Business spin-off is the term used to mean the division or partition of a business in order to create a new one. In it, the main company gives up and divests some of its assets and liabilities to form a new company or capitalize and grow an existing one. A division in no case implies the disappearance of a company.
Definition
Excision is the operation by which the assets of a company are fully or partially divided to transmit, without any liquidation, the resulting part or parts to as many pre-existing companies or that are created for this purpose. (Pérez-Fadón, p. 37)
Types of excision
According to Pérez-Fadón (p.37) they are the following:
- Total excision. An entity divides its total equity into two or more parts and transfers them en bloc to two or more existing or new entities, as a result of its dissolution without liquidation, by attribution to its partners, in accordance with a proportional rule, of values representing the capital stock of the entities acquiring the contribution. Partial excision. When an entity segregates one or more parts of its corporate assets that constitute branches of activity and transfers them en bloc to one or more newly created or existing entities, receiving in exchange representative values of the latter's capital stock, which must be attributed to Your partners. Excision of majority stakes. When an entity segregates a part of its equity,constituted by participations in the capital of other entities that confer the majority of the capital stock in them, and transmits it to another entity, newly created or already existing, receiving in exchange values representing the capital of the acquiring entity, which must be attributed to Your partners
Basic excision figures
There are three, namely:
- Incorporation. It occurs when the part that is separated passes to an already constituted company. Fusion It occurs when several companies give up part of their assets to create a new company. Internal or own split. It occurs when a company adds part of its patrimony to constitute a new one.
How it is handled legally
It is legally established that there is a split when:
- A company uses part of its resources and transfers them in a package or in several parts to one or more existing companies or allocates them to the creation of one or more companies.A company is separated without involving its liquidation by dividing its properties in two or more parts that are transferred to existing companies or new companies.
Spin-off actors
In the legal figure of excision there are two players:
- Splitting company. Company (s) that generate (s) the operation. Beneficiary company. It is the result of the partitioning process.
Reasons for spinning off a company
Galindo (p.113) explains them like this:
The most famous cases of division have had some relation to the succession of companies, generally family-owned, not incorporated as a Public Limited Company or with registered shares. The personal disagreements or interests between the heirs often lead them to spin off the company. In other cases, the disagreement between the founding partners has had the same result. Normally, these cases do not respond to a convenience related to the efficiency or profitability of the new companies or some problem of the size of the initial company.
Among the few existing examples of "strategic split", we can cite as causes, institutional barriers, such as the establishment in different countries or the use of incentives for the creation of companies or reduced size. Often times, the creation of subsidiaries responds to the same reasons as the division: diversification of risks and limitation of liability and, above all, capital leverage.
For this reason, this operation would not avoid market concentration, but could respond, among others, to image reasons, management economies, avoidance of control costs, externalization of risks and losses and a very important financial one: Search greater capital leverage in current investments, without losing control or the ability to borrow. This is due to the fact that the entry of new minority shareholders in the spun-off companies (subsidiaries) allows the group to reduce the investment in said company to a strict percentage of control, as a holding company. In this way, the parent company does not have to expand the volume of its investment to own a company with a total asset much greater than the notional value of its control portfolio.
In the own division, the patrimonial separation can suppose a separation of interests between the shareholders or a confluence between them, that is, the shareholders can distribute the resulting companies or they can distribute the shares of the new companies among all the shareholders, in proportion to the aliquots of the original company. Sometimes, the skillful efforts of the administrators can have as a factual result the expulsion of unwary shareholders towards a company that will fail, in benefit of the consolidation of certain majority and ultimately indisputable interests.
In the following talk, Humberto Della Corte shares the experience and the main consequences derived from splitting a family partnership.
Bibliography
- Galindo Lucas, Alfonso. Fundamentals of company valuation.Pérez-Fadón Martínez, José Javier. The family business. Taxation, organization and family protocol. CISS, 2005
