The legal perspective on spin-offs from attorneys at Gibson, Dunn & Crutcher.
Spin-offs are intricate, multifaceted endeavors for corporates that decide to take a subsidiary and make it an independent public company. In addition to internal finance and tax teams, they can involve scores of investment bankers, auditors and lawyers.
- At a recent NeuGroup meeting, one member in the midst of a spin-off described the process as an “all-consuming activity.”
- For a look at some of what’s involved, NeuGroup Insights turned to Andrew Fabens and Steve Glover, partners at the law firm Gibson, Dunn & Crutcher, who work on spin-off transactions. Below are some of their insights along with some information from the firm’s presentation, “The Art of the Spin-off.”
“Spin-offs are complicated undertakings. The process is significantly more demanding than the process associated with a debt financing, and in many cases is more complicated than the IPO process. Just a quick list of some of the tasks that need to be accomplished highlights this:
- The transaction planners need to move all of the assets and liabilities associated with the business being spun into a subsidiary.
- They need to prepare audited financial statements for the business and draft a disclosure document.
- They need to confirm that the spin-off will be tax free, which can take many months if the company seeks a letter ruling from the IRS.
- They have to decide on governance for the spin-off company and develop a capital structure.
- They need to decide on a management team, identify members of the new board of directors and develop compensation plans.
“Treasury has a significant role to play in developing the spin-off company’s capital structure and anticipating adjustments of the parent’s structure. These are mixed economic and strategic decisions, with a healthy dose of legal work if the spin-off is of such significance that there are ‘all-or-substantially all’ (AOSA) debt covenant compliance questions at the parent level.”
- An AOSA covenant can prohibit the disposal of “all or substantially all” of the assets of the parent unless all assets are conveyed to a single acquirer that assumes the debt obligation.
Keep one eye on the market. “The transactions that rebalance the capital structures must be executed with precision just as the other components of the separation all are finalized. You need to have one eye on the market and the other on the separation workstreams to get that timing right.” The methods used to do this typically include some combination of the following:
- New issue + repurchase. Elements include: new bonds issued by the spin-off company for cash; a special dividend paid to the parent; redemption and/or tender offer by parent for existing bonds; redemption or offer to purchase.
- Par-for-par exchange offer. Elements include: spin-off company offers to exchange new bonds for existing parent bonds; cash premium paid to participating bondholders; no cash proceeds to the spin-off company.
- Intermediated exchange. Elements include: tender offer by underwriters for existing parent bonds; underwriters agree to exchange tendered bonds for new spin-off company bonds; new spin-off company bonds sold by underwriters for cash; no cash proceeds to the spin-off company.
“When the pandemic struck, many companies put M&A and other significant strategic undertakings like spin-offs on hold. They wanted to understand better what implications the pandemic would have for their business, the capital markets and the broader economy before they proceeded with their plans.
- “To the extent companies had been facing pressure from stockholder activists or other investors to engage in spins, some of this pressure became less intense during the first several months of the pandemic. Activists and investors also wanted to get better perspective on the impact of Covid-19.”