New demerger by spin-off: The simplest of demergers and a practical alternative to the demerger by separation and in-kind contribution | In Principle

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New demerger by spin-off: The simplest of demergers and a practical alternative to the demerger by separation and in-kind contribution

On 15 September 2023, an amendment to the Commercial Companies Code entered into force, introducing into the Polish legal system a previously unknown method of demerging companies: the demerger by spin-off. The parliament was obliged to implement EU directives providing for the demerger by spin-off as well as additional methods for cross-border demerger.

What is demerger by spin-off?

Demerger by spin-off is a novelty in Polish commercial law, but, as our experience shows, it has already been used in practice. It draws heavily on the legacy of German legislation, which, even before entry into force of the EU directive, specifically provided for this method of demerger.

A demerger by spin-off involves a transfer of a portion of the assets of the demerged entity (which may be a company or a joint-stock limited partnership) to an existing or newly formed company or companies in exchange for shares of the acquiring or newly formed company or companies, which are taken up by the demerged company. As a result of the demerger, the acquiring company enters into the rights and obligations of the demerged company specified in the demerger plan (universal succession) as of the date of the demerger, including, by operation of law, all rights and obligations of the demerged company provided for in tax law. Permits, licences and concessions related to assets assigned to the acquiring company in the demerger plan are also transferred to the acquiring company, unless the act or decision granting the permit, licence or concession provides otherwise. The acquiring company can be either an existing company or joint-stock limited partnership, or a company newly formed in connection with the demerger by spin-off.

In a demerger by spin-off, the partners or shareholders of the demerged company do not take up shares in the company to which the assets of the demerged company are transferred. Newly created shares in the acquiring company are taken up directly by the demerged company. Against the backdrop of the provisions on changes in corporate form, the design of a demerger by spin-off resembles a demerger by separation. The biggest difference is the limited participation in the demerger by the demerged company’s partners or shareholders. As in the case of the demerger by separation, a company subject to demerger by spin-off is not dissolved as of the date of demerger.


Carrying out a demerger by spin-off has been significantly facilitated by the law itself. In a demerger by spin-off, certain elements of the company’s demerger plan are excluded because the shares in the acquiring company are taken up directly by the demerged company and not by its partners or shareholders. And for the same reason, the companies participating in the demerger by spin-off must include in the demerger plan information regarding the number and value of shares in the company or the acquiring or newly formed companies taken up by the demerged company. As a result, the plan for a demerger by spin-off does not have to include the following elements:

  • The ratio for exchange of shares of the demerged company for shares of the acquiring or newly formed companies and the amount of additional contributions in cash, if any
  • The rules for granting shares in the acquiring companies or newly formed companies
  • Indication of the date from which the newly created shares entitle the holder to participate in the profit of the acquiring or newly formed companies
  • Indication of the rights granted by the acquiring or newly formed companies to shareholders, partners, or persons with special rights in the demerged company
  • Rules for distribution among the shareholders or partners of the demerged company of the shares of the acquiring companies or newly formed companies.

Additionally, the management boards of companies participating in the demerger are not obliged to prepare a written report justifying the company’s demerger. Unlike a demerger by separation, where examination of the plan by an auditor can be waived (optionally, with the shareholders’ consent), in the case of a demerger by spin-off the need for audit of the company’s demerger plan is excluded by virtue of law.

At the same time, other simplifications will be allowed to be introduced with the consent of all the partners or shareholders of each of the companies involved in the companies’ demerger. It is possible to skip:

  • Attaching to the demerger plan a statement on the accounting status of the demerged company, prepared for purposes of the demerger as of a specified date in the month preceding the filing of an application for announcement of the demerger plan, using the same methods and the same layout as the last annual balance sheet
  • Notification by the demerged company’s management board to the management board of each acquiring company, or the newly formed company in organisation, of any material changes in assets or liabilities between the date of preparation of the demerger plan and the date of adoption of the resolution on demerger.

Demerger by spin-off as an alternative to demerger by separation or in-kind contribution of an organised part of an enterprise

Due to the foregoing simplifications, a demerger by spin-off may be an interesting alternative to carrying out a reorganisation in a group of companies, which under previous law would have to be carried out by a demerger by separation, in-kind contribution, or transfer of an enterprise or organised part of an enterprise.

In essence, a demerger by spin-off seems to most resemble an in-kind contribution, as the acquiring company issues shares to the demerged company in exchange for the assets it receives. However, the differences are significant, and therefore a decision to conduct a separation or an in-kind contribution should be preceded by meticulous legal, business and tax analysis.

As a rule, an in-kind contribution to a company includes solely assets. In contrast, in the event of a separation, the company’s spun-off items include both assets and liabilities (for example contractual obligations). With an in-kind contribution, singular succession (contribution of individual assets to the company) takes place, which may require additional agreements between the company contributing certain assets and its creditors. Also, in the case of in-kind contribution, a broad tax succession does not take place. Similar restrictions will also apply to the disposal of an enterprise or an organised part of an enterprise. The advantage of a demerger by spin-off is the transfer of rights and obligations by virtue of law (partial general succession). The effect of general succession will be the transfer as of the date of spin-off of, among other things, permits, concessions and exemptions, unless the law or a relevant decision provides otherwise.

Here, it should be pointed out that if the acquiring company is a joint-stock company (S.A.), both in-kind contributions and demergers by spin-off will, in principle, require an auditor’s opinion under the provisions on in-kind contributions to joint-stock companies.

When is it a good idea to choose the demerger by spin-off, and how quickly can it be conducted?

During the company’s existence, there are many situations where it is necessary to carry out restructuring. The reasons may include:

  • A need for refinancing of operations
  • A need to isolate specific business lines to optimise processes
  • Starting joint activity with another undertaking
  • The need to spin off part of the existing business in order to sell that part of the business.

Suppose a parent company spins off part of its business to a 100%-owned subsidiary. But the subsidiary has already been granted a number of permits that would have to be updated in the event of a change of shareholders (direct change of control). In such a scenario, if a separation were to take place, a need to update the permits would occur, as the shares in the subsidiary would pass to the shareholders of the parent company. The demerger by spin-off allows the parties to avoid updating the permits, as in that scenario the entities involved in the ownership structure of the subsidiary will remain unchanged.

Preserving the existing ownership structure after reorganisation may also be important, for example, for regulated entities in the capital market (investment fund companies) and financial institutions (banks), which will not be obliged to obtain a decision from the Polish Financial Supervision Authority on the lack of objection to implementation of the demerger, which might have to be obtained in the event of a change in shareholders.

Also, against the backdrop of state aid regulations, preservation of the existing ownership structure by a company that is the beneficiary of state aid may, at least in some situations, allow the state aid to be maintained, while avoiding the need to notify or obtain approval from the financing institution for reorganisation.

In business practice, a number of other situations certainly will occur in which a demerger by a separation will be the optimal solution.

Tax considerations should be taken into account when choosing the appropriate form of restructuring. To maintain the tax neutrality of the process (in the case of both in-kind contributions and demergers), it will most often be necessary to first internally spin off an organised part of the company. Depending on the assumptions made, allowing for the tax requirements (such as obtaining interpretations), it should be possible to carry out a demerger by spin-off within a minimum of three to four months.

The choice of the right legal form for a reorganisation will always be dictated first and foremost by the business needs, which must be effectively translated into the legal and tax levels. In this context, a demerger by spin-off creates new opportunities for reorganisation that were not available before the change of law and are worth considering at the initial planning stage.

Piotr Ząbkiewicz, adwokat, Adam Strzelecki, M&A and Corporate practice, Wardyński & Partners