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Demergers and their ability to combat Shareholder Disputes

“Business structuring - you only need to consider it when you are setting up a limited company, right?” 

No, this is far from the case!  The business structuring should be considered when:

  • You intend to sell your business in the coming years

  • You are considering your succession planning

  • You have shareholders in dispute

  • You want to motivate and incentivise key employees to drive the business forward

  • You want to protect business assets from the forfeiture to creditors of the business in future

Demergers are one of the effective ways to restructure a business for pre-sale planning or dealing with disputing shareholders.

When to use Demergers

Following our recent customer-exclusive webinar on Business Structure Tax Planning, a heavily focused topic was that of demergers. In particular, how demergers can be used as an option to combat client problems.

A demerger is where the business's operations are segregated into one or more components. Now demergers can be used in a range of client situations, such as:

  • Shareholder disputes 

  • Only part of the business qualifies for tax relief 

  • Wanting to sell part of the business, but retain the other  

  • Undesirable subsidiary blocking a sale of a group/business 

And there are different types of demergers, which have a better use case depending on the client scenario. But as an example, below is a visual representation of a demerger decision tree.

Demergers and Shareholder Disputes

One of the follow-up questions to our recent webinar was this:

With shareholder disputes, what advice would you give in approaching clients with a demerger as a solution?  

And we thought this to be such a strong question that we couldn’t not answer it.

With most tricky situations, they are better handled with care. And what this will mean from you as their adviser, is that you take the correct steps to ensure a frictionless process and the most positive outcome for all parties involved, including the business.

What we recommend doing:

Firstly, undergo a review. This will involve understanding your client's business model, their plans for the future, ideas on how they’d like to cease their business relationship and identify where the disputes are coming from between the shareholders.

Once you have all this information in front of you, you can provide effective tax advice to your clients.

Thirdly the action plan, which given the topic of this blog post, will be a demerger.

To make this as simple as possible, we will provide an example of applying the above three-step framework. Which is the review, tax advice, and action plan:

Say for example you have a company with 2 shareholders who are in dispute over the way they run the business. They want to cease working together and run their own businesses the way they want to.

The company has 2 trades – 1) manufacturing and distribution of cat food 2) purchase and resale of mouse wheels.

The shareholders do not have the funds to buy each other out.

They want to take their respective trades and run separate businesses but are unsure how to make this change.

The recommended approach is to undertake a partition demerger so that the trades are split into different companies with 1 shareholder per company.

HMRC clearance is required plus implementation to put in place the paperwork for the transfer and set up the new companies. In short:

  • Review: Two different types of businesses, shareholders don’t agree on how to run the businesses. The goal is to run 2 separate businesses.

  • Tax Advice & Action Plan: Partition Demerger as the solution. Create 2 separate trading companies, 1 each.

  • HMRC clearance: Obtain HMRC clearance for the demerger

  • Implementation: Work with a solicitor to draft and execute the paperwork & set up new companies

  • Benefit: Shareholders go their separate ways to run their own businesses.

Now that you have your action plan as well as the benefits, it’s approaching this with your clients.

Soft skills play a massive factor here. As you will have to act as a mediator in this situation, given that you don’t know how hostile the shareholders are with each other, it’s important that you treat all parties the same.

So, we suggest that you set up a meeting with the shareholders to discuss the option of a demerger to combat their problem. This will ensure all parties are involved throughout the process and that you are not favouring one side over the other. Not only in this meeting will you provide the answer that they are looking for, but you will also highlight the benefits towards the business if they were to go ahead with the tax advice you have provided.

Focusing on the benefits towards the business is a sure way to keep all shareholders on-board, as they share a common goal, which is ensuring that their business remains successful. This focus will help the shareholders to see clearly that it is the right decision to make for all parties, as well as for the longevity of the business.

Time to take action, adviser!

Business structure tax planning can be a great way to optimise your clients' tax efficiency as well as dealing with non-tax issues like disputes.

As their accountant or advisor, it is up to you to provide your clients with the relevant options that not only benefit them personally but also the business.

At the end of the day when it comes to tax, as long as you optimise your clients current and future tax position, you are doing everything that you can do from a tax efficiency standpoint.

Want to find out more about optimising your clients’ tax efficiency?

Check out this blog post 👇

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