing shareholder receives stock of the subsidiary in proportion to the amount of parent company stock already held. No cash changes hands, and the shareholders of the original parent company become the shareholders of the newly spun company. Results can lead to: Unlocking hidden value Establish a public market valuation for undervalued assets Undiversification – Divest non-core businesses and sharpen strategic focus. Promote equity research coverage and ownership by sophisticated institutional investors, either of which tend to validate the Spin Company as a standalone business. Create a public currency for acquisitions and stock-based compensation programs Improve performance by better aligning management incentives Reduce bureaucracy Break up a business in response to anti-trust concerns Divest "crown jewel" assets to make a hostile takeover of Parent Company less attractive Tax Implications are: A spin-off is usually tax-free under Internal Revenue Code (IRC) Section 355, meaning that no taxable gain is recognized by either the parent entity or the parent's existing shareholders. To qualify for favorable tax treatment, the spin-off must meet the requirements of Section 355: Tax Regulations say for this to happen: The parent and subsidiary must both have been engaged in an "active trade or business" the entire 5 years preceding the spin-off, and neither entity may have been acquired during that period in a taxable transaction. Both the Parent and Spin must continue in an active trade or

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