How Spin-Offs Drive Company Growth: Insights from Serbian Corporate Law 

In the fast-evolving corporate world, spin-offs have emerged as a powerful tool for companies to unlock value, streamline operations, and achieve growth. A spin-off allows a parent company to separate a part of its business into a new, independent entity, often with the expectation that the new entity will perform better on its own. Under Serbian corporate law, spin-offs provide businesses with a strategic restructuring option to enhance operational efficiency and shareholder returns. 

Clearing Terminology Confusion Gap Between Spin-Offs in Serbian Law and the Anglo-Saxon Legal System 

In the Anglo-Saxon legal system, a spin-off is a corporate restructuring strategy in which a parent company creates an independent business entity by distributing shares of a subsidiary or division to its shareholders. This separation, also known as a spinout or starburst, allows the spun-off entity to operate independently, often under a new name and management.

Spin-offs are typically initiated when the parent company projects that the new entity will be more valuable and profitable as a standalone business. Although the spin-off gains independence, the parent company may retain a minority stake or provide financial and technological support during the transition. 

On the other hand in Serbian law, a spin-off (izdvajanje) involves the transfer of a portion of assets, liabilities, and rights from the transferring company to one or more new or existing companies. 

Why Do Companies Pursue Spin-Offs? 

Management might consider a spin-off if they believe that the value of the separate entities would be greater than the combined value of the parent company and the subsidiary. This often happens when the parent company’s overall value is lower than the sum of the value of its individual parts. 

Several reasons may drive executives to consider a spin-off: 

1. Expertise and Focus 

There may be subsidiaries or divisions that require specialized management, which could be more effective if the unit becomes a separate entity. This allows for dedicated leadership and management, focusing solely on the needs and growth of that division, while the parent company’s executives can focus on the remaining business lines. 

2. Different Growth Trajectories and Strategies 

Some divisions of a company may grow at different rates or require different strategies. For example, a mature unit with slow but steady growth might not align with a fast-growing division. By separating them, each can adopt more suitable strategies for its stage of growth, potentially attracting more investment and attention from the right investors. A spin-off can be a specific type of startup that develops new products, services, or technologies.  

3. Analyst Coverage 

A spin-off can make it easier for securities analysts to assess the future prospects of a more focused and less complex business. Furthermore, after a company spins off a division, it may attract analysts who specialize in that specific niche, offering more accurate market insights. 

4. Shareholder Value 

Often, a spin-off is pursued when the parent company’s value is perceived to be underestimated, either due to management challenges or a strategic mismatch. By spinning off a division, the parent company may unlock hidden value, which could lead to a higher valuation for the remaining business.  

The Spin-Off Process Under Serbian Company Law 

In Serbian company law, companies can undergo four types of status changes, one of which is a spin-off. A spin-off is particularly specific because it is the only type of status change in which the transferring company does not cease to exist after the reorganization but continues to exist alongside the acquiring companies. Serbian law recognizes three types of spin-offs:  

1. spin-off with the establishment (which closely corresponds to the spin-off in the Anglo-Saxon legal system), 
2. spin-off with merger, and  
3. mixed spin-off. 

Each of these forms serves different purposes and has its unique legal structure, particularly concerning the traditional spin-off concept. 

1. Spin-Off with Establishment (Spin-Off) 

The spin-off with the establishment is the form of reorganization that most closely aligns with the Anglo-Saxon concept of a spin-off. In this structure, a company separates part of its assets, rights, and obligations to establish a completely new, independent entity. 

In this case: 

• The parent company continues to exist. 

• A new, independent company is established, which becomes fully autonomous in terms of its management, operations, and legal status. 

• The shares in the newly established entity are typically distributed to the shareholders of the parent company, who then own stakes in both the parent company and the new spin-off.

This form of spin-off reflects the core idea of a spin-off in Anglo-Saxon legal systems, where the goal is to allow both the parent company and the new entity to grow independently, often unlocking greater value for shareholders by focusing on different business operations. 

2. Spin-Off with Merger 

In contrast to the spin-off with the establishment, spin-off with merger involves the separation of a part of the parent company’s assets, rights, and obligations, which are then integrated into an already existing company. 

Here: 

• The parent company continues to exist. 

• The divested assets are merged into another existing company, which takes on the rights and obligations of the divested business unit.

This type of spin-off does not align with the traditional spin-off model, as it does not create a new independent entity. Instead, it integrates the divested unit into a pre-existing business, maintaining the continued existence of the parent company while altering the structure of the companies involved. 

3. Mixed Spin-Off 

The mixed spin-off combines aspects of both the spin-off with the establishment and the spin-off with the merger.  

In this case: 

• A portion of the assets, rights, and obligations is transferred to a newly established company, similar to the spin-off with the establishment. 

• The other portion of the divested business is transferred to an already existing company, akin to the spin-off with the merger. 
• The parent company continues to operate after the transaction is completed. 

While this form of reorganization shares some characteristics with a spin-off, particularly the creation of a new legal entity, it differs significantly because it also involves the integration of part of the business into an already existing company. This mixed approach is more complex and offers flexibility, allowing the parent company to restructure and optimize its portfolio of operations. 

A company currently undergoing liquidation or bankruptcy cannot participate in a spin-off unless this is part of a broader reorganization measure in accordance with the Bankruptcy Law. This restriction ensures that companies in financial distress are not further fragmented, which could harm creditors or other stakeholders. 

Key Considerations in the Process and Documentation Requirements 

The spin-off process begins with the preparation of key legal documents. The company must draft a spin-off agreement or, in case of a spin-off with the establishment, a division plan. This document governs the distribution of assets, liabilities, and employee rights, and it outlines the exact process of the spin-off.  

Along with the spin-off agreement or division plan, other necessary documentation must also be prepared, such as a division balance sheet and a draft of the article of association for the newly established company or the amendments to the article of association existing company as an acquiring company. Depending on the legal structure, financial statements might also need to be prepared, although this is not always required, because there are ways to avoid this. 

Once the required documents are prepared, the company must inform all relevant parties. This includes publishing the documents on the website of the Business Registers Agency (“BRA”) to ensure full transparency. Additionally, known individual creditors must be notified, and they must be given access to the documentation, allowing them to review the proposed changes and make any necessary claims. 

After the documentation has been prepared and stakeholders have been notified, the spin-off must be formally approved. The company’s general assembly (which is made up of all shareholders of the company) must give its approval by a qualified majority for the spin-off to move forward. 

Once approved, the final step is the registration of the spin-off with the BRA. It is only upon this registration that the legal consequences of the spin-off become effective, meaning the new or restructured entities are legally recognized. 

In certain cases, when the acquiring company holds at least 90% of the shares in the transferring company, the process becomes simpler. Fewer documents are required, and the procedure is streamlined, allowing for a more straightforward implementation of the spin-off.  

Conclusion 

By following these steps and ensuring compliance with Serbian company law, businesses can execute a spin-off effectively, unlocking value while maintaining legal and operational integrity. Whether the spin-off results in the creation of a new entity or involves the integration of assets into an existing company, careful planning, and thorough documentation are key to a successful reorganization.