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IAI Actuarial Core Principles · Business Finance · Corporate growth, restructuring and divestment

A listed company transfers one of its divisions into a new company and issues the new company's shares to its existing shareholders in proportion to their holdings. No cash is paid to the shareholders. Which description best fits this transaction?

This is a spin-off, also called a demerger. The parent distributes the new company's shares to its existing shareholders in proportion to their holdings and receives no cash. That distinguishes it from carve-outs, buy-outs and trade sales, where outside buyers pay for the shares or assets.

  1. AA spin-off (demerger) with shares distributed pro rata to existing shareholdersCorrect
  2. BAn equity carve-out through an IPO of a minority stake
  3. CA management buy-out of the division
  4. DA trade sale of the division to a competitor
  5. A share buyback by the parent company

Explanation

In a spin-off the parent distributes shares of the new entity to its own shareholders pro rata, with no cash raised. A carve-out sells shares to new outside investors for cash. An MBO and a trade sale involve a buyer paying consideration.

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