Canadian M&A Perspectives Private and Public Mergers & Acquisitions | Private Equity

The Spin on Spin-Offs (Part 3)

A Valuable Tool to Unlock Shareholder Value

Posted in Public M&A, Shareholders, Strategy
David RandellOmar Soliman

In our recent series on corporate-spin off transactions, we focused on why a company should consider a spin-off, and how the spin-off could be implemented. In this post, we briefly outline some of the common risks that a company should be aware of before pursuing the spin-off.

Even for seasoned practitioners, a great deal of planning is required to effectively “spin-out” a part of an existing business and the road to completion is rife with challenges and legal complexities. First and foremost, a failure to adequately address the division of assets and liabilities as between the Parent and Spinco could spell disaster for all parties involved. Advice from counsel is a must to deal with these sorts of issues. The Parent and Spinco should enter into an agreement that comprehensively allocates assets and liabilities between them. An intellectual property licence agreement, a shared facilities agreement and a transitional services agreement (among other agreements) should specify the respective rights of the Parent and Spinco vis-à-vis intellectual property, real estate, and other corporate services.

Boards of directors must also be attuned to compliance with the range of corporate and securities law requirements involved in such transactions. If the Parent assets that are spun-off to Spinco represent “all or substantially all” of the assets of the Parent, for example, then shareholder approval for the spin-off must be obtained (by way of special resolution). Depending on the method used to implement the corporate spin-off, securities legislation may also deem the share transfer to be a “distribution”, which invokes prospectus and registration requirements.

Finally, spin-offs should never simply be used as a means of dumping company debt, bad assets and struggling business lines. In conceiving the package of assets to be allocated to Spinco, boards of directors need to be mindful of the risks involved in sending that company out into the world without the tools it needs to survive. The relative cost-benefit as between the Parent and Spinco, in other words, must not be too wide. Directors may otherwise run the risk of exposing themselves to liability vis-à-vis the adequacy of the spin-off. For an interesting read on some of the pitfalls of spin-offs, we recommend this recent article by Steven M. Davidoff.

Despite these hurdles, pursuing a spin-off is still well worth the challenge – especially in times when financing is not readily available. In the mining and mineral resource sectors in particular, many of the major players have reversed the two-decades long trend of expansion (through the acquisition of new mines around the world) with the logic of “shrinking to grow”. The goal for these companies is to “focus on margins and containing soaring costs, rather than boosting output.”

Some recent examples include Score Media Inc.’s spin-off of its digital assets into theScore, Inc., Mondelez International, Inc.’s (formerly Kraft Foods Inc.) spinoff of its North American grocery business, Petrobank Energy and Resources Ltd.’s spin-off of Petrominerales Ltd., Bankers Petroleum Ltd.’s spin-off of its US assets into BNK Petroleum Inc., and Mansfield Minerals Inc.’s spin-off of Pachamama Resources Inc.