A split – off is a transaction in which the parent company conducts an exchange offer, whereby it gives its stockholders the opportunity to swap some or all of their parent company stock for subsidiary stock.
Because the SEC considers a split – off to be an exchange offer for new securities under its rules and regulations, the exchange offer itself the SEC´s tender offer rules, typically on Form S-4, which includes financial and business disclosure for the parent and the subsidiary. Like a one step equity spin-off, the split-off transaction is not inherently a capital raising transaction. Once it has split off, the subsidiary can raise capital by establishing a bank line of credit, selling securities, or engaging in an IPO.
The principal difference between a spin-off and split-off is that after completion of a split-off, the subsidiary´s stock is held by the parent´s stockholders on a non pro rata basis. Some stockholders may hold only parent stock; others may hold only subsidiary stock; still others may hold both. Companies can choose to transact a split-off, the stockholders get to decide what combination of stock they wish to hold post-split. This flexibility may be important when stockholders holding a significant interest express a preference for one stock over the other.
Some have suggested that split-off may have a less dilutive effect on parent earnings per share than spin-offs, in which the parent loses the benefit of any earning the subsidiary generates and the proportionate number of outstanding shares of parent stock remains the same. Thus, if the subsidiary is profitable, parent earnings per share decrease. In a split-off, the parent also loses the beneficit of subsidiaryñs earnings; however, the number of outstanding shares of the parent stock decreases. A such, the earninigs per share of the parent company may not decrease as significantly in a split-off as in spin-off transaction.
From a tax perspective, at least 80% of voting control of the subsidiary must be exchanged (or distributed) to comply with Section 355 of the IRC. Assuming all the requirements of Section 355 are met, the requirement of parent company stock inm exchange for the carve-out entity´s enables the parent company to derive the benefits of a major share repurchase and a tax free spin-off. Like spin-off transaction, split-off transactions can often take a considerable amount of time to excute. Although the parent can begin the exchange after it has initially filed its registration statement with the SEC, completion of the offer is contigent upon the SEC´s review, and declaration that the registration statement is effective. And, as in the spin-off, if a private letter ruling has been sought from the IRS regarding tax free status, the transaction timeline can often be extended.