What is a divestment?
Divestment is the opposite of the merger: a demerging company will dissolve without liquidation by transferring all its assets and liabilities by universal succession into two or more limited liability companies (acquiring companies). Shareholders of the demerging company receive newly issued shares of the acquiring companies proportionally to their ownership in the demerging company. Demerger consideration may also be given in cash, but tax neutrality requires the share of cash to be maximum 10 per cent of the total amount of demerger consideration.
Divestment may be so-called full demerger when the demerging company is dissolved in total. Divestment may also be carried out as a partial division when only part of the assets and liabilities of the demerging company will be transferred to one or more acquiring companies. In a partial division transferred assets and liabilities must constitute an independent business entity.
What can be achieved by a divestment?
Divestment may also be a preparatory action before other acquisition. The buyer may only be interested in business of the company so the divestment can be used to divide the business and e.g. estates of the company into their own companies. Accordingly, generational succession may be convenient to conduct in a way that only the business of the company is transferred to the next generation.
Divestment may also be used as cutting the companies into more practical entities and as a risk management method in a situation where part of the business is practiced in an exceptionally risky business area.
It is possible to make a divestment into an already functional company. This restructuring may be used e.g. when a company wishes to combine a business unit into another already existing company.
What should be considered?
Just like in merger, in divestment the assets, liabilities and contracts are transferred directly by law to the acquiring companies. In some cases, the contracting parties may have a right to terminate an agreement prematurely due a divestment. To guarantee a smooth process it is recommended to define the key liabilities and check the main contracts and licenses before the divestment.
If the divestment is planned to be conducted as a partial division, it should be carefully inspected, if the independence criteria for the business entity required for the tax neutrality is fulfilled. E.g. estates as themselves, that have been serving the demerging business, do not typically meet the business entity criteria.
Possible business mortgages of the demerging company should be reorganised or annulled in order the Trade register to approve the implementation of the divestment.
What is the divestment procedure like?
Execution of a divestment takes usually at least four to five months.
Companies participating in divestment first draft the draft terms of demerger in order to define how the assets and liabilities of the demerging company are divided in between the acquiring companies.
Distribution of assets and liabilities will bind the creditor without a separate approval unless the creditor opposes the divestment. Draft terms of demerger will be signed by the boards of directors of the demerging and acquiring companies and the auditor will give a statement on the draft terms of merger.
According to the merger procedure, registration of the draft terms of demerger will start the procedure for protection of the creditors.
Implementation of the divestment requires a separate resolution and registration of the resolution to the Trade register. By the implementation of a full demerger, the demerging company will dissolve without liquidation and new acquiring companies are incorporated.