Wachtell, Lipton, Rosen & Katz: Spin-Off Guide

Spin-off transactions are a common sight in special situation investor portfolios. In some cases activist investors will argue for spin or split-offs. Law firm Wachtell, Lipton, Rosen & Katz published a 73 page paper covering spin-offs. The paper covers everything from the legal transaction structure to tax issues and trading considerations. 

Wachtell, Lipton, Rosen & Katz: Spin-Off Guide

From the introduction:

A spin-off involves the separation of a company’s businesses through the creation of one or more separate, publicly traded companies. Spin-offs have been popular because many investors, boards and managers believe that certain businesses may command higher valuations if owned and managed separately, rather than as part of the same enterprise. An added benefit is that a spin-off can often be accomplished in a manner that is tax-free to both the existing public company (referred to as the parent) and its shareholders.

The issues that arise in an individual situation depend largely on the business goals of the separation transaction, the degree to which the businesses were integrated before the transaction, the extent of the continuing relationships between the businesses after the transaction, and the structure of the transaction. For example, if the businesses were tightly integrated before the transaction or are expected to have significant business relationships following the transaction, it will take more time and effort to allocate assets and liabilities, identify personnel that will be transferred, separate employee benefits plans, obtain consents relating to contracts and other rights, and document ongoing arrangements for shared services (e.g., legal, finance, human resources and information technology) and continuing supply, intellectual property sharing and other commercial or operating agreements