When DeMerging is the answer for a Family Business

Deconstructing a property investment company

J E Strutt (London) started life in the 70s as a roofing contractor. It was a successful family business with many prestige assignments. It was majority owned by the Strutt family with the Nelson family owning the remaining shares. Between 1997 and 1999, the increased regulatory burden led to the directors contracting its trade and by 2000 it had ceased roofing all together. From the early 90s the profits of the roofing business were used to acquire residential properties. Once the roofing trade ceased, the sole activity of the company was residential property investment.

Contractual risk goes with the territory in the construction industry and can spell disaster for businesses caught up in claims, so in 1998 Arcachon was incorporated and became the parent of J E Strutt (London). Arcachon then incorporated a separate entity, Grantock as a wholly owned subsidiary to further protect against the risk of claims against J E Strutt (London). (Though, in nearly 40 years of trading, not a single claim was brought.) This resulted in two subsidiaries of Arcachon; Grantock and JE Strutt (London). As well as reducing commercial risk, Arcachon was a vehicle which could be used to obtain bank funding and pass that funding down to one of the two property acquisition subsidiaries.

Although the Strutts were the majority shareholders of Arcachon, they were not the only family owning its shares. In recent times the two families acknowledged that it was appropriate to unwind their business interests. Goodman Jones were recommended to the families by their bankers and we were asked to advise on an effective mechanism to allow a separation.

Having understood the business objectives of those involved, we recommended a demerger under Section 110 Insolvency Act 1986. This allowed the Strutt family to retain Arcachon and J E Strutt with the Nelsons taking Grantock.

We worked with both families on the mechanism to demerge their interests and provided advice to minimise the stamp duty and stamp duty land tax as a consequence of the demerger. Stamp duty land tax was an issue as there were transfers of properties between the companies prior to the demerger. These property transfers were to ensure that the values of the companies obtained by each family were commensurate with their interest in the overall business.

Of the entire process John Strutt commented,

We found the right team to identify our needs and handhold us throughout. As well as designing the demerger, Goodman Jones managed the whole process. They took all the parties through each stage of the process and managed the activities of the lawyers and the liquidators. This allowed us to concentrate on our core business of property management without the distraction of managing the demerger process.

I was really impressed with how quickly Goodman Jones picked up on the issues and their proactivity in identifying and resolving situations which we had not even considered. In particular I was seriously impressed with Graeme Blair’s commercial ability and his deep understanding of the tax legislation. I can’t imagine a transaction as complex as ours being completed as smoothly by anyone else. I can’t rate him highly enough.

Graeme Blair concludes,

Despite the complexities of the structuring as well as the family business angles, we were delighted to be able to deliver a solution that met with the approval of all parties involved.