Company reconstructions: shareholder: demergers
A demerger can take the form of a scheme of reconstruction. The main guidance on demergers is at CT17250. Part of the company’s business can be transferred to a new company which issues ordinary shares to the shareholders of the original company. Under Sch 5AA para 4(3) the business to be demerged can include a controlling holding of shares in another company which is carrying on a business (see CG52709). The shares in that controlled company are transferred to a new company. The new company then issues shares to the shareholders in the original company. These demergers are usually called indirect, or three cornered, demergers, see CT17280.
Where the issue of shares under the reconstruction took place before 17 April 2002, the conditions were stricter, see CG 52732.
Mr Parker and Mr Gillespie each hold 50% of the ordinary share capital of Bop Ltd. It carries on 2 businesses, performing and publishing. To “ring fence” liabilities of performing, it is decided to demerge the publishing business to a newly incorporated company (Rhythm Ltd).
Mr Parker and Mr Gillespie, are each issued with 50% of the ordinary share capital of Rhythm Ltd. The 1st condition of Sch 5AA is met. The publishing business is transferred to Rhythm Ltd. The whole of the business of the original company, Bop Ltd, is carried on by the successor companies, Bop Ltd. and Rhythm Ltd: therefore the third condition of Sch 5AA is met. As indicated at CG 52720, assume that the second condition of Sch 5AA is met.
TCGA92/S136 applies to the issue of shares by the new company. TCGA92/S139 applies to the transfer of the part of the undertaking or of the 75 per cent subsidiary to the new company.