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Our Top Tips for a Successful Carve Out Project

08/03/21

Richard-Edmundson-managing-partner Richard Edmundson
Managing Partner, Global International Business Reorganisations Leader, ILC Legal, LLP, United States

Over the past few years, we have assisted many organisations successfully complete large scale carve-out or separation projects. Smooth and timely implementation of such projects helps minimise business disruption as well as ensures that the projects are completed within the agreed timeframe. This is important because timeframes are often ambitious as groups aim to complete their projects within months of announcing their potential plans to the market.

Here are our top tips for planning and implementing successful projects:

Design the reorganisation to minimise legal risk

1. Prioritise information gathering and feasibility in known ‘problem’ jurisdictions with long lead times. If necessary consider workarounds to ensure that a delayed implementation in a particular jurisdiction does not lead to a delayed implementation of the overall project.

2. Use agreed form template documents for all share and business transfers, and ensure that those template documents receive local territory tax and legal sign-off. They should include agreed clauses regarding, for example, the transfer of contracts and what happens if consent to a transfer of a contract is not received.

3. Ensure that the local transfer documents do not contain warranties, indemnities or other provisions that may inadvertently create local territory legal relations between the two new groups, post completion.

4. If the carved out group is to be sold to a third party buyer, ensure alignment of the local territory documents with the negotiated terms of the Master Share Purchase Agreement. 

Manage transitional support

5. Allow sufficient time to scope any transitional services and to structure how they will be provided. Consideration should be given to how to structure the service provision (for example, local to local, centre to local), how payments will be calculated for each service, and how pricing is affected by the gradual reduction of services. This can sometimes make the costs of performing the services more expensive.

Understand which legal issues have the biggest operational impact

6. Where the reorganisation requires the formation of new legal entities, branches or representative) offices, identify the steps required between the legal formation and the operational ‘go live’ date. Tax and payroll registrations, bank account setup and IT systems readiness (where the new entity is to be an operating entity) can be obstacles to implementation.

7. Identify where transactions require specific accounting information, especially if third parties need to be involved. In many European jurisdictions, certain transactions trigger the need for a third party valuation report, a requirement for audited accounts or a requirement for an independent auditor statement. These can be critical path items from a timing perspective.

8. Determine where physical flow of funds is required in local territories, and identify territories with exchange control restrictions or other central bank approval processes.

9. Consider whether the existing operating model is still appropriate for the group post-separation; where the model changes, this can impact a wide range of legal issues.

Put in place a robust governance and decision making structure

10. Designate decision makers within the business, across each relevant function.

11. Design a clear internal escalation process to ensure a clear and final decision can be reached in the event that different functions are not aligned on a proposed approach.

12. Develop a communication protocol for passing project strategic messages from HQ/central team to the management/signatories of the business located in overseas subsidiaries. This can often be a source of tension within the business, and a viable protocol has to balance the need for confidentiality at HQ level with ensuring the local subsidiaries are involved enough that they are able and ready to implement local reorganisation transactions (via signing of local territory documents), where required.

In addition to these tips for a successful carve-out or separation project, there are also a number of specific legal issues that can arise related to corporate, HR, pensions or intellectual property issues. Our experts can help walk you through these too.

Carve outs and separation projects run smoothly when they are carefully thought through. Global legal specialists at PwC are well placed to support you with both the design, planning and implementation of your carve-out or separation project and any local legal issues you might come across.