Split-off a company (demerge) in Kenya
A company might choose to undergo a demerger as a strategic decision to move certain or all of its business operations to a different entity. Basically, a demerger happens when a company splits its ongoing operations into different segments, forming a new independent entity or disposing of/dissolving the separated unit. The company transferring its operations is called the demerged entity, while the receiving company is termed the resulting company.
Types of demergers
In Kenya, there are three main options for demerging a company, each providing its specific tax advantages.
Statutory demerger
The creation of a new company and the transfer of shares to the parent company’s shareholders is known as a “statutory demerger.” In a “three-cornered” demerger, the parent company transfers the new subsidiary to another company, which then issues shares in the new company to the shareholders of the distributing company in exchange for the distribution. Another option is for the parent company to pay a direct dividend to its shareholders on the new shares.
Share capital reduction demerger
One alternative method to separate a company is by reducing the parent company’s share capital, which results in a corresponding decrease in the transferring company’s capital. This allows for a trading operation to be transferred to new shareholders or holding companies controlled by those shareholders. A demerger through capital reduction can be advantageous in certain situations.
- When a statutory demerger or liquidation demerger isn’t an option
- There are non-member state parties
- The entities aren’t trading companies
- None of the enterprises in the mix should be liquidated
- You intend to sell some group members or float them
- The distributing firm does not have sufficient distributable reserves
Liquidation demerger
When a company is dissolved and its assets are moved to different entities through a liquidation demerger, the current shareholders of the dissolved company receive shares in the new companies in return for their interests in the winding up process. If shareholders have differing opinions on the future of the company and wish to go their separate ways, a demerger may be seen as a viable option. This strategic decision enables each shareholder to pursue their own direction independently.
Benefits of demerging
One of the main reasons why corporations decide to demerge is to increase shareholder value. After the demerger, the newly formed company typically issues shares to the shareholders. If the demerger results in the expected advantages, profits and share prices of both companies will likely increase. This increase in profits may be due to the fact that separate management teams are in charge of their own successes and failures without interference from the main board. In addition, with clear accountability for outcomes, these teams may be more motivated to achieve financial targets. Splitting management teams also allows CEOs to concentrate on their specific expertise. Demerging enables each new business to raise its own capital rather than depending on centrally assigned budgets. The advantage of dealing with a joint venture or acquisition that is not successful is that each partner can cut their losses and continue running their own independent company.
Considerations before demerging a company
Before moving forward with a demerger in Kenya, it is important to conduct a comprehensive assessment of multiple factors to guarantee a seamless and effective transition. This involves examining the company’s assets, debts, and activities, while also grasping the legal and regulatory obligations at play. It is crucial to factor in the effects on stakeholders, like shareholders, staff, clients, and vendors, in order to minimize any possible risks or interruptions. In summary, careful planning and contemplation of these elements are vital for a prosperous demerger procedure in Kenya.
Contact us
If you are thinking about implementing a demerger for your business in Kenya, our team is available to help you throughout the entire process. Utilizing our knowledge in corporate law and business deals, we can offer customized advice to ensure a seamless and prosperous demerger procedure. If you require help with adhering to legal regulations, conducting financial evaluations, or communicating with stakeholders, we are dedicated to aiding you in achieving your objectives efficiently. Get in touch with us now to arrange a meeting and discover how we can assist your company’s demerger process.