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ACCA Strategic Professional · Advanced Financial Management · Business re-organisation

Which of the following best describes a demerger (spin-off) in which a parent company distributes shares of a subsidiary to its own shareholders?

In a spin-off demerger, the parent distributes the subsidiary's shares to its existing shareholders, so they hold shares in both companies and the parent receives no cash. Sales for cash, management buy-outs and public flotations with retained control are different reorganisation methods.

  1. AShareholders end up holding shares in both the parent and the newly separate subsidiary, and no cash is paid to the parentCorrect
  2. BThe parent sells the subsidiary's shares to a new group of investors for cash, which is retained in the parent
  3. CManagement of the subsidiary buy it from the parent using borrowed funds
  4. DThe subsidiary issues new shares to the public and the parent keeps control

Explanation

In a spin-off, the parent distributes the subsidiary's shares pro rata to existing shareholders, who then hold shares in both entities. No cash passes to the parent. A sell-off or management buy-out would involve cash consideration, and an IPO by the subsidiary describes an equity carve-out.

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