Executive Summary:  From a commercial perspective, spin-offs can represent incredible opportunities for unlocking shareholder value.  As with any major undertaking, spin-offs require a tremendous amount of planning, and investors and management alike should rightfully strive to achieve predictable outcomes.  Fortunately, the Panamanian legislature has shed some additional light on this subject by recently enacting a long overdue law that specifically regulates corporate spin-offs.

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From a commercial perspective, spin-offs can represent incredible opportunities for unlocking shareholder value.  Whether it’s by decoupling a high value/growth asset from the trappings of its larger conglomerate or by devising more tax efficient means of distributing value to shareholders, spin-offs offer a whole host of potential benefits.  However, spin-offs (as is the case with any major undertaking) may be plagued by certain commercial, administrative and legal challenges, and as such, companies undergoing spin-offs must carefully “manage” the marketplace’s expectations, lest they inadvertently send a mixed or negative message.  Some onlookers might interpret a spin-off as tossing out the trash, in order for the winners to keep the cash.  Others might view it more favorably if they believe in the operational benefits of having “focused” companies instead of unwieldy conglomerates.  In any event, corporate spin-offs require a tremendous amount of planning, and investors and management alike should rightfully strive to achieve a predictable outcome.

In Panama, the law has historically been silent on the issue of corporate spin-offs.    The lack of proper regulation has led to corporate spin-offs being perceived as ambiguous and unpredictable affairs in Panama. The unregulated environment and the unpredictability surrounding corporate spin-offs made corporations wary of taking any such actions.  Fortunately, the Panamanian legislature recently enacted a long overdue law that specifically regulates corporate spin-offs.  Since the enactment of Law 85 of November 22, 2012, Panamanian corporations have finally been able to engage in corporate spin-offs within a regulated and more predictable framework.

Law 85 added several new provisions to the Panamanian Commercial Code, regulating various types/forms of corporate spin-offs. This law starts off by stating that: “A company engaged in commerce of any kind or nature can be split by dividing all or part of its assets and transferring them to one or more new or existing companies, called beneficiaries, which should have the same shareholders or partners as the company being divided or which have said company as their sole partner or shareholder.”

Essentially, the above provision allows for the following types/forms of spin-offs:

1)         A complete spin-off, whereby the original company to distribute its assets in full to the beneficiary company or companies and is thereby dissolved in the process; or

2)         A partial spin-off, whereby the dividing company remains intact following the split with part of its assets being allotted to one or more beneficiary companies.

It is important to note that in both cases, existing companies or companies to be incorporated pursuant to the spin-off can be used as beneficiary companies for the corporate spin-off process; provided that the beneficiary companies retain the same ownership structure (ie, same partners and shareholders) as the pre-spinoff company, or for the beneficiary companies to be wholly owned subsidiaries of the surviving post-spinoff company.

From a mechanical/procedural perspective, this law clearly lays out the ground rules for completing a spin-off.  For example, the members or shareholders of a company are required to approve a spin-off; conversely, the board of directors does not have the authority to unilaterally authorize a spin-off without member/shareholder oversight and approval.  Moreover, a company wishing to initiate a spin-off process must provide the Panamanian National Revenue Authority (ANIP) with at least 30-days’ notice prior to registering the spin-off at the Public Registry.  After the notification period has expired, the minutes of a meeting of the shareholders/partners adopting the resolution that authorizes a spin-off (or a written certification of the Secretary of said meeting) must be protocolized and registered at the Public Registry for the spin-off to be effective. The law goes on to list a series of other issues that may be dealt with at the above referenced shareholders/partners meeting, which include the following:

a.         Total or partial transfer of assets, individually or in block.

b.         The limitation of liability regime of the company being divided and of each of the beneficiary companies.

c.         Transfer of liabilities of the company being divided.

d.         Transfer of shares or related interests to the beneficiary companies.

e.         The amount of shares or related interests corresponding to each partner or shareholder of the company being divided, in accordance with the proportion of their stake therein.

f.         The approval of the Articles of Incorporation of the beneficiary companies.

This law takes a strong stance towards protecting minority interests and creditors’ rights (viz-a-viz the controlling stakeholders of a company contemplating a spin-off).  For example, by requiring a shareholders/members meeting, minority stakeholders are given the tools to overturn any corporate action taken that falls short of strict compliance with the law (e.g., meetings held without providing all shareholders/partners with due notice).  Furthermore, by requiring the same ownership structure amongst the various beneficiary companies, minority stakeholders are protected from potentially unscrupulous controlling shareholders/partners attempting to syphon off quality assets, while leaving minority stakeholders holding the proverbial bag.   In addition to building in fundamentally sound corporate governance protections, this law introduces an element of paternalism by requiring companies to provide the Panamanian National Revenue Authority (ANIP) with prior notice of forthcoming spin-offs.

With respect to the protection of creditors, this law specifies that any and all liabilities associated with a given asset shall flow directly into the recipient beneficiary company (e.g., mortgaged property).   However, creditors are afforded additional protections in the event they oppose the spin-off.  For example, a certification issued by the Public Registry in connection with the spin-offs is required to be published (ie, made available to the public) for three days.  Any creditor may challenge a spin-off within thirty (30) days of the final publication of the above referenced certification.  Furthermore, creditors that either were unable to avail themselves of this thirty (30) day window or opted not to use it may still sue the other beneficiary companies involved in the spin-off.  Such beneficiary companies would be treated as jointly and severally liable in the event the spin-off was found to be prejudicial to the suing creditor.

From a tax perspective, this law creates a conundrum that in many instances might make spin-offs an unattractive alternative for certain corporations.  On its face, spin-offs are treated as tax neutral events (ie, not treated as transfers for tax purposes); provided that, assets are transferred at book value.   However, this law imposes joint and several liability on the beneficiary companies for any and all of the dividing company’s tax liabilities at the time of the spin-off and into the future.  If the courts opt to interpret this new provision literally, spun-off companies may need to account for this contingent liability in their books, subject to applicable statutes of limitation.  Since this law does not clarify whether this joint and several liability applies for spin-offs where the dividing company does not survive (ie, joint and several liability as between the beneficiary companies), practitioners may opt to advise their clients to pursue this type/form of spin-off until the courts and/or the legislature clarifies this issue.

The views expressed herein are solely those of the author and have not been endorsed, confirmed or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.