How to prep for a separation from a parent company

Published
  • March 27 2017, 10:16pm EDT
As more and more advisers continue to transition from the role of product salesman to client benefit facilitator, knowing what to do in the event of the client entering into a corporate spinoff can be critical.

John Hendrickson, partner at McDermott Will & Emery, says he is beginning to see a trend in corporate spinoffs from parent companies, and he believes that advisers need the tools necessary to assist in this transition.

To breakdown the key points advisers should focus on during this transition, Hendrickson has highlighted 10 items to consider in a corporate spinoff.

Overview

As more and more advisers continue to transition from the role of the product salesman to benefit facilitator, knowing what to do in the event of the client entering into a corporate spinoff can be critical.

John Hendrickson, partner at McDermott Will & Emery, says he is beginning to see a trend in corporate spinoffs and ensuring advisers have the tools necessary to assist in this transition could be imperative.

To breakdown the key points advisers should focus on during this transition, Hendrickson has highlighted 10 items to consider in a corporate spinoff.

Changing benefit and compensation packages

A spinoff may be an ideal time to consider changes to a company’s benefits package and compensation programs. In fact, changes may be necessary to achieve cost savings or to align incentives and costs with the client’s strategy. If significant differences are envisioned or desired, additional time and resources will be critical.

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Support systems

Often not enough consideration is given to the benefits and compensation infrastructure that needs to be moved or replicated to support the client’s employee benefit plans and compensation programs. HRIS, payroll, benefits administration, third-party administrators, trustees, investment managers, etc. are critical aspects of operating benefits and compensation programs smoothly and efficiently. If the support structure is unique to the firm, it will be easier to move. If all or part is the parent company’s support system, it will take more time and effort to extricate and replicate. Consider leasing the parent's systems for a time until replacements can be secured. Pay attention to contract hurdles in third party agreements.

Equity programs for management

Notwithstanding the other particulars of the spinoff, the equity and incentive programs for management will be new and will take time and consideration to put into place before the spinoff. As a new public company, it will have considerations and constraints that it didn’t have as part of the parent. SEC and IRS regulation as well as shareholder approval considerations must be front and center not to mention establishing the right incentives to propel the new entity forward. Consideration of board compensation will also be a new activity that will require time and consideration.

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Employee communication timeline

Communicating with employees about the impact of the spinoff on their benefits is critical and can’t be over emphasized. Develop a communication strategy and timeline early to assuage employee questions and concerns and to ensure that they stay focused on tasks necessary to affect the spinoff and launch the new company.

Clean house before the move

In much the same way we clean and clear before we move to a new home or office, it may be beneficial to do some housecleaning before a spin. Right-sizing head count may be a very important pre-spin endeavor using appropriate severance programs and benefits as advisable. House cleaning activities could also include changes to programs, benefits and the support infrastructure. Anything that you don’t want to move should be considered.

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Retirees, take 'em or leave 'em

Taking the assets and liabilities with respect to employees that have left the business prior to spin can be an important consideration. Both parent company and the spinoff may have strong reasons to keep or take former employees. If the benefit plans being spun are unique to the new company, its best that former employees follow the plans. If the plans replicate the parent company plans it could be a coin toss with some consideration given to re-employment possibilities.

Company stock, new and old

The garden variety spin is affected by a distribution of the spun-off stock to the parent company shareholders. If the shareholder is a benefit plan or an employee, conversion mechanisms and metrics will be necessary to exchange non-employer stock for employer stock or other investments following the spinoff. Particular care will be required for stock held in qualified retirement plans with employee investment direction typically an important fiduciary consideration.

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Leverage the past

Before leaving the nest, the parent company and the spun-off entity should use their combined leverage to extend preferable pricing from third parties to both companies' plans. Extending current plan relationships and pricing for a period of time post spin can provide both firms with some breathing room to get the spin accomplish at a price they separately may not have been able to secure on their own.

Governance structure

The spinoff company will have a new business governance structure and consequently, so will its plans. While some aspects of plan administration may well carry over, the governance structure will need to be created anew stemming from the spinoff's BOD. This will entail consideration and preparation of delegations of authority consistent with the plan documentation and possibly the creation of one or more spinoff committee’s to oversee plan administration and investments. Fiduciary insurance and ERISA bonding requirements must also be a part of these considerations and workflow.

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Assemble the team

Even the most basic of spinoffs require a fair amount of work to establish the governance structure, assemble the new executive compensation programs and infrastructure and deal with new compliance requirements. Accordingly, assembling a strong in-house team and outside service provider support group that will assist in getting through the spinoff and into the first several years of the new company's life in the public eye will be critical to a smooth and orderly exit of the spinoff from the parent company. Among the most critical will be a compensation consultant and an executive compensation lawyer well versed in public company norms and compliance to ensure that the executive compensation program is effective in driving the spinoff's strategy forward.