Chapter 8 - § 8.4 • SPIN-OFFS

• Jurisdiction: Colorado

§ 8.4 • SPIN-OFFS

Spin-offs occur where one person (the Parent) distributes shares of another issuer (the Subsidiary) to the Parent's shareholders for no apparent consideration. This would not seem to involve the offer or sale of a security, but the SEC has prohibited such transactions absent compliance with the registration requirements.⁵

The SEC and courts have imposed the requirement to register spin-offs to prevent the creation of a trading market in stock of a company whose shares are distributed in the absence of adequate disclosure to the investing public and when there was no business purpose for the transaction. The courts have found disposition of securities for value within the meaning of § 2(a)(3) of the 1933 Act in connection with these "contrived spin-offs."⁶

As an alternative to the registration requirement, the SEC has, on numerous occasions, taken no-action positions in situations where an information statement substantially meeting the requirements of Regulation 14C was to be furnished to the recipients of the distribution and there were valid business purposes for the spin-off.⁷

In 1997, the SEC issued a Staff Legal Bulletin discussing in detail the registration issues in connection with spin-off transactions. In Staff Legal Bulletin 4,⁸ the SEC said that a spin-off would not have to be registered if it met five conditions:

1) The parent shareholders do not provide consideration for the spin-off.
2) The spin-off is pro rata to the parent shareholders.
3) The parent provides adequate information about the spin-off and the subsidiary to its shareholders and to the trading markets.
4) The parent has a valid business purpose for the spin-off.
5) If the parent spins off restricted securities, the parent has held them for at least two years.

In 2005, the SEC issued a no-action letter to a foreign private issuer that proposed to complete a spin-off of certain businesses.⁹ The company proposed transferring the businesses to a public limited company in a series of intragroup transfers, and then issuing a pro rata dividend of the stock in the businesses to the public holders. The foreign private issuer advised that shareholders would receive information similar to that required under the proxy rules and would receive periodic reports in compliance with U.K. law. The SEC staff concurred that the shares issued to the shareholders would not be restricted securities, although affiliates would be subject to Rule 144 (except for the holding period...