City law in practice

Case Study 1: The demerger of Woolworths from Kingfisher Plc


On 13 September 2000 Kingfisher plc announced its plans to demerge its general merchandising businesses as Woolworths Group plc.

Recently ranked second in a survey of legal advisers for European mergers and acquisitions, Freshfields Bruckhaus Deringer advised on the demerger and public listing of Woolworths. Freshfields had to ensure that Kingfisher complied with all the steps necessary to demerge Woolworths effectively into a separately quoted public company.

The demerger was conditional on the shareholders&#39 approval of the demerger resolution proposed by Kingfisher at an Extraordinary General Meeting called on 24 August 2001 and on Woolworths&#39 admission to the Official List of quoted companies and to the London Stock Exchange.

The Extraordinary General Meeting

The demerger process began on 1 August 2001 when Kingfisher sent all its UK shareholders a Circular explaining the proposed demerger and related proposals together with a Notice of EGM. Kingfisher sought the approval of its shareholders at the EGM to the demerger of Woolworths. The Circular was accompanied by the Listing Particulars relating to the prospective Woolworths Group plc as required by the UK Listing Rules.

At the EGM the shareholders were asked to vote on five resolutions, the first of which was the “demerger resolution” providing that consideration for the demerger would be a distribution in specie of the shares in Woolworths to Kingfisher&#39s ordinary shareholders. This meant that Kingfisher shareholders were required to vote on the distribution of one Woolworths share for each Kingfisher ordinary share held. The Woolworths shares were to be credited as paid in full and were consideration for the transfer by Kingfisher to Woolworths of the whole of the issued share capital in the holding company for its general merchandise businesses.

The shareholders were also asked to vote on the consolidation of Kingfisher ordinary shares immediately following Woolworths&#39 admission to the Official List on the basis of 10 consolidated shares with a nominal value of 13.75 pence for every 11 shares with a nominal value of 12.5 pence held at that time. The purpose of the consolidation was to preserve the value of options over Kingfisher ordinary shares despite the fact that they would no longer reflect the value of the general merchandising businesses.

The other resolutions before the shareholders concerned future Kingfisher dividends which, it was proposed, would reflect the loss of profits resulting from the demerger, the relationship between Kingfisher and Woolworths after the demerger, and the effect of the demerger on employee share schemes.

Kingfisher&#39s directors were obliged to provide the shareholders with a clear recommendation under the terms of the UK Listing Rules, and all five ordinary resolutions were passed by the shareholders in line with the directors&#39 recommendation that the proposed demerger was in the best interests of the shareholders as a whole. Therefore, the first condition of the demerger was met at the EGM on 24 August 2001.

Listing

Following the shareholders&#39 approval of the demerger, an application was made to the UK Listing Authority for 1,407,067,332 ordinary shares in Woolworths at 12.5 pence each to be admitted to the Official List and to trading on the London Stock Exchange, which was the second condition to the demerger of Woolworths becoming effective.

A proposed company can only be listed after it has been validly incorporated. Woolworths was incorporated as a private limited company on 8 October 1999 and was re-registered as a public limited company on 11 July 2001.

The Listing Rules set out the documents to be lodged by the company applying for admission, and required Woolworths to publish and distribute Listing Particulars disclosing all relevant financial information required by investors. Woolworths duly provided the UK Listing Authority with the necessary documents and Price Waterhouse Coopers prepared a financial report for the three years to February 2001 for inclusion in the Listing Particulars.

Woolworths&#39 application for admission to the Official List was sponsored by UBS Warburg, advised by Clifford Chance. As the sponsor, UBS Warburg was responsible for overseeing compliance with the Listing Rules and was approved by the UK Listing Authority as required by the Rules.

The UK Listing Authority approved Woolworths&#39 application. The transfer of shares took place on 28 August 2001 at 6.00 am, when the demerger of Woolworths Group plc was officially recorded. All holders of ordinary Kingfisher shares on 24 August 2001 at 5.00 pm became shareholders of the newly demerged Woolworths. The newly demerged company was admitted to the Official List and to trading on the London Stock Exchange at 8.00 am on 28 August 2001.

The transaction was completed when share certificates were sent to all Woolworths&#39 shareholders by 31 August 2001. Those shareholders who held ordinary Kingfisher shares through CREST at the time the demerger was recorded received uncertified shares in Woolworths immediately after it was admitted to the Official List.

An effective demerger

Clearance was obtained from the Inland Revenue under s.138(1) Taxation of Chargeable Gains Act 1992 so that Kingfisher shareholders were not treated as disposing of their ordinary shares by virtue of receiving shares in Woolworths for the purpose of capital gains tax. The Inland Revenue also granted clearance under s.215(1) Income and Corporation Taxes Act 1988 confirming that the distribution of Woolworths shares under the demerger was exempt for income tax purposes.

Under the terms of the demerger agreement regulating the relationship between Kingfisher and Woolworths following the demerger, Woolworths paid Kingfisher £200 million to extinguish its debt. As a result of the successful demerger and the sale of Woolworths stores, Kingfisher raised in the region of £1.1 billion cash and separated its general merchandise businesses from its home retail business. Gerald Corbett, the former chief executive of Railtrack plc, became chairman of the newly formed Woolworths Group plc.

Woolworths Group plc is now a public company in its own right. Although Kingfisher ordinary shareholders hold shares in both Kingfisher and Woolworths, the two companies are separately listed and have their own distinct management teams and business strategies. Woolworths&#39 profitability decreased following the demerger. However, the success of the demerger in terms of Woolworths long-term growth remains to be seen.

Timeline

1 August 2001

Announcement of demerger

Shareholder Circular with Notice of EGM

Listing Particulars

24 August 2001

Extraordinary General Meeting – 5.00pm

Deadline for transfer of ordinary Kingfisher shares

28 August 2001

Admission to the Official List – 6.00am
Demerger record time – 8.00am
Listing of Woolworths, consolidation of Kingfisher ordinary shares and commencement of dealings in Woolworths

31 August 2001

Dispatch of share certificates for Woolworths Group plc

31 July 2001

Demerger agreement

Jargon Buster

PUBLIC LIMITED COMPANY (PLC)
Public limited company – Company limited by shares that is registered as a public company in accordance with the Companies Act 1985

QUOTED COMPANY
Company whose shares are quoted on a stock exchange

EXTRAORDINARY GENERAL MEETING (EGM)
Non-AGM meeting of shareholders

NOTICE OF EGM
Notice to shareholders that an Extraordinary General Meeting will take place

ORDINARY RESOLUTION
Shareholders&#39 decision requiring a simple majority to be passed

DISTRIBUTION IN SPECIE
Distribution of shares in a demerging company to the distributing company&#39s shareholders

UK LISTING RULES
Rules made by the UK Listing Authority under the Financial Services Act 1986 governing the admission of securities to the Official List

UK LISTING AUTHORITY
The Financial Services Authority, responsible for listing under the Financial Services Act 1986

THE OFFICIAL LIST
The official list of the UK Listing Authority

LISTING PARTICULARS
Document required by the Listing Rules, disclosing all information on a company&#39s prospects and rights attaching to its securities that investors and their professional advisers would reasonably require

INCORPORATION
Establishment of a company with a legal personality

CREST
A paperless alternative to share certificates enabling shares to be held and/or transferred