There are a number of factors that go into a company’s decision to pursue a spin-off or separation transaction. These reasons may include enhancing the focus of each business on its own unique strategy and operations, attracting a new investor base and implementing capital structure changes that best suit each business. Shareholder activism may also influence a company’s decision to pursue a separation transaction.

Generally, separation transactions involve the sale to public shareholders or distribution to the parent company’s shareholders of the stock in a newly created public company. The new public company holds the separated business. The parent company generally exerts significant control over the transaction timing and the terms of the separation agreement.

Spin-off or separation transactions can come in a few different forms, taking into account various financial, tax, legal and business considerations. Perhaps the simplest structure to understand is the 100% spin-off. This structure involves distributing all of the shares of the newly formed public company (“SpinCo”) to the shareholders of the parent company. The distribution is classified as a dividend payment. A spin-off using this structure generally is tax-free and does not require a vote of the parent company’s shareholders.

A variation on the above structure is the partial spin-off. This structure involves the distribution of less than all of the shares of SpinCo to the parent company’s shareholders. The parent company will opt to retain the remaining portion of SpinCo’s shares that are not distributed to the parent company’s shareholders. In order to qualify for tax-free treatment under this structure, at least 80% of the voting power of SpinCo’s shares and at least 80% of each non-voting class of stock must be distributed. In addition, the parent company must demonstrate a valid business purpose for retaining a portion of SpinCo’s shares in connection with the spin-off.

Another way to structure a separation transaction involves an IPO followed by a spin-off. The first step involves an initial public offering of a portion of the common stock of the subsidiary entity (i.e., the SpinCo entity) that will ultimately be spun-off. The IPO is followed by the distribution of SpinCo’s common stock to the parent company’s shareholders. One advantage of this structure is that it helps generate an investor base prior to the spin-off. The IPO, which is an underwritten offering, helps to establish a market price for SpinCo’s shares. The IPO proceeds may either go to SpinCo or the parent company.

A variation on the above structure involves an IPO followed by a split-off to a large shareholder. In a split-off, the parent company makes an offer to its shareholders to tender their shares in the parent company in exchange for shares of SpinCo. A split-off has the effect of a share buyback, allowing the parent company to reacquire shares of its own stock. One advantage of a split-off is that the parent company’s shareholders have the option to receive SpinCo shares only if they are interested in receiving SpinCo shares. In a spin-off, SpinCo shares are distributed to the parent company’s shareholders as of a fixed record date regardless of whether they want them.

Finally, spin-offs can occur in connection with M&A transactions. Some spin-offs occur simultaneously with M&A transactions while in other cases the spin-off occurs after the M&A deal closes. A spin-off combined with an M&A transaction often does not receive tax-free treatment.