UK Law and Practice Contributed by: Federico Fruhbeck, Alice Brogi, Alex Bluett and Gisele Zouein, Gibson, Dunn & Crutcher LLP
3. Spin-Offs 3.1 Trends: Spin-Offs
ally the most common liquidity route. It may be run as an auction or bilateral negotiation, depending on market conditions, performance and investor prefer- ences. While auctions are generally preferred to max- imise value and manage single‑buyer risk, bilateral sales can deliver greater speed and certainty and may suit situations with a strong strategic buyer. Sellers (including founders) typically stand behind represen- tations, warranties and certain deal-specific liabilities (eg, tax, employment and environmental liabilities). Caps are often the purchase price for fundamen- tal warranties and 10–30% for business warranties, subject to negotiation. Warranty and indemnity (W&I) insurance is becoming the norm in sponsor-led deals to facilitate clean exits, while smaller VC or early-stage deals still rely on traditional escrow or holdbacks (typi- cally 5–15% of the purchase price for 12–24 months) aligned to warranty survival periods. In contrast, a listing is generally pursued where it is expected to generate stronger demand or a higher valuation, or where founders or investors wish to retain a material stake. In some cases, company size or competition concerns can also limit buyer univers- es, making a listing more attractive. Investors may also run a dual‑track process (pursuing both a sale and a listing) to create price tension if both tracks are credible. The London Stock Exchange is the natural venue for UK listings, including many energy and infrastructure companies. Some issuers may consider a foreign exchange (eg, the US) if expected valuation, investor base or strategic factors support it. Key considera- tions include relative valuations, capital‑raising costs, ongoing compliance burdens, peer locations and liti- gation risk. Following several years of reduced IPO activity, the UK overhauled its listing regime in 2024 to encourage more listings and growth on UK markets, with more flexible eligibility and continuing obligations that are disclosure focused (rather than shareholder- approval focused).
Spin-offs are not very common in the UK energy and infrastructure sector, as they may involve significant costs, complexity and risks. However, in recent years there have been a few spin-offs in the sector, includ- ing: • SSE’s spin-off of its retail business, SSE Energy Services, and subsequent sale to OVO Energy, a challenger energy supplier, in 2020 as part of its strategy to focus on its core businesses of renew- able energy generation and networks, and to address the regulatory and competitive challenges in the retail market; and • National Grid’s spin-off of its gas distribution busi- ness (National Grid Gas Distribution) and subse- quent sale to a consortium of infrastructure inves- tors in 2017, as part of its strategy to rebalance its portfolio and create value for its shareholders, and to comply with regulatory requirements for the separation of its gas and electricity businesses. Some of the reasons to consider a spin-off include:
• strategic realignment; • regulatory compliance; • unlocking shareholder value; • capital raising and financing;
• facilitating future M&A opportunities; • tax and financial considerations; and • managing risk profiles. 3.2 Tax Consequences
Spin-offs are generally structured in a way that ben- efits either from general tax reliefs (eg, participation and dividend exemptions) or from specific UK tax reliefs for company reconstructions and reorganisa- tions. A combination of these reliefs generally means that there is no UK tax payable either at the corpo- rate or shareholder level. The specific requirements will depend on whether the spin-off is in the form of a direct distribution or a three-cornered demerger, and whether the shareholders are individuals or corpora- tions.
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