Tom: Hmmm, I am not sure I understand the stock exchange thing—does it mean that the split-off company requires their shareholders to give up their parent company’s shares in order to receive new shares of the split-off?

Tina: Exactly. Let me put this way: in a spin-off, the shareholders of the original parent company become the shareholders of the newly spun-off company.

Tom: So, how does it work in a split-off situation?

Tina: In a split-off, the parent company offers its shareholders the opportunity to “exchange” their parent company’s shares for new shares of the split-off company. They must choose to stay with the original company or take a share of the new company.

Tom: I guess the difference between the two is actually quite significant. Is there anything else I should know about a split-off?

Tina: One thing of note is that in a split-off, shareholders may choose to file a lawsuit against the parent company if the exchange ratio, or premium, offered by the parent company is deemed unfair.

Tom: A premium?

Tina: A premium is like a bonus—for example, a parent company may offer its shareholders of the split-off $10.00 a share in exchange for $8.00 of the parent company’s stock.

Tom: Why? Is it a way to encourage existing parent company’s shareholders accepting the new offer?

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