carve-out best practices and how reorganizations can help
TRANSCRIPT
© 2020 Eversheds Sutherland (US) LLP
Carve-out best practices and how reorganizations can help
Carving out the best deal
October 28, 2020
Chelse FerreroSenior Legal Counsel, Cisco
Marc RawlsPartner, Eversheds Sutherland
Antony WalshPartner, Eversheds Sutherland
Eversheds Sutherland
Panelists
Chelse FerreroSenior Legal CounselCisco
Marc RawlsPartnerEversheds Sutherland
Antony WalshPartnerEversheds Sutherland
Eversheds Sutherland
Agenda
3
What is a ‘Spin’?
Why ‘Spin’? Preparing to ‘Spin’:
common issues and
considerations
Delivering a ‘Spin’:
practicalities
Questions
Eversheds Sutherland
“In a “spin-off,” a parent company distributes shares of a subsidiary to the parent company’s shareholders so that the subsidiary becomes a separate, independent company.”
U.S. Securities and Exchange Commission
Defining a ‘Spin’
“A spin-off occurs when a parent corporation separates part of its business into a second publicly-traded entity and distributes shares of the new entity to its current shareholders.”
Corporate Finance Institute
5
“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.”
Wikipedia
Eversheds Sutherland
DowDuPontReal life examples
6
Splitting into three new firms:
Dow, DuPont and Corteva
Before
Shareholders
DowDuPont, Inc.(NYSE)
Agricultural Subsidiaries (Corteva)
Materials science Subsidiaries
(Dow)
Specialty Products Subsidiaries
(DuPont)
100%
Eversheds Sutherland
DowDuPontReal life examples
7
Splitting into three new firms:
Dow, DuPont and Corteva
After
Shareholders
Agricultural Subsidiaries (Corteva)
Materials science Subsidiaries
(Dow)
Specialty Products Subsidiaries
(DuPont)
100%
SpinCo 1,I c. (NYSE)
100%
100%
SpinCo 2,I c. (NYSE)
Shareholders
100%
Shareholders
SpinCo 3,I c. (NYSE)
100%
100%
Eversheds Sutherland
Tenneco / Federal-MogulReal life examples
8
Spinning off Tenneco’s ride performance and Federal-Mogul’s motorparts businesses
Before
Shareholders
Tenneco, Ii c. (NYSE)
Ride Performance Subsidiaries(Tenneco)
Clean Air Subsidiaries(Tenneco)
MotorpartsSubsidiaries
(Federal-Mogul)
100%
Powertrain Subsidiaries
(Federal-Mogul)
Eversheds Sutherland
Tenneco / Federal-MogulReal life examples
9
Spinning off Tenneco’s ride performance and Federal-Mogul’s motorparts businesses
After
Shareholders
Tenneco, Inc.(NYSE)
Clean Air Subsidiaries(Tenneco)
Powertrain Subsidiaries
(Federal-Mogul)
100%
100% 100%
Shareholders
SpinCo, Inc.(NYSE)
MotorpartsSubsidiaries
(Federal-Mogul)
Ride Performance Subsidiaries(Tenneco)
100%
100% 100%
Eversheds Sutherland
Autoliv / VeoneerReal life examples
10
Splitting off Autoliv’s electronics segment
Before
Shareholders
Autoliv, Inc. (Stock on NYSE) (SDR’s* on Nasdaq Stockholm)
Electronics Subsidies(Veoneer)
Passive Safety subsidiaries
(Autoliv)
100%
100% 100%
Eversheds Sutherland
Autoliv / VeoneerReal life examples
11
Spinning off Autoliv’s electronics segment
After
Passive Safety subsidiaries(Autoliv)
100%
Autoliv, Inc. (Stock on NYSE) (SDR*’s on Nasdaq Stockholm)
Shareholders
100%
100%
100%
Shareholders
Veoneer, Inc. (Stock on NYSE) (SDR’s on Nasdaq Stockholm)
Electronics Subsidiaries(Veoneer)
Eversheds Sutherland
“Smiths Group to spin off and float medical devices division –Analysts say value of demerged unit would be roughly £2bn.”
Ft.com, 22 March 2019
In the news
“Prudential says ‘good progress’ made on UK spin-off – Insurer has reorganized UK and Hong Kong businesses ahead of M&G Prudential demerger.”
FT.com, 13 March 2019
12
“Metals group Arconicto spin off one of its two main divisions – Break-up decision follows collapse of Apollo buyout plans.”
FT.com, 8 February 2019
Eversheds Sutherland
Some companies want to get rid of a weak or low-margin division that is detracting attention from the parent
Why Spin?
Some companies seeking buyers for parts of their business are not getting good offers from other firms, or from private equity, and so choose to Spin (i.e. Foster’s Group spinoff of Treasury Wine Estates)
14
Shareholder activism and the concept of the “Conglomerate discount” (the Economist) – “stock markets value a diversified group at less than the sum of its parts.”
The theory
Eversheds Sutherland
Since 2003, the Bloomberg Spin-Off Index has generated a total return of 1,030%, versus 194% for the S&P 500 Index
Why Spin?
For the 10-year period, the Bloomberg Spin-Off Index has appreciated 342% (versus 154% for the S&P 500 Index)
15
Over the three years to 2018 the spin index is up 60% versus 35% for the S&P 500
The facts
Eversheds Sutherland
Common issues
• Initial Scoping• Structuring a Spin-off
• Transaction structures• Historic liabilities• Valuations
• Gathering the underlying information
• Incorporating the skeleton structure
18
Eversheds Sutherland
Common issues
• Progressing to ‘Spin and the ‘curveball’’ • Third party consents
1. Landlords2. Regulatory (i.e. permits, operating licenses) 3. Lenders4. Customers/suppliers5. Employee representatives and labor authorities
• Global and shared agreements, interdependencies and shared assets
• Employee consultations and benefits• Value, consideration and “distributable profits” • Treasury and finance issues • IT issues• IP issues
19
Eversheds Sutherland
Common issues
• Delivering• Project management• Data volume• Execution issues
• Logistics• Powers of attorney• Notaries/apostil• Electronic execution
20
Eversheds Sutherland
Transaction structuresInitial scoping
“[x] transfers the stock of [y] to [z] in exchange for shares.”
21
X100%
Y Z
Eversheds Sutherland
Transaction structuresInitial scoping
• Transfer• Shares • Assets
• Distribution • Requirement for available
profits
• Contribution to capital • Not a legal concept in all
jurisdictions
• Contribution in kind • Not a legal concept in all
jurisdictions
• Share for share exchange• Tax clearances often required
• Statutory demerger• Not available in all
jurisdictions
• Gift• Often not tax efficient
22
Eversheds Sutherland
Be clear and aligned on how these are being treated
Initial scoping
May impact tax analysis if not all historic liabilities transfer
23
Also affects any market value calculations required
Historic liabilities and valuations
Eversheds Sutherland
Do not wait until the steps plan is near-final to commence information gathering
Initial scoping
Have a clear, uniform request list in to which key stakeholders have input, and which is used globally and is clearly managed by identified points of contact / project managers with clear responsibility
24
Have lawyers and accountants work together so as to avoid duplication of requests / multiple pieces of paper
Gathering the underlying information
Eversheds Sutherland
Incorporating the skeleton structureInitial scoping
• Consider the ‘right’ jurisdiction for each Newco
• Jurisdictions must be balanced with ‘real seat’ requirements
• Time to open bank accounts, for Newcos to pay/receive consideration
• Tax registrations prior to the transactions taking place
• Incorporation formalities in some jurisdictions require physical attendance or other formalities
• New entities will need to have capital payments physically paid in to their accounts, may have certain minimum levels of capitalization
• Plus, consider governance issues
25
Eversheds Sutherland
EmployeesInitial scoping
• Key consideration – both practically and legally –how do you ensure the right people are employed by the right business?
• Employee and Employee Representative information and consultation requirements will be defined by the global and local transaction steps Time to open bank accounts, for Newcos to pay/receive consideration
• Key to understand employee numbers by entity and representative structures at an early stage – both locally and at a European level to gain an indication of likely steps and timeframe for consultation processes
• Timing and messaging
• Identify and cross jurisdictional employee transfers
26
Eversheds Sutherland
Third party consentsProgressing to ‘Spin’ and the ‘curveball’
What approach will you take to these issues?
27
• Customers/suppliers
• Landlords
• Regulatory (i.e. permits, operating licenses, public grants)
• Lenders
Eversheds Sutherland
Approaches to third party consentsProgressing to ‘Spin’ and the ‘curveball’
28
• Obtain consent (either explicit or informal)
• ‘Non-objection’ letters
• No notification
• Approach part-informed by the nature of transaction? For example: • Statutory demergers• Share/stock transfers• Asset transfers• Jurisdiction involved
• The ultimate Spin (or wider elements of it) could itself be a ‘change of control’
Eversheds Sutherland
Global and shared agreements, interdependencies and shared assets
Progressing to ‘Spin’ and the ‘curveball’
29
• Shared property
• Global suppliers/customers
• IT services (shared servers, etc.)
• Payroll and HR systems
Eversheds Sutherland
Employee consultations and benefitsProgressing to ‘Spin’ and the ‘curveball’
30
• Share/stock transfer: less of a concern• Consider: Works councils/unions
• Asset transfer• TUPE• Consider: Works councils/unions
• Information gathering—start early!
• Re-deployment where no TUPE transfer• Consider: Works councils/unions
• Redundancies• Consider: Works councils/unions
• Pensions/benefits
Eversheds Sutherland
Transfers at less than market value, or distributions/dividends, are likely to require distributable profits
Progressing to ‘Spin’ and the ‘curveball’
Transactions undertaken without distributable profits may be unlawful
31
Distributable profits may be created in some circumstances
Value, consideration and “distributable profits”
Eversheds Sutherland
Treasury and finance issuesProgressing to ‘Spin’ and the ‘curveball’
32
• Bank consents
• Cash pools
• Third party financing
• Intra-group financing• Repayment• Waiver (noting potential tax downsides
to the same) • Capitalizing • Assigning/transferring the receivable
Eversheds Sutherland
It and IP issuesProgressing to ‘Spin’ and the ‘curveball’
33
• IT issues most likely to arise in the context of interdependencies
• Intellectual property licenses may require termination
• Registered intellectual property rights may require transferring
• New intellectual property rights (for SpinCo) may require registration
• Ensuring that any new SpinCo name/branding is not already used or protected by other third parties (often worldwide)
Eversheds Sutherland
EHS permits and approvals can be easily overlooked, but can add significant amounts of time and formality to your transfer process
Progressing to ‘Spin’ and the ‘curveball’
Be aware of historic environmental contamination issues –these issues can impact the Spin-out group regardless of your documentation!
34
Environmental issues
Eversheds Sutherland
Getting to ‘Spin’Delivering
• Delivering• Project management• Data volume• Execution issues
• Logistics• Powers of attorney• Notaries/apostil• Electronic execution
36
Eversheds Sutherland
• Do not underestimate the time that a Spin transaction can take. The more time you can give yourself (and advisors) the better
• Prior planning and establishment of systems can be the differentiator between a well-managed Spin and timetable extensions
• Validate and interrogate the steps plan from every angle
• Collate information in a uniform, coordinated manner
• Be alive to employee consultation and people dynamics
• Curve-balls will arise, but can typically be dealt with provided they are identified with sufficient time
Conclusion
37
eversheds-sutherland.com© 2020 Eversheds Sutherland (US) LLPAll rights reserved.
Marc RawlsPartnerEversheds Sutherland - [email protected] +1 404 853 8058
Antony WalshPartnerEversheds Sutherland – [email protected] +44 20 7919 4848