On March 6, 2013, Time Warner Inc. issued a press release announcing plans to implement,
courtesy of a spin-off transaction, a "complete legal and
structural separation of Time Inc. from Time Warner."
The proposed spin-off highlights an increasing trend among
public companies in the face of tough market conditions – the
transformation of what are usually large corporations not by
building up their assets, but by efficiently siphoning them out.
Time Warner would know, too – in the past decade, the company
has used the vehicle of the spin-off to divest several of its major
divisions, including the spin-off of AOL in 2009, and before that,
Time Warner Cable, Warner Music Group and Time Warner Book Group.
Last year alone, according to Dealogic, there were 85 spin-offs
worldwide worth a total of $109 billion.
Generally speaking, a spin-off occurs when a division of a
company is separated into an independent business. It is a form of
reorganization in which the parent company (the "Parent")
establishes a new entity ("Spinco") and distributes
shares in Spinco to the shareholders of the Parent on a pro
rata basis. In the end, the Parent will have divested itself
of Spinco, and the shareholders of the Parent will have retained
their respective interests in both the Parent and Spinco.
Boards of directors of Canadian corporations that are interested
in pursuing this method of unlocking shareholder value want to know
why they should use it, how they should implement it, and what the
attendant risks are. In our first of two posts on corporate
spin-offs, we answer the first question.
Why Should I Use It?
Allows Parent to Focus on "Core" Business,
Improving Corporate Accountability and Efficiency. First
and foremost, spin-offs improve management focus by allowing a
company to optimize its business lines. A division that is not
needed to support the core business and that is not big enough to
be competitive in its own sector takes up valuable management time
and financial resources.
"Liberates" the Market Value of Spinco and
Enables Spinco to Access Capital Markets Directly. The
separation of non-core assets into Spinco has the secondary effect
of improving the identification and valuation of Spinco's
assets by the market. The market generally likes businesses that
are focused in their space and have a management team devoted to
growing only that business. In Canada, the forestry, mining and
mineral resource sectors have used spin-off transactions for this
purpose. There are now examples of retail companies doing the same
with their real estate assets. Spun out divisions have the ability
to access capital markets directly, allowing Spinco to raise more
money than would be the case as a division within another
Separates Parent or Spinco from Regulatory
Regimes. A spin-off may enable the Parent or Spinco to
avoid the compliance costs associated with a regulatory regime that
is specific to either the Parent or Spinco. This may allow the
Parent or Spinco to escape certain regulatory limits on business
Stay tuned for our next post, in which we outline three of the
most common methods used to implement the corporate spin-off, as
well as some of the expected risks.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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