Demerger is a form of corporate restructuring in which an entity's business operations are divided into one or more components. Where a company/corporate house has a number of different departments, the company chooses to demerge that department which is growing at a remarkable rate and has an abundant potential. In this form of reorganisation, the shareholders or unit holders in the parent company get direct ownership of the demerged entity or the subsidiary entity. Apart from that, where a company elects to demerge, with an aim of corporate restructuring, the undertakings sought to be demerged are transferred from the transferor company to an existing transferee company.

Other common reasons for demerger are: it offers the investors a clear choice between different business types; it allows independent financial strategy; increases the price earning of the companies; it increases the overall market valuation of a company, although a demerger does not increase the value of the assets of the company.  

The Company Act 1994 does not explicitly define the term 'demerger'. The concept of demerger may, however, be deduced from different provisions of the said Act, for instance section 228 (6) of the Company Act defines the term 'agreement' as “a reorganisation of share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes or by both those methods and, for the purposes of this section unsecured creditors who may have filed suits or obtained decrees shall be deemed to be of the same class as other unsecured creditors.” Further, pursuant to section 107 of the Company Act, the directors of a company or of a subsidiary company of a public company shall not, except with the consent of the company, in general meeting: (a) sell or dispose of the undertaking of the company; and (b) remit any debt due by a director. Finally, according to section 229, where an application is made to the Court under section 228 of the said Act for sanctioning a compromise or arrangement between a company and any such persons mentioned in section 228. The Court may either by the order sanctioning the compromise or arrangement or by any sub-sequent order make provision for such incidental matters as are necessary to secure that the reconstitution or amalgamation is fully and effectively carried out.

A demerger usually attract the other provisions of the 1994 Act envisaging reduction of share capital and as such the company is required to pass a special resolution which is subject to confirmation by the court by making an application under section 60 of the Company Act 1994. Further it is essential that the Articles of Association of the company authorises demerger, division or split of the company in any way.

Procedure of Demerger:

Step-1 If the Articles of Association of the Company does not authorise such restructuring the Articles needs to be amended by passing special resolution;

Step-2 a scheme of demerger needs to be prepared;

Step-3 both the demerged company and the resulting company needs to make an application to the Court to obtain an order for holding meetings of members/creditors;

Step-4 once the Court gives the order notice of the meeting needs to be served to the members/creditors;

Step-5 once the notice is served the company shall hold meeting(s) of the creditors/members;

Step-6 reporting the result of the meeting to the Court;

Step-7 a petition needs to be filed to the Court for sanctioning the scheme of demerger;

Step-8 once the Court gives an order sanctioning the scheme certified copy of the Courts order needs to be communicated to the Office of the Registrar of Joint Stock Companies and Firms (RJSC).

The writer is an Advocate, Supreme Court of Bangladesh.