New York City attorney Charles Wolofsky is managing partner of Wolofsky PLLC, where he advises Fortune 500 companies, private equity firms, and high net worth entrepreneurs on complex international business matters and corporate structuring. Drawing on experience that spans corporate governance, entity formation, mergers and acquisitions, technology licensing, and securities regulation compliance, he helps executive teams align legal strategy with business growth and risk management. His practice includes both advisory work and litigation related to cross border transactions, contract enforcement, and fiduciary duties, giving him practical insight into how restructuring decisions play out in real disputes. Through work on targeted real estate investments, international business structures, and green regulation issues, he has seen how corporate spin offs can affect capital allocation, management focus, and investor expectations. His ongoing scholarship and teaching at Fordham University School of Law underscore his interest in the legal framework governing modern corporate transactions.
An Overview of Corporate Spin-Offs
A spin-off is the separation of a business division into a new independent corporation. The spun-off entity has its own board of directors, and its shares trade separately from those of the parent company. Companies pursue spin-offs for a variety of strategic reasons. A spin-off differs from a merger. In a merger, two or more companies combine into a single entity, while in a spin-off, a parent company separates part of its business into a new company. Companies generally pursue spin-offs when they believe the businesses may perform better or create more value as separate entities. Although the spin-off company operates independently, the parent company may retain an ownership stake in it, depending on the structure of the transaction. In a divestiture, by contrast, the parent company sells a division or subsidiary outright.
Spin-offs can also help corporations reduce risk. Mergers and acquisitions may increase risk exposure. Spin-offs may help mitigate risk by isolating financial and operational risks. This way, downturns affecting either company do not affect the other. A spin-off may also help companies achieve greater management expertise and focus. When a company has several lines of business, a particular faction, division, or department may underperform because of neglect. A spin-off gives the breakaway outfit the attention it requires. From a financial standpoint, it may also be easier to oversee a less complex business.
In a spin-off, the parent company typically allocates shares in the new outfit to existing shareholders. A shareholder receives the same percentage of shares in the new outfit as they hold in the parent company. Although existing shareholders receive shares in a new company for free, the parent company’s stock price is adjusted to reflect its actual value since the spin-off. Moreover, spin-offs are typically tax-free for shareholders, as the company isn’t being sold. Even so, shareholders who choose to sell the shares of either the parent company or the new outfit may be liable for capital gains tax.
Spin-offs, for all their potential, can be challenging. There’s no guarantee a merger or acquisition will be successful. Similarly, there’s no assurance that the breakaway entity will thrive on its own. In fact, five in 10 spin-offs fail, according to a 2022 Harvard Business Review study of 350 spin-offs. An effective way to see whether a company’s division would succeed as a stand-alone entity is to run it as a subsidiary. A subsidiary is a distinct legal entity from the holding company, but it remains under the parent company’s control.
A critical factor to consider in most spinoffs is how to distribute talent. Every division will naturally want to retain its most talented leaders. To reduce friction, management should identify the critical employees who would drive the most value in both the parent company and the spin-off. Then there’s the question of the company name. The name of the spin-off can make or break a spin-off. Take PayPal, for example. It didn’t have to start building the brand afresh after eBay spun it off in 2015. Sometimes a spin-off means abandoning an established position, and thus credibility, and asking stakeholders to trust a new entity.
Spin-offs can be rewarding for entities and their stakeholders, but can also be disruptive. They can be costly and time-consuming, with some deals spanning many months. Companies considering a spin-off should consult experts to help them navigate restructuring, complex transactions, regulatory compliance, and agreements.
About Charles Wolofsky
Charles Wolofsky is managing partner of Wolofsky PLLC in New York City, where he counsels private equity firms, global corporations, and entrepreneurs on corporate structuring, cross border transactions, technology law, and securities regulation compliance. His practice combines advisory services in entity formation, governance, mergers and acquisitions, real estate investment, and technology licensing with litigation involving complex commercial disputes, contract enforcement, fiduciary duty issues, and international arbitration. He is also active in legal scholarship and mentoring through his work with Fordham University School of Law and related initiatives.