The information statement will also be mailed to all of ParentCo’s stockholders in advance of the distribution and spin-off. While the formal rules applicable to Form 10 are less onerous than an S-1, common practice is to include fulsome disclosure and to mimic the structure of an S-1.
Cathy A. Birkeland, Mark D. Gerstein, and Laurence J. Stein are partners at Latham & Watkins LLP. This post is based on a Latham & Watkins memorandum by Ms. Birkeland, Mr. Gerstein, Mr. Stein, Ryan J. Maierson, Pardis Zomorodi, and Alexa M. Berlin. Excel Shortcuts PC Mac List of Excel Shortcuts Excel shortcuts – It may seem slower at first if you’re used to the mouse, but it’s worth the investment to take the time and… Also refers to such contemporaneous spin-offs and is frequently translated as “side story”. One of the earliest spin-offs of the modern media era, if not the first, happened in 1941 when the supporting character Throckmorton P. Gildersleeve from the old time radio comedy show Fibber McGee and Molly became the star of his own program The Great Gildersleeve (1941–1957). In the United States, a spin-off may be executed by complying with the requirements of Internal Revenue Code section 355. The previous News Corporation’s remaining media properties were retained under the name 21st Century Fox.
Statistics For Spin
But your gain or loss on the other 12.5 shares of Eastman Chemical stock would be short-term, because your holding period was less than one year, even when the period you held the block of 50 shares of Kodak stock is included. A consequence of not being able to share such projections with research analysts in a spin-off transaction is that some research analysts, including analysts who already cover ParentCo, may take a period of time post-closing before they initiate coverage on SpinCo. During this time, analysts will diligence SpinCo, wait for SpinCo to provide guidance to the Street, and build their own proprietary models. When a corporation spins off a business unit that has its own management structure, it sets it up as an independent company under a renamed business entity. When a company creates a new independent company by selling or distributing new shares of its existing business, this is called a spinoff.
If Macy’s did spin off its e-commerce business from physical retail that could well bring a higher valuation than Saks, Morningstar analyst David Swartz said in a note last week. When brand is embraced early, a spin-off is an opportunity to remold the future, redesign the customer experience and drive meaningful change. A key factor that tends to show a possible device is a plan or intent at the time of the spin-off to sell ParentCo or SpinCo in a taxable disposition after the spin-off. ParentCo’s board must satisfy its duties of care and loyalty to ParentCo and its stockholders in making the decision to distribute SpinCo’s stock to its stockholders and satisfy itself that the distribution is a permissible dividend.
IBM said Tuesday its board of directors has approved the separation of the tech giant’s managed infrastructure services business into an independent publicly traded company called Kyndryl next month. The reality of most spin-offs is that management of both companies feels compelled to rationalize why the transaction is in their best interest. The financial community is quick to pick a winner, with the business being spun off often positioned in a less than favorable light.
Form 10 Effective Date
To illustrate how the holding period works, suppose you bought 100 shares of Kodak stock in 1990 and another 50 shares in September 1993. You received as of January 3, 1994, 25 shares of Eastman Chemical stock for the first block of Kodak stock and 12.5 shares of Eastman Chemical stock for the second block. As no fractional shares of Eastman Chemical stock were issued, your .5 share was sold as of January 4, 1994. It would be considered that you realized long-term gain or loss on the first block of 25 shares (since you add to the time you held the 100-share block of Kodak stock).
The Form 10 is an opportunity to market SpinCo’s growth story and to identify SpinCo’s competitive strengths, strategy, position in the industry, and market opportunity. In addition to serving as a marketing document, the Form 10 will also provide the basis for future investor presentations and SpinCo’s ’34 Act disclosure (i.e., Annual Report on Form 10-K), once SpinCo is a stand-alone public company. The Form 10 should not be viewed simply as a disclosure document that meets specified rule requirements, but rather as a marketing opportunity to sell SpinCo’s story to the investment community. Spin-offs are divisions of companies or organizations that then become independent businesses with assets, employees, intellectual property, technology, or existing products that are taken from the parent company. Shareholders of the parent company receive equivalent shares in the new company in order to compensate for the loss of equity in the original stocks.
To ensure a successful execution of the transaction for both SpinCo and RemainCo, both companies need everyone rowing in the same direction. It is common for ParentCo to name SpinCo’s Chairman, CEO, and CFO earlier on in the process to enable pre-planning for SpinCo’s financial profile and strategic and cultural frameworks, with decisions on the management team and employee base coming later in the process. While this approach is effective in maintaining business continuity, if the allocation of employees between RemainCo and SpinCo is unclear, an unreasonable gap in communication may create unnecessary anxiety and potential retention issues among the employee base. One potential mitigation for this risk is to make decisions on a staged, leveled basis, determining layers of leadership one at a time, from most senior to junior. This method enables each management level to engage in the allocation of headcount to best preserve high-performing teams and ensure equitable allocation of talent to set up both companies for success. Regardless of the process selected, consistent communication to employees is critical—even if only to communicate that no decisions have been made yet—as employees will fill an information void with their own predictions or suspicions.
Origin Of Spin
As a practical matter, first-class mailing of the information statement is often necessary. From a governance perspective, under the listing requirements SpinCo must have at least one independent director on its Audit Committee at the time when-issued trading commences.
- We’ve helped create leading brands through spin-offs, including ITT to Xylem and Exelis, Pfizer to Zoetis, Biogen to Bioverativ, American Express to Ameriprise and Citigroup to OneMain.
- The New York-based company revealed in September that it has experienced three consecutive years of declining revenue along with a $2.01 billion net loss last year.
- Shareholders of a split-off are given the option to relinquish their shares of stock in the parent company in order to receive shares of the subsidiary company.
- Recent examples include the 2020 spin-off of Smith & Wesson from American Outdoor Brands, or the separation of PayPal from its parent company, eBay.
- From the time of the announcement through the formal separation, leadership has a defined window of opportunity to engage employees about the promise of the future and reinforce the importance of their partnership in bringing it to fruition.
The downside of spinoffs is that their share price can be more volatile and can tend to underperform in weak markets and outperform in strong markets. Spinoffs can also experience high selling activity; shareholders of the parent may not want the shares of the spinoff they received because they may not fit their investment criteria. The share price may dip in the short term because of this selling activity, even if the spinoff’s long-term prospects are positive.
Interacting With Equity Research Analysts
This agreement will specify how outstanding ParentCo equity-based compensation awards are treated in connection with the separation. For example, ParentCo awards may “follow” the employee, with ParentCo awards held by employees of SpinCo converted into SpinCo awards and ParentCo awards held by employees remaining with ParentCo continuing to represent ParentCo awards. Along with identification and transfer of SpinCo’s business, ParentCo must consider the appropriate initial capital structure of SpinCo. In particular, ParentCo must determine both the nature and amount of debt at SpinCo at the time of the spin-off, which will depend in large part on the nature of SpinCo’s business and the reasons for ParentCo’s desire to undertake the spin-off.
- A spin-off occurs when a parent corporation separates part of its business operations into a second publicly traded entity and distributes shares of the new entity to its current shareholders.
- Spinoffs can also experience high selling activity; shareholders of the parent may not want the shares of the spinoff they received because they may not fit their investment criteria.
- It’s essential for a spin-off to begin to make a clean, clear break from its parent company and be confidently positioned as a strong independent entity.
- As noted above, the record date should be at least 10 calendar days after the declaration date, but can be later.
- These non-deal roadshows are typically held a couple of weeks prior to the closing and during the “when-issued” trading period .
All of this puts employees, customers and leadership teams in a difficult position, but that doesn’t have to be the case. Limitations on Acquisitions of ParentCo or SpinCo Stock as Part of a “Plan” with the Spin-Off.
Financial Analyst Training
Effectiveness is required prior to the commencement of when-issued trading as well as any non-deal roadshow, and is also required for the transfer agent to initiate eligibility conversations with DTC. In most spin-off transactions, SpinCo management often waits until SpinCo’s first quarterly earnings call post-closing of the transaction before providing annual guidance.
For purposes of this calculation, actual current value, not book value, should be used—this ordinarily results in a substantial increase in surplus relative to book. Stockholder approval of the dividend is typically not required under the laws of most states. Additionally, for example, the NYSE has a strict 10-calendar-day notice requirement in advance of the record date. As the NYSE has clarified in recent years, only one small exception exists to this requirement—notice can be provided to the public eight calendar days prior to the record date provided that private notice has been provided to the NYSE at the requisite 10 calendar days. Public notice should not be given until there is board approval, so the declaration date should be at least 10 calendar days prior to the intended record date. The declaration date is the date the spin-off is declared, when the ParentCo board formally approves the spin-off and sets the record date, distribution date, and distribution ratio. The two primary considerations when selecting the distribution date are the status of the SEC process and Exchange notice requirements.
A company creates a spinoff expecting that it will be worth more as an independent entity. IBM plans to exchange the 19.9 percent of the shares of Kyndryl common stock for IBM debt during the 12-month period following the distribution, according to the statement. Shareholders do not need to take any action to receive Kyndryl common stock shares, IBM said. Once distributed, each IBM common stockholder will receive one share of Kyndryl common stock for every five shares of IBM common stock held on Oct. 25, according to a Tuesday statement from IBM. IBM stockholders will receive a pro rata distribution of 80.1 percent of outstanding Kyndryl shares.
Reasons For A Spin
Tax-free spinoff refers to a corporate action in which a publicly traded company spins off one of its business units as an entirely new company. Distribution of Kyndryl shares to IBM stockholders will happen after the market closes Nov. 3, Big Blue said, paving the way for Kyndryl to launch as an independent public company soon after. It’s essential for a spin-off to begin to make a clean, clear break from its parent company and be confidently positioned as a strong independent entity. There is no better way to do this than for a new company to be clear about its purpose and differentiation in the market as communication about its future is conveyed.
- Often, a spin-off offers the opportunity for a division to be backed by the company but not be affected by the parent company’s image or history, giving potential to take existing ideas that had been languishing in an old environment and help them grow in a new environment.
- A spin out is a type of corporate realignment involving the separation of a division to form a new independent corporation.
- A subsidiary is a business entity or corporation that is fully owned or partially controlled by another company, termed as the parent, or holding, company.
- The Separation and Distribution Agreement establishes the framework for the separation of SpinCo as an independent company and the relationship between ParentCo and SpinCo post-transaction.
- The information statement will also be mailed to all of ParentCo’s stockholders in advance of the distribution and spin-off.
- The development of this product will allow us to spin off dozens of smaller, innovative products for years to come.
Once the spin-off steps have been defined, ParentCo will divide these steps a number of functional workstreams; these workstreams may require involvement from the treasury, tax, financial reporting, human resources, supply chain, and investor relations functions at ParentCo. ParentCo and its counsel also will begin preparing the legal documentation (i.e., Form 10 and related transaction documentation) to effect the transfers that are required to establish SpinCo’s business. The amount of time between the record date and distribution date is usually driven by the desired length of when-issued trading—traditionally 7–10 business days, and capped at two weeks by the Exchanges.
The Company Name Merits A Rigorous, Fact
The new protagonist generally appears first as a minor or supporting character in the main story line within a given milieu and it is very common for the previous protagonist to have a supporting or cameo role, at the least as a historical mention, in the new sub-series. Spin-offs sometimes generate their own spin-offs, leaving the new show in its own series only vaguely connected to the original series. Since 1997, Oxford University’s Isis Innovation has helped create more than 70 spin-out companies, and now, on average, every two months a new company is spun out of “academic research generated within and owned by the University of Oxford”. Over £266 million in external investment has been raised by Isis spin-out companies since 2000, and five are currently listed on the London Stock Exchange’s Alternative Investment Market . One of the main reasons for what The Economist has dubbed the 2011 “starburst revival” is that “companies seeking buyers for parts of their business are not getting good offers from other firms, or from private equity”.
How Do Spinoffs Impact Investors In The Both The Parent And Subsidiary Companies?
The Separation and Distribution Agreement will also contain indemnification provisions between the parties that often survive indefinitely post-closing and can be the subject of post-closing disputes. The main reason for a spinoff is that the parent company expects that it will be lucrative to do so. The Internal Revenue Service ruled that under existing law at the time of the spin-off, Kodak shareholders would incur no tax upon the receipt of stock of Eastman Chemical. And aligned with best practices advocated by proxy advisory firms such as ISS and Glass-Lewis. However, best practice for a public company at ParentCo’s stage of corporate life may not be desirable for a newly spun-off public company that may have a one-, two-, or three-year ramp to achieve profitability, execute on its business plan, or simply get its sea legs.
In this illustration, your basis for gain or loss for the 25 shares of Eastman Chemical stock would be $800. As a result of SpinCo’s inability to provide research analysts with long-term projections and the typical timeframe in which SpinCo provides annual guidance to the Street, it often takes two to three quarters post-closing for SpinCo’s stock to trade at a multiple that represents fully-distributed value.
Time and time again we hear that the legacy company is “shedding noncore assets” and “detaching themselves from underperforming businesses,” believing these are key to securing the legacy company’s growth. Shareholders of a split-off are given the option to relinquish their shares of stock in the parent company in order to receive shares of the subsidiary company. The split-off is also a tax-efficient way for the parent company to redeem its shares of stock. A second definition of a spin-out is a firm formed when an employee or group of employees leaves an existing entity to form an independent start-up firm. Spin-outs typically operate at arm’s length from the previous organizations and have independent sources of financing, products, services, customers, and other assets.