During these economic uncertain times, many Professional Services Firms will be seeking to protect themselves from financial difficulties and move into position for longer-term growth. For those firms which have an umbrella of practice areas this may involve scaling back and divesting none core practices through a demerger.
Demergers involve part of a business breaking away from a larger Firm (“Divesting Firm”) to form a new Firm (“Demerged Firm”), usually by way of a transfer of business, assets and people.
Demergers have many advantages. As the modern business environment increasingly favours specialist firms, those which have a more varied practice have comparatively struggled. This has led to many businesses scaling back and focusing on one particular line of business. Demergers are a major tool used by firms to streamline their operations.
Demerged firms also benefit from management accountability. When Companies demerge, the management of each Company has its own balance sheet. This means that should one Company be doing better than the other, the former is no longer taking the financial hit. The management of each Company becomes accountable for its own financial results, and will have an increased control over its operations, by having the right to make its own investments and even raise funds from the market on their own account.
Demergers can be used to create stock market value. With investors of the Demerged Firm having heightened visibility over the operations and accounts, they can make controlled investment decisions. Leading to a willingness to pay premiums, resulting in an increase in market capitalization.
There are of course two sides to every coin. Every firm will need to consider in detail the timetable and commercial terms of the demerger. This will include; valuing the assets and liabilities being transferred, partner approval of the transaction, notice requirements, payment of any outstanding capital and current account balances and restrictive covenants that may be in place affecting the partners of the Demerged Firm (if any) to name a few.
Depending on the nature of your firms work, dividing client engagements for transfer can be difficult and should be dealt with carefully to ensure that professional duties to your clients are upheld with as little disruption as possible. Clients will need to be made aware of the demerger and consent obtained to transfer effected client’s files and personal data.
A demerger may also trigger the application of Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE). This means that employees and possibly LLP members (if the Divesting Firm is an LLP) may transfer to the Demerged Firm with preserved employment rights. If TUPE applies you will be obligated to inform your employees as to why and when the transfer is happening, exactly how it will affect them and whether there will be any re-organisation. Forward planning is therefore essential.
You will see that for a successful demerger forethought and good communication between the firms is critical. At Ramsdens we want to support you in providing you with the correct advice and guidance. Our Company & Commercial team has extensive experience in demergers and can help you take the right steps to ensure the process is smooth and the demerger is ultimately successful and a positive experience for all parties. Should you want to discuss a possible demerger please do not hesitate to contact our team.
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For advice on all aspects of company and commercial law, please call our specialist team on 01484 821 500 or email us at info@ramsdens.co.uk and we will be in touch at a convenient time for you.