The business world has a lot of complexities involved. The complexities may evolve from time to time because of many reasons. The high-level competition in the industry or the obsoleteness of the product or the service, the reasons are many. Surpassing all the complexities, the organization must survive.
The business owners have many strategies in place to keep the organization from dissolving because of the tides. It involves a lot of thought and planning. In fact restructuring, the firm has many advantages as well. It can be driven by the need for change too.
Reorganizing can happen to reduce cost or involve the manpower to new highly productive technology which is more profitable than the previous one. It may also be the reason for concentrating on key products.
Any which ways, restructuring is for good. Corporate law has its way to do that which may not impact many people. The two main corporate reorganizing methods are Split -up and Split-off. They both give rise to new companies but in totally different ways.
Split-Up vs Split-Off
The main difference between Split-up and Split-off is the reorganizing ways, Split-up is the term used where a parent company splits into two or more independent companies while the parent company is dissolved in the process whereas Split-off is a corporate reorganizing method where the parent company divests another business unit utilizing structured terms, while the parent company is still in business and not dissolved.
Comparison Table Between Split-Up and Split-Off (in Tabular Form)
| Parameter of Comparison | Split-up | Split-off |
|---|---|---|
| Meaning/Definition | Split-up is the term used where a parent company splits into two or more independent companies while the parent company is dissolved in the process. | Split-off is a corporate reorganizing method where the parent company divests another business unit utilizing structured terms, while the parent company is still in business and not dissolved. |
| Shares | The shareholders of the parent company have their shares liquidized and may exchange it with one of the new entities. | The shareholders have an option to keep the parent company’s shares or exchange it with the new entity. |
| Reason | The main reason is to seek out new businesses to flourish while the old one is not performing well. | The main reason is to build a subsidiary for the parent company which can complement by acquiring a certain percentage of market share |
| Taxable | If Taxable, the shareholders are taxed on Liquidation. | If taxable the shareholders are taxed on a share redemption |
| Share Benefits | There are no benefits offered to shareholders. | The company may offer an attractive incentive in acquiring the new company’s shares, they may also offer a premium for the exchange of shares. |
What is Split-Up?
Split-Up is a financial term that describes a corporate action of dissolving the parent company to give rise to two or more entities. The two or more companies formed shall operate independently.
Once this happens, the shareholders of the parent company are given an offer to exchange the old parent company’s shares. The shareholders may be taxed on the grounds of liquidation.
The corporate segmenting process is considered worthwhile when the parent company does not offer any product or service that is needed in the current trend. Split-up may also happen when the business owners want to explore newer business opportunities which is more profitable.
At times, Split-ups are forced by the government to avoid monopolistic practices. It all depends on the investors to accept the shares of the new entities.
Split-up has a great advantage for businesses that are diversified. It is an attempt to revamp the operations by segmenting it into different entities.
This shall be profitable to the shareholders too, as more focus is given on each unit thoroughly and the collective profit can result in a major rise in the share prices.
There are many examples of monopolistic practices, like Microsoft, Google, and Facebook. Microsoft was sued earlier for the same and government-initiated split-up, however, it ended in a settlement later on.
What is Split-Off?
Split-off is a corporate reorganizing method where the parent company gives rise to a subsidiary company by giving its assets. In this course, the shareholders of the parent company are given an offer to exchange their old shares with the new company’s share.
Of course, the shareholders have the option to retain the parent company’s shares. At times, attractive offers and premiums are offered to the shareholders to exchange it with the new shares.
Outstanding shares are not proportioned on a pro-rata basis. The distribution of shares with split-off is unique from other reorganizing methods.
Tax exchange is considered tax – free event in a few countries, however if taxable then the shareholders are taxed for the redemption of shares. Most of the time, split-off happens by providing maximum assets to the new entity and giving its prominence for the shares to roll out a big way.
It also allows the new entity to operate independently. Indeed, split-off is a process that offers higher value shares to the shareholders.
Making a new company by shredding assets can help the parent company in showing expenses. These expenses shall play a vital role in tax evasion under various clauses.
Main Differences Between Split-Up and Split-Off
- The main difference between Split-up and Split-off is the reorganizing ways, Split-up is the term used where a parent company splits into two or more independent companies while the parent company is dissolved in the process whereas Split-off is a corporate reorganizing method where the parent company divests another business unit utilizing structured terms, while the parent company is still in business and not dissolved.
- Split-up initiates the liquidation of the old stocks and also allows the shareholders to exchange it with any of the new entities’ shares whereas Split-off does not have the shares dissolved as the parent company still exists, at the same time it initiates the process of exchanging parent company’s shares with the new one.
- The reason for a split-up is to seek out new profitable business ventures to operate when the old one is not performing well, this makes the business owners dissolve the parent company and form new entities. However, in many cases, split-off is actioned to create a subsidiary that can complement the parent company in acquiring substantial market share.
- Tax sharing event is considered tax free events, however, if taxable in few countries then for split-up shareholders are taxed for liquidation while split-off attracts redemption tax.
- There are no benefits offered to acquire new entity’s shares to the shareholders in the case of split-up while split-off will give way to new incentives and premiums to attract the shareholders to exchange the parent company shares with the new one.
Conclusion
Companies perform split-up of split-off if the parent company is not performing well. The advent of low productivity can also give rise to such situations in major organizations. Split-off gives a new vision towards the operation of the new entity, while split-up gives a new dimension to the business altogether.
Split-up and Split-off can offer a wonderful opportunity for growth if the new entities pick up. All the more reorganizing of the company structure becomes a mandate in certain cases, while it must be addressed case by case basis. However, the change is for good, and embracing the same is wise.
References
- https://repository.upenn.edu/cgi/viewcontent.cgi?article=1522&context=pwpl
- https://onlinelibrary.wiley.com/doi/abs/10.1002/jctb.5010061005