As companies vie to remain profitable and increase shareholder revenue, some may strategically decide to spin off business lines that can be viable, standalone companies. Last year, spinoff transactions happened at notable companies such as Kraft Foods, Sara Lee, Tyco International, McGraw-Hill, and Abbott Laboratories. The Washington Post called 2011 the “Year of the Oops” as companies decided to “…sever business lines into separate companies underscored [by] new thinking about strategy.” Many sought to “…undo strategic shifts that had been panned by investors and threatened their valuable franchises.”

When spinoffs occur, two or more public companies can be created and these businesses would be well advised to hire an experienced business attorney to consider the legal issues and potential ramifications that must be addressed.

First, the board of directors must deem that a spinoff is in the best interests of shareholders and other key stakeholders. Spinoffs can be a complex, challenging task, so the board must balance their interests with the need to treat the decision with care and fairness. It is not just about increasing share price or calming shareholder activists; spin off companies should be created for best interests in the long-term.

Companies should remember that extensive disclosures to shareholders must be completed when a spinoff transaction occurs. Legal counsel can help to prepare these required disclosure documents and inform directors of the new company what their responsibilities are in conjunction with securities regulations. Thorough due diligence is also needed to separate assets and liabilities between the original company and the spinoff. Decisions on these matters can affect the company’s future growth and risk profile, so bringing in a business attorney and financial experts can make this undertaking more successful.

Spinning off can also involve decisions on how the management team will change. This can involve employment contracts, pension plans, option and incentive plans, and collective agreements. Legal counsel can review changes in these matters to ensure that the decisions are fair and appropriate. Arrangements must also be made so that any shared services and business opportunities do not create conflicts.

Spin offs can be created without big tax implications, and legal counsel can review the requirements needed to lessen or eliminate taxes. These requirements include that the company being spun off must have been operating for at least five years and will need to have three years of audited financials. Additionally, at least 80 percent of the spinoff’s equity must be distributed to existing shareholders to avoid large capital gains tax.

Anthony Spotora is a Los Angeles business lawyer and Los Angeles business litigation lawyer. To learn more, visit Spotoralaw.com.

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