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Replies to post #193586 on Golkor Inc (GKOR)
04/16/12 2:04 PM
Does the Subsidiary Have to Register the Spin-Off Under the
Securities Act?
A. The Subsidiary Does Not Have to Register the Spin-
Off if Five Conditions are Met
It is the Division's view that the subsidiary does not have
to register a spin-off under the Securities Act when: /4
* the parent shareholders do not provide
consideration for the spun-off shares;
* the spin-off is pro-rata to the parent
shareholders;
* the parent provides adequate information about the
spin-off and the subsidiary to its shareholders and to
the trading markets;
* the parent has a valid business purpose for the
spin-off; and
* if the parent spins-off "restricted securities,"
it has held those securities for at least two years.
B. An Explanation Of The Conditions
1. The parent shareholders do not provide
consideration for the spun-off shares
If the parent shareholders provide consideration for the
spun-off shares, the parent would be transferring the spun-off
securities for value. This transfer of securities for value is a
"sale" under the Securities Act. So, when shareholders provide
consideration, the subsidiary must register the spin-off unless
an exemption is available.
2. The spin-off must be pro rata
When the spin-off is pro rata, the parent shareholders have
the same proportionate interest in the parent and the subsidiary
both before and after the spin-off. If a spin-off is not pro
rata, the shareholders' relative interests change and some
shareholders give up value for the spun-off shares. Ordinarily,
Securities Act registration would be required if a spin-off is
not pro rata.
3. The parent must provide adequate
information to its shareholders and the trading
markets
Whether the parent provides adequate information about the
spin-off and the subsidiary to its shareholders and the trading
markets depends on whether the subsidiary is an Exchange Act
reporting company or a non-reporting company before and after the
spin-off. In this discussion, we assume the parent is a
reporting company. /5
a. Non-reporting subsidiary
If the subsidiary is a non-reporting company, the parent
provides adequate information if, by the date it spins-off the
securities:
* it gives its shareholders an information statement
that describes the spin-off and the subsidiary and that
substantially complies with Regulation 14A or
Regulation 14C under the Exchange Act; and
* the subsidiary registers the spun-off securities
under the Exchange Act. /6
b. Reporting Subsidiary
If the subsidiary is a reporting company, the parent may
provide less information about the spin-off to its shareholders.
In this situation, the parent provides adequate information if,
by the date it spins-off the securities:
* the subsidiary has been subject to the Exchange
Act reporting requirements for at least 90 days;
* the subsidiary is current in its Exchange Act
reporting; and
* the parent gives its shareholders information
about the ratio it used to compute the number of shares
distributed for each share held, how it will treat
fractional shares, and the spin-off's expected tax
consequences. /7
If the reporting subsidiary has not been reporting for 90
days or is not current in its Exchange Act reporting, the parent
may provide adequate information in the same manner as for a non-
reporting company. /8
c. Foreign companies
When the parent and subsidiary are foreign, the parent
provides adequate information if, by the date it spins-off the
securities:
* it gives its U.S. shareholders an information
statement that describes the spin-off and the
subsidiary and that substantially complies with
Regulation 14A or Regulation 14C; and
* the subsidiary registers the spun-off securities under
the Exchange Act.
There may be situations where the subsidiary will not
register the spun-off securities under the Exchange Act (for
example, the Rule 12g3-2(a) or 12g3-2(b) exemption from
registration may be available). Whether the parent provides
adequate information in these situations requires an analysis of
all of the facts and circumstances. /9 We will continue to
consider requests for "no-action" positions from foreign
companies that do not intend to register the spun-off shares
under the Exchange Act.
4. Valid Business Purpose for Spin-Off
When there is a valid business purpose for a spin-off, it is
less likely that the parent indirectly will receive value for the
spun-off shares through the creation of a market in those
securities. /10 The Division has recognized the following as
examples of valid business purposes for a spin-off:
* allowing management of each business to focus
solely on that business;
* providing employees of each business stock-based
incentives linked solely to his or her employer;
* enhancing access to financing by allowing the
financial community to focus separately on each
business; or
* enabling the companies to do business with each
other's competitors.
In our view, there is not a valid business purpose for a
spin-off when the purpose is:
* creating a market in the spun-off securities
without providing adequate information to the
shareholders or to the trading markets;
* the creation of a public market in the shares of a
company that has minimal operations or assets; or
* the creation of a public market in the shares of a
company that is a development stage company that has no
specific business plan or whose business plan is to
engage in a merger or acquisition with an unidentified
company.
Other than the business purposes discussed above, the facts
of a particular situation will determine whether the business
purpose is valid. Accordingly, the parent must determine whether
there is a valid business purpose for the spin-off.
5. If the parent spins-off "restricted
securities," the parent must have held those
securities for at least two years
A company that spins-off "restricted securities" may be an
underwriter in the public distribution of those securities. /11
The Division believes, however, that the parent would not be an
underwriter of the spun-off securities and the subsidiary would
not have to register the spin-off under the Securities Act when:
* the parent has held the "restricted securities" at
least two years; and
* the spin-off satisfies the conditions described
above. /12
This two-year holding period position does not apply where the
parent formed the subsidiary being spun-off, rather than
acquiring the business from a third-party.
5. Does Securities Act Rule 145 Require the Subsidiary To
Register A Spin-Off?
Securities Act Rule 145 requires specified transactions to
be registered under the Securities Act when investors decide
whether to accept a new or different security in exchange for
their existing security. For example, when shareholders vote on
a plan or an agreement for the transfer of assets in
consideration for the issuance of securities, Rule 145(a)(3) may
deem that vote to be a "sale" under the Securities Act.
Parent companies often ask their shareholders to vote on
proposed spin-offs. Further, spin-offs may include the transfer
of assets to the subsidiary.
Based on Rule 145(a)(3), the Division generally has refused
to say that the subsidiary does not have to register a spin-off
where the parent's shareholders vote on an asset transfer from
the parent to the subsidiary. /13 However, we have reconsidered
this position where the parent wholly owns the subsidiary. In
this situation, we will no longer require Securities Act
registration of a spin-off solely as a result of a shareholder
vote on the asset transfer. The reason for the change in our
view is that, when the other conditions described in response to
Question 4, immediately above, are met, the vote on the asset
transfer does not change the overall nature of the transaction.
/14
AI
