UK Law and Practice Contributed by: Carly Gulliver, Giles Distin, David Anderson, James Dawson, George Danczak and Elvan Hussein, Addleshaw Goddard
5. Spin-Offs 5.1 Trends: Spin-Offs
Key Requirements The key requirements for spin-offs and subsequent mergers include overcoming regulatory hurdles, including competition and national security. The National Security and Investment Act 2021 (NSIA) is increasingly relevant for the technology sector, due to: • key components being manufactured for defence or used by the government; and • interest in UK technology companies from Chinese investors. Early analysis will need to be done on these two regu- latory aspects to ensure the subsequent merger is not blocked; otherwise, significant time and cost could be wasted. Early engagement is possible with the regula- tors, however, which UK law firms are able to assist with. 5.4 Timing and Tax Authority Ruling Timing for Demergers It is typical to seek HMRC tax clearance on a demerg- er, although not compulsory. It typically takes 30 days to receive a response from HMRC to a clearance application. This response can take the form of further questions, which then further elongates the timescale. Accordingly, it is prudent to factor in six to eight weeks Increasingly, clients are choosing not to seek clear- ance owing to timing difficulties or perceived risk. Bespoke insurance is becoming a popular alterna- tive to traditional clearance. Typically, the demerger also requires (post-completion) applications to secure stamp duty relief. These are perennially delayed and it often takes more than six weeks to hear back from HMRC. 6. Acquisitions of Public (Exchange- Listed) Technology Companies 6.1 Stakebuilding A potential bidder may consider building up a stake in a target company in connection with a UK takeo- ver, whether before or during its takeover offer. Whilst stakebuilding is not uncommon in UK takeovers, it for the full clearance timetable. Seeking Clearance From HMRC
Spin-offs are more common within bigger technology groups, to enable innovation to continue at a quicker pace (thus maximising revenue generation ability). Key drivers for these spin-offs in the UK tend to be the technology arms growing at a more rapid pace and needing greater scale, autonomy and more focused delivery expertise (through a specialised management team) to enable them to innovate quickly, which can- not be delivered under their current company struc- ture. 5.2 Tax Consequences Demergers and Requirements The typical structure for a spin-off in the UK would be by way of “demerger”. This is a complicated area of the UK tax code and requires specialist advice to ensure that: • there is no taxable distribution; • no capital gains arise; and • as far as possible, the spin-off is neutral from a stamp duty perspective. Tax Treatment on Demergers Whilst there are statutory exemptions to ensure no distributions arise, these are narrowly cast and often lead to demergers being structured as a capital reduc- tion demerger, particularly if the spin-off precedes a sale to a third-party purchaser. However, when prop- erly structured, a demerger should occur tax neu- trally, provided the ultimate beneficial owners of the demerged entity are the same prior to the demerger taking place. 5.3 Spin-Off Followed by a Business Combination Spin-Offs and Mergers The UK is a common law jurisdiction and there is noth- ing preventing a company from spinning-off and then undertaking a merger. However, this is not particularly common, given the tax exemptions available where a company sells a wholly owned subsidiary.
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