Key Considerations, Issues: A Complete Spin-Off Guide by Wachtell, Lipton, Rosen & Katz
A spin-off involves the separation of a company’s businesses through the creation of one or more separate, publicly traded companies. Spin-offs have been popular because many investors, boards and managers believe that certain businesses may command higher valuations if owned and managed separately, rather than as part of the same enterprise. An added benefit is that a spin-off can often be accomplished in a manner that is tax-free to both the existing public company (referred to as the parent) and its shareholders. Moreover, robust debt markets have enabled companies to lock in low borrowing costs for the business being separated and monetize a portion of its value. For example, in connection with its $55 billion spin-off from Abbott Laboratories in 2012, AbbVie conducted a $14.7 billion bond offering, which at the time was the largest ever investment-grade corporate bond deal in the United States, at a weighted average interest rate of approximately two percent. Other notable recent spin-offs include Penn National Gaming’s spin-off of its real estate assets into the first-ever casino REIT, Rayonier’s spin-off of its performance fibers division, Energizer Holdings’ planned spin-off of its personal care business, Gannett’s planned spin-off of its publishing business, DuPont’s planned spin-off of its performance chemicals business, Yahoo!’s planned spin-off of its stake in Alibaba, eBay’s planned spin-off of PayPal, HP’s planned separation of its PC and printer business and its enterprise business and W.R. Grace’s planned separation of its construction and packaging business and its catalyst and materials technologies business. There were 204 spin-offs announced in 2014 and 201 in 2013.
The process of completing a spin-off is complex and requires consideration of a myriad of financial, capital markets, legal, tax and other factors. The issues that arise in an individual situation depend largely on the business goals of the separation transaction, the degree to which the businesses were integrated before the transaction, the extent of the continuing relationships between the businesses after the transaction, and the structure of the transaction. For example, if the businesses were tightly integrated before the transaction and/or are expected to have significant business relationships following the transaction, it will take more time and effort to specify assets and liabilities, identify personnel that will be transferred, separate employee benefits plans, obtain consents relating to contracts and other rights, and document ongoing arrangements for shared services (e.g., legal, finance, human resources and information technology) and continuing supply, intellectual property sharing and other commercial or operating agreements. If the parent is expected to own a substantial portion of the spin-off company after the closing, careful planning is also required with respect to the composition of the new company’s board, independent director approval of related-party transactions, handling of corporate opportunities and other matters. In addition to these separation-related issues, spin-offs raise various issues associated with taking a company public, including drafting and filing the initial disclosure documents, applying for listing on a stock exchange, implementing internal controls and managing ongoing reporting obligations and public investor relations.
This guide is intended to help navigate the spin-off process, from the preliminary phases through completion of the transaction. Part II of this guide describes some of the initial planning considerations relating to spin-offs, and includes a discussion of the principal reasons for spin-offs and a comparison to other separation transactions. Part III examines a broad array of general corporate separation issues that may arise in a spin-off. Part IV discusses the transaction agreements commonly executed to implement a spin-off and govern the post-spin relationship between the parent and the spin-off company. Part V identifies the principal securities law matters. Part VI examines certain tax issues, which are critical given the tax-sensitive nature of separation transactions. Finally, Part VII reviews stock exchange listing and trading considerations. A sample illustrative timetable for a spin-off (that is not preceded by an initial public offering) is attached as Annex A. A discussion of post-spin limitations on strategic transactions is attached as Annex B.
Initial Planning Considerations
A. Reasons for Spin-Offs
There are several drivers of spin-off activity. The principal reasons often cited by companies for pursuing spin-offs include the following.
- Enhanced business focus. A spin-off will allow each business to focus on its own strategic and operational plans without diverting human and financial resources from the other business.
- Business-appropriate capital structure. A spin-off will enable each business to pursue the capital structure that is most appropriate for its business and strategy. Each business may have different capital requirements that may not be optimally addressed with a single capital structure.
- Distinct investment identity. A spin-off will create distinct and targeted investment opportunities in each business. A more “pure-play” company may be considered more transparent and attractive to investors focused on a particular sector or growth strategy, thereby counteracting the “conglomerate discount” and enhancing the value of the business.
- Effectiveness of equity-based compensation. A spin-off will increase the effectiveness of the equity-based compensation programs of both businesses by tying the value of the equity compensation awarded to employees, officers and directors more directly to the performance of the business for which these individuals provide services.
- Use of equity as acquisition currency. By creating a separately publicly traded stock, a spin-off will enhance the ability of the spun-off business to effect acquisitions using its stock as consideration.
Shareholder activism is another and more recent potential driver of spin-off activity. Shareholder activists have become a more dominant force in the corporate landscape, and many activists agitate for “value maximizing” activity, including spin-offs. Activists are often a catalyst for spin-off activity, and the rise in shareholder activism may explain some of the increase in spin-off activity.
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