Spin Off

A distribution of subsidiary stock to the shareholders of the parent corporation without having cost to the shareholders of the parent corporation.

  • The process of splitting off certain parts of the company and found them as separate independent businesses. The shares of the new company are given to the shareholders of the existing company (on a pro rata basis). The transfer of product knowledge and knowledge from the parent to the newly start up company is the most important aspect.
  • The event through which a new company is created and separated from its parent company. After the event there are 2 separate companies, each with their own outstanding share capital. Owners of the parent company’s shares are being given an amount of shares in the spun off company according to a ratio (for example, each shareholder in parent company A will receive 5 shares in the spun off company B). Both company’s shareholders and stakes are identical at the moment of the Spin Off event taking place. Each shareholder holds shares in company A as well as in B at the moment of the Spin Off.

Longer Description from the point of view of different market participants

Once the Spin-Off has been approved at the AGM, the board of the company will declare that the event will happen and announce details. A new legal entity will need to be created (the company that is to be spun off) and shares need to be issued for the new company as well.

The Registrar will need to record all the eligible positions as per close of day Record Date. They will also need to keep 2 company registers from the effective date of the event onward; 1 for the old company and 1 for the newly created company.

The Agent Bank will need to create the Event in the systems of the CSD (or in their own systems) and initiate messaging downstream. Assuming that payment is triggered automatically, the Agent needs to ensure that the new shares are credited to the first ring participants so that they can be cascaded down the system.

Numbering Agencies need to update the status of the original shares to “Ex-Entitlement” or something that reflects that the transaction has taken place. Equally, it needs to create a new Security Identification Number for the new Security.

Any exchange that is listing the security will continue to list the security and see a change in pricing on the Ex Date (In theory, the Price will go down with the amount that the spun off company is valued at)

Any index that included the security will continue to include the original security in the index. The price of the individual share goes down. Whether the spun off company is to be included in the Index as well depends on its size (in terms of market value).

At CSD level the stock proceeds of the transaction (ie the new company shares) need to be booked to participants. To effect this, bookings (so called Deliveries free of Payment) need to be made to Participants. Open Trades that are in “matched” status as of Record Date of the Spin Off need to compensated (Stock Claims), meaning that an additional trade has to be created (Delivery free of Payment) to deliver the stock proceeds from the seller to the buyer. Messaging is generated at the issuer CSD and sent down the chain. The CSD needs to make sure that the amounts of stock coming in and out are Reconciling with each other otherwise it would make a loss.

At Custodian level the stock needs to be booked to Clients. To effect this, bookings (Deliveries free of Payment) need to be made to Clients. Open Trades that are in “matched” status as of Record Date of the Spin Off need to compensated (Stock Claims), meaning that an additional trade has to be created (Delivery free of payment) to deliver the stock proceeds from the seller to the buyer. Messaging is received from the Issuer CSD (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. The Custodian needs to make sure that the stock amounts coming in and out are Reconciling with each other otherwise it would make a loss.

At Broker level the stock proceeds need to be booked. To effect this, bookings (so Delivery free of Payment trades) need to be made to Clients. Open Trades that are in “matched” status as of Record Date of the Spin Off need to compensated (Stock Claims), meaning that an additional trade has to be created (Delivery free of Payment) to deliver the Stock Proceeds from the seller to the buyer. Messaging is received from the Custodian (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. The Broker needs to make sure that the Stock amounts coming in and out are Reconciling with each other otherwise it would make a loss.

If the stock is on loan or held as collateral, then both the stock lending brokers (or all 3 if it’s 3rd-party lending) and collateral agents need to effect the transaction in their books. Stock may have to be recalled before the important dates of the event. When it comes the Spin Off event, it may be that the borrower ends up with both the original stock and the spun off stock. In that case they’d have to return both at the end of the Lending Period.

Fund Manager need to include the change in the fund accounting and possibly in the NAV. Or if the Fund Manager uses a Transfer Agent, then this is a task for the Transfer Agent.

    • In case the fund manager uses a Transfer Agent, then the transfer Agent needs to handle the transactions as a result of the event.
    • These transactions need to be included in investment statements that are sent to investors also.

Vendors will have to update their systems with the correct information for the securities and send messaging to their clients about it.

    • At Retail Bank level the additional shares need to be booked into Beneficial Owners Accounts. To effect this, bookings (free of payment) need to be made to Participants. Open Trades that are in “matched” status as of Record Date of the Bonus Issue event need to compensated (stock claims), meaning that an additional trade has to be created (free of Payment) to deliver the additional shares from the seller to the buyer. Messaging is received from the higher up in the chain (and often ingested by automated systems) and subsequent messaging is generated and sent further down the chain. What is interesting to see here is that this seems to be the End Point for Swift Messaging as a means to inform underlying clients. At this level it’s often just a text message or a short description with the event and a reference to where source documentation can be found (online).
    • When the beneficial owner holds the securities through for example a Fund or an ETF, then the Retail Bank does in that case not need to take action on the event (it’s part of the fund manager’s tasks)

Beneficial owner will have to take note of the changes and reconcile these within their systems (if applicable). This can via real time messaging that they may receive, but it should also be in their periodic investment statements.

Background

    • The company has adopted a strategy to focus on its core activities. Non-core related activities are spun off
    • The company thinks that the spun of activities can be better developed on their own, rather than as part of a bigger concern (usually the new company is a new technology or a new market)
    • The company thinks that it can make more money by spinning the activities off. For example it could be that the spun off company yet needs to prove it can be profitable.
    • Sometimes the activities don’t fit in the overall branding strategy of the parent company.
    • The spin off activities could be more profitable than the overall parent company
    • Newly independent entities are no longer constrained by the overall culture of the parent company that might not fit
    • The spun-off company can try to seize opportunities it would normally not be able to explore
    • The management of the new company is often formed out of employees from the old company. For these employees, a spin off represents a good chance to make career progress.
    • In a takeover, sometimes the acquirer does not want or can not for regulatory reasons, buy one of the target company’s businesses.  A spin-off of that business to the target company’s shareholders prior to the merger can provide a solution.
    • Tax advantages (see more below)
  • CAEV
    • SOFF
  • CAMV
    • MAND
  • CAEP
    • DISN
  • CAOP
    • SECU
  • Qualifier CAEV = SOFF
  • CAOP = SECU
  • Mandatory event => field 22F: CAMV = MAND
  • Parent company to adopt a strategy to focus on its core business and to spin off certain parts of the business (often based on advice from management consultants, accountants, its own shareholders  and industry experts)
  • Parent company to decide which assets and which debt obligations should be transferred to the newly created company
  • Parent company to appoint a Paying Agent
  • Paying agent to publish a prospectus with the exact details of the event
  • Paying agent to announce the event to shareholders via the usual communication channels
  • Custodians and broker dealers to receive the new shares from the Paying Agent and to pass them on the beneficial owners that are entitled to receive the new shares
  • Shareholders and parent company to deal with tax consequences and amend their investment portfolios and their share value
  • Shareholders to decide their trading strategies for both companies
  • Announcement Date
  • Ex Date
  • Record Date
  • Paydate
  • Sese.025
  • Seev.031
  • Seev.036

!!Important!! You should contact your own Tax Advisor for your specific Tax queries. No rights can be derived from any information on this website or from any of the websites that the below text links to. This topic is included for Information purposes only.

Tax laws differ per country and jurisdiction, but in many a spin-off distribution can be made tax-free to the parent corporation and the receiving shareholder. Rather than selling the division outright, a spinoff can represent significant savings to the parent company, especially if the subsidiary is carried on the books at a large discount to expected market value. A sale would generate a big capital gain tax. If at least 80% of a subsidiary’s equity is distributed to existing shareholders, a spin-off lets a company avoid the potentially large capital gains tax liability that a straight sale would incur. Spin-offs are the most tax efficient mechanism to separate a division. There are several rules and conditions to acquire tax free status though (depending on jurisdiction).

Open trades that are in “matched” status on Record Date will be compensated, meaning that additional trades will be created to compensate the buyer who is entitled to the stock  proceeds of the Spin Off.

With ratios often being 1 new for every “n” held, it is likely that there will be many fractional entitlements to the new shares. This applies to both the entitlements on settled balances as of Record Date as well as on Claim Trades. Fractions can be handled in 3 ways and are often only processed at “omnibus account level”:

  • Round Down (SWIFT RDDN)
  • Round Up (SWIFT RDUP)
  • Cash Compensation (SWIFT COMP) → Partial share entitlements are compensated by a cash amount, effected through so called “PFOD” (Payment free of Delivery) trades.

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