recent series on corporate-spin off transactions, we focused on
why a company should consider a spin-off, and how the spin-off
could be implemented. In this post, we briefly outline some of the
common risks that a company should be aware of before pursuing the
Even for seasoned practitioners, a great deal of planning is
required to effectively "spin-out" a part of an existing
business and the road to completion is rife with challenges and
legal complexities. First and foremost, a failure to adequately
address the division of assets and liabilities as between the
Parent and Spinco could spell disaster for all parties involved.
Advice from counsel is a must to deal with these sorts of issues.
The Parent and Spinco should enter into an agreement that
comprehensively allocates assets and liabilities between them. An
intellectual property licence agreement, a shared facilities
agreement and a transitional services agreement (among other
agreements) should specify the respective rights of the Parent and
Spinco vis-à-vis intellectual property, real estate, and
other corporate services.
Boards of directors must also be attuned to compliance with the
range of corporate and securities law requirements involved in such
transactions. If the Parent assets that are spun-off to Spinco
represent "all or substantially all" of the assets of the
Parent, for example, then shareholder approval for the spin-off
must be obtained (by way of special resolution). Depending on the
method used to implement the corporate spin-off, securities
legislation may also deem the share transfer to be a
"distribution", which invokes prospectus and registration
Finally, spin-offs should never simply be used as a means of
dumping company debt, bad assets and struggling business lines. In
conceiving the package of assets to be allocated to Spinco, boards
of directors need to be mindful of the risks involved in sending
that company out into the world without the tools it needs to
survive. The relative cost-benefit as between the Parent and
Spinco, in other words, must not be too wide. Directors may
otherwise run the risk of exposing themselves to liability
vis-à-vis the adequacy of the spin-off. For an interesting
read on some of the pitfalls of spin-offs, we recommend this
recent article by Steven M. Davidoff.
Despite these hurdles, pursuing a spin-off is still well worth
the challenge – especially in times when financing is not
readily available. In the mining and mineral resource sectors in
particular, many of the major players have
reversed the two-decades long trend of expansion (through the
acquisition of new mines around the world) with the logic of
"shrinking to grow". The goal for these companies is to
"focus on margins and containing soaring costs, rather than
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.
While most are well aware that the sale of a business is generally a complex process, even sophisticated business owners are surprised by just how much cost and effort is required to complete the sale.
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