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Spin-Off: Legal Due Diligence and the Employees’ Golden Handshake

Spin-Off: Legal Due Diligence and the Employees’ Golden Handshake

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Companies evolve. They change and react to their individual needs and the needs of the market. A company unwilling to consider its options is a company unwilling to be strategically competitive.

Hence, companies throughout the world may, for a myriad of reasons, elect to spin off a product or business into a wholly owned independent company. Under Art. 1 par. (12) of Law No. 40 of 2007 concerning Limited Liability Company (“Company Law”), a Spin-Off is defined as a ‘Separation’, a legal action taken by a Company in order to separate its businesses and legally transfer its assets and liabilities to new companies.

Further, the Art. 135 of Company Law has categorized a Spin-Off as follows:

  1. Pure Separation, a separation that legally transfers all of the Company’s assets and liabilities to 2 (two) other companies or more that dissolves the transferror Company upon the completion of the Separation.
  2. Non-pure Separation, a separation that transfers a part of the Company’s assets and liabilities to 1 (one) company or more. The transferring company still exists after such Separation.

There are several drivers of spin-off activities. The principal reasons often cited by companies for pursuing spin-offs include the following:

  • Business focus development. A spin-off will allow each business to focus on its own strategic and operational plans without diverting human and financial resources from the other business.
  • Employment cost-effectiveness. A spin-off will increase the effectiveness of the employment costs; the significant number of employees who are transferred to the new companies will decrease the holding company’s employment costs, in particular the costs associated with the equity compensation awarded to the employees (e.g. salary structures, severance payment, etc.)
  • Business focus support. A spin-off will allow the subsidiary company to support its holding company’s business focus. Creating one subsidiary company to provide support can be a better option than hiring external subcontractors.

Based on our experiences advising and assisting clients in spin-offs, we have identified 2 (two) target areas your company should consider before taking action.

First: Legal Due Diligence
Before conducting the spin-off, it is strongly suggested the original company conduct a legal due diligence. Your company has to be fully aware whether the spin-off would impact its business permits and licenses or not. In general, some of the business permits in Indonesia (e.g.: Mining Permit) require the permit holder to report to the relevant institution prior to conducting any corporate restructuring. Further, your company must review its liabilities according to the existing agreements with any third parties. The spin-off must not adversely affect the rights of third parties. Art. 126 par. (1) letter (b) of Company Law expressly states that the Separation shall observes the interests of the creditors and business partners of the Company.

Second: The Golden Handshake
In a corporate spin-off, both the existing company and the new company must consider the implications of such restructuring on the employees, particularly related to employee benefit plans and compensation arrangements. Art. 126 par. (1) letter (a.) expressly stipulates that the Separation must observe the the interests of the employees. Employee benefit plans and compensation structures can be significant liabilities.

Employees transferred to the new company will enter into new employment agreements with the spin-off company. A Spin-off is an opportunity for the old company to restructure potential liabilities associated with long term employment retention costs. The old company must consider their obligations as an employer under individual employment as well as collective labour agreements, including potential withdrawal liabilities related to multi-employer defined benefit pension plans and compensation for the termination of the existing employment agreement with the transferred employees.

The company can negotiate with employees and/or labour union(s) to agree on a ‘golden handshake’ (mutually agreed compensation structure for the employees). Therefore, a spin-off is also a ‘golden’ opportunity for employees to receive a handsome sum of money while still retaining their job. In our experience, when a spin-off benefits both the employer and the employees, the transition is smooth.

Conclusion:
Prior to corporate restructuring, including a spin-off, the Company should conduct internal legal due diligence to assess potential risks and benefits of such action. Afterwards, the Company can more effectively prepare action plans such as transfers of assets and liabilities and can more economically prepare for the employment matter implications. Negotiation on golden handshake compensation with the employees and/or the labour union(s) is a crucial element to ensuring a smooth execution of the spin-off.

We at SLF believe in evolution and proactive business strategies, but we equally believe in equipping your company with the information it needs to change wisely.

About the author:

Budhi Satya Makmur Budhi Satya Makmur

is a junior partner of Schinder Law Firm. His practice focus is corporate commercial and dispute resolution. He has advised clients in various spin-off transactions. He has also represented many clients in negotiations and disputes related to employment matters.




Spin-Off: Legal Due Diligence and the Employees’ Golden Handshake