The hostile demerger: splitting a company due to disputes

What is a hostile demerger?

A hostile demerger, or 'ruziesplitsing' in Dutch practice, refers to the legal splitting of a company due to irreconcilable differences between shareholders or partners. Instead of one party buying out the other, the company is effectively partitioned.

Each shareholder gains control over their own part of the business following the split. It serves as a strategic last resort when cooperation has become impossible and a standard exit through sale is not feasible.

When should you choose to split?

Splitting becomes an option when the relationship between owners has completely broken down. When strategic decision-making grinds to a halt due to a deadlock, the survival of the entire business may be at risk.

Sometimes, a simple buyout is not an option due to lack of liquidity or sentimental attachment to specific business units. A split allows for a 'clean break' where both parties can chart their own course independently.

How does the splitting work in practice?

Legally, a split takes place in accordance with the Civil Code, where assets and liabilities are transferred to one or more new entities. This process requires a formal split proposal, an explanatory memorandum, and often the involvement of a civil-law notary.

Tax-wise, it is a complex procedure, as you want to avoid immediate taxation on latent capital gains. Parties often aim for a 'tax-neutral' split, which requires strict adherence to conditions regarding the continuation of business activities.

Risks and pitfalls

A hostile demerger is legally and tax-wise complex. If the process is not carefully structured, the tax authorities may still levy taxes on the value development of the entities involved.

Furthermore, there is the risk regarding creditors: they may object if they fear that their recovery options will deteriorate after the split. The division of personnel, contracts, and intellectual property is also a sensitive area that often leads to new disputes.

Alternatives to splitting

Before opting for a rigorous split, consider other solutions. A buyout arrangement (exit) is often simpler and less costly than a formal splitting procedure.

Also consider restructuring control or appointing an independent third party as a mediator. Sometimes, physically and administratively separating tasks within the company is sufficient without legally splitting the entity immediately.

Aandachtspunten op een rij

• Ensure an accurate valuation of all assets and liabilities.
• Verify tax implications and consult a tax specialist regarding tax-neutral transitions.
• Audit all current contracts and check whether counterparties must consent to the transfer of rights.
• Make clear agreements about personnel; they should not become victims of a split.
• Explicitly document the allocation of intellectual property and customer portfolios.
• Account for the rights of creditors to demand security.
• Ensure the articles of association for the new entities are correctly drafted from the start.

What should you do now?

A hostile demerger is a drastic event that requires a combination of strategic insight and legal precision. Because the interests at stake are high and tax risks are lurking, thorough preparation is essential.

Therefore, engage a specialized corporate law attorney as early as possible. They can assess whether a split is indeed the best route and guide you through the process to minimize conflicts and legal errors.