Split-off a company (demerge) in Hong Kong
A demerger is chosen by a company as a strategic decision to move some or all of its business activities to another entity. Essentially, this involves splitting the company’s operations into separate parts, either creating a new independent entity or selling/dissolving the separated unit. The company that transfers its activities is called the demerged entity, while the receiving company is called the resulting company.
Types of demergers
There are three main choices for demerging a company in Hong Kong, each with its own tax-efficient benefits.
Statutory demerger
When a new company is established and its shares are given to the parent company’s shareholders, it is known as a “statutory demerger.” In a “three-cornered” demerger, the parent company transfers the new subsidiary to a different company, which then provides shares in the newco to the shareholders of the distributing company in return for the distribution. Alternatively, the parent company may directly pay a dividend to its shareholders on the new shares.
Share capital reduction demerger
An alternative method of separating a company is by reducing the parent company’s share capital. By simultaneously reducing the capital of the subsidiary company, the trading operations can be transferred to new shareholders or holding companies under their control. A demerger through a capital reduction may be beneficial.
- When a statutory demerger or liquidation demerger isn’t an option
- There are non-member state parties
- The entities aren’t trading companies
- None of the enterprises in the mix should be liquidated
- You intend to sell some group members or float them
- The distributing firm does not have sufficient distributable reserves
Liquidation demerger
In a liquidation demerger, a company is dissolved and its assets are distributed to new entities. Shareholders of the original company receive shares in the new businesses as part of the winding up process. If shareholders have different visions for the company’s future and want to go their separate ways, a demerger may be considered. This strategy enables each shareholder to pursue their own direction independently.
Benefits of demerging
One of the primary reasons why companies choose to demerge is to increase shareholder value. After a demerger, the newly formed company often issues shares to its shareholders. If the demerger results in the expected benefits, profits and share prices of both companies will likely increase. Profits may increase because separate management teams are now in charge of their own successes and failures without interference from the main board. This increased accountability can also lead to higher motivation to achieve financial goals. Additionally, splitting management teams allows CEOs to focus on their specific expertise, and each new business can raise capital independently instead of relying on central budgets. In the case of a failed joint venture or acquisition, a demerger allows each partner to limit their losses and continue operating their own separate businesses.
Considerations before demerging a company
In order to successfully carry out a demerger in Hong Kong, it is crucial to thoroughly assess different factors to guarantee a seamless transition. This involves examining the company’s assets, liabilities, and operations, as well as being familiar with the legal and regulatory obligations. It is also important to take into account the effects on stakeholders, such as shareholders, employees, customers, and suppliers, in order to minimize any possible risks or interruptions. In conclusion, careful planning and consideration of these elements are necessary for a successful demerger in Hong Kong.
Contact us
If you are thinking about a demerger for your Hong Kong company, our team is available to support you at each stage of the process. With our knowledge in corporate law and business deals, we can offer customized advice to guarantee a seamless and prosperous demerger process. Whether you require help with following legal regulations, financial assessment, or communication with stakeholders, we are dedicated to assisting you in achieving your objectives efficiently. Get in touch with us now to arrange a meeting and discover how we can back your company’s demerger process.