Divestiture Examples: Types, Tax Rules, and Successor Liability

Corporate divestitures come in six main forms: sell-offs, spin-offs, equity carve-outs, split-offs, liquidations, and mandated divestitures ordered by antitrust regulators. Each method moves a business unit out of a parent company in a different way, and each carries different consequences for shareholders, taxes, employees, and creditors. The examples below show how each type actually works in practice.

Sell-Offs

A sell-off is the most direct divestiture: one company sells a business unit or set of assets to a buyer for cash, stock, or both. The purchase agreement spells out which assets, employees, contracts, and liabilities transfer. The seller takes the payment and removes the business from its books.

Clorox did this in 2024 when it sold its Better Health vitamins and supplements business to an affiliate of Piping Rock Health Products. The deal included the Natural Vitality, NeoCell, Rainbow Light, and RenewLife brands together with the trademarks, licenses, and manufacturing facilities in Florida.¹ Supplements no longer fit the core cleaning and household strategy, and a clean sale let Clorox exit entirely.

Larger sell-offs can look almost like mergers. Unilever announced in 2026 that it would combine its Foods division with McCormick in a transaction valuing Unilever Foods at $44.8 billion. Unilever and its shareholders will receive 65% of the combined company’s equity plus $15.7 billion in cash.² The consideration is mostly equity rather than cash, but the underlying logic matches every sell-off: divest a non-core division so the parent can focus elsewhere, in this case on health and personal care brands.

Spin-Offs

In a spin-off, the parent carves out a division and distributes shares of the new standalone company to existing shareholders. Nothing changes hands with an outside buyer. Shareholders end up holding stock in two companies instead of one, with each parent share entitling the holder to a proportional share of the new entity.

eBay’s separation of PayPal in 2015 is the textbook case. eBay distributed 100% of PayPal’s outstanding common stock to shareholders on a pro rata basis, so every eBay stockholder received PayPal shares in proportion to their existing holdings.³ After the distribution, eBay and PayPal traded independently and pursued their own strategies.

Tax-Free Treatment Under Section 355

The main appeal of a spin-off is that it can be tax-free. Under 26 U.S.C. § 355, shareholders who receive stock in the new company generally owe no federal income tax on the distribution, and the distributing corporation itself recognizes no gain.⁴ The relief is not automatic. Section 355 imposes several conditions:

Both the parent and the spun-off entity must have been actively conducting a trade or business for at least five years before the distribution.⁴
The parent must control the subsidiary immediately before distributing its shares, and must distribute all of the subsidiary stock or enough to constitute control.
The transaction cannot be primarily a device to distribute corporate earnings at capital gains rates rather than as dividends.
There must be a legitimate corporate business purpose, not just a tax advantage.

eBay structured the PayPal spin-off to qualify under both Section 368(a)(1)(D) and Section 355, and obtained an outside tax opinion before proceeding.³

When a Spin-Off Fails to Qualify

If the IRS decides a spin-off does not meet Section 355, the distribution is reclassified as a taxable dividend to shareholders under Section 301.⁵ Shareholders then owe ordinary income tax on the value of the shares they received, up to the distributing corporation’s earnings and profits. The corporation itself also recognizes gain on the appreciated subsidiary stock it distributed. A deal designed to be tax-neutral can produce large tax bills for both the company and every shareholder.

Equity Carve-Outs

An equity carve-out sits between a sell-off and a spin-off. The parent takes a subsidiary public through an IPO, selling a minority stake to outside investors while keeping majority ownership and control. The subsidiary gets its own ticker and market valuation, and the parent collects the IPO proceeds.

Pfizer used this approach with its animal health business, Zoetis. In the 2013 IPO, Pfizer sold roughly 17% of Zoetis while retaining about 83% of the economic interest and 98% of the voting power.⁶ That structure raised billions in capital, established a standalone market price for the animal health business, and preserved Pfizer’s control through the retained supermajority. Pfizer later completed the separation by distributing its remaining Zoetis shares to shareholders in a tax-free spin-off.

The IPO portion requires registration with the SEC under the Securities Act of 1933. The subsidiary files a Form S-1 registration statement disclosing its financials, risks, and operations.⁷ That regulatory work makes carve-outs more expensive and time-consuming than a straight spin-off, but the parent receives cash instead of just redistributing equity.

The Pfizer/Zoetis sequence also shows a common two-step strategy. Carve out a minority stake first to establish a market price, then spin off the remainder tax-free under Section 355. The parent gets immediate cash from the IPO and a clean tax-free exit through the follow-on spin-off.

Split-Offs

A split-off resembles a spin-off but works differently for shareholders. Instead of automatically receiving new shares, shareholders must choose to trade their parent company stock for shares in the subsidiary. It is an exchange, not a distribution, and shareholders who prefer to keep their parent stock simply do nothing.

Johnson & Johnson used a split-off to complete its separation from Kenvue, the consumer health company behind Tylenol and Band-Aid. J&J offered shareholders the option to tender J&J shares in exchange for Kenvue shares at a final ratio of 8.0324 Kenvue shares for each J&J share tendered.⁸ The ratio built in a premium on the Kenvue shares to encourage participation, a standard feature of split-offs since the parent needs enough shareholders to volunteer for the exchange to absorb the subsidiary shares.

The J&J/Kenvue split-off was oversubscribed, meaning more shareholders wanted to exchange than J&J had Kenvue shares to distribute, so tendered shares were prorated.⁸ Every share exchanged reduced J&J’s outstanding share count, concentrating ownership among shareholders who stayed. For investors, the decision came down to whether Kenvue’s consumer health business would outperform J&J’s remaining pharmaceutical and medical device operations.

Liquidations

Liquidation is the most final divestiture. Rather than selling a business as a going concern or spinning it into an independent company, the company shuts down operations and converts its assets to cash piece by piece. Inventory gets sold off, equipment goes to auction, real estate is listed, intellectual property is transferred to the highest bidder, and the legal entity is dissolved.

Toys R Us is the vivid modern example. In 2018, after years of declining sales and an unsustainable debt load from a leveraged buyout, the company filed to liquidate roughly 800 U.S. stores. Holiday earnings came in $250 million below budget, and the company projected it would run out of cash within months. Liquidators ran closing sales at every location.

Creditor Payment Priority

When a company liquidates, the cash does not go straight to shareholders. Creditors get paid first, and the order matters:

Secured creditors, such as a bank with a lien on real estate, get paid from the value of that collateral before anyone else.
Priority claims come next. These include unpaid employee wages up to statutory limits, tax debts, and domestic support obligations.
General unsecured creditors, including suppliers and bondholders without collateral, split whatever remains and often receive cents on the dollar.
Shareholders are last and frequently receive nothing.

Toys R Us creditors with secured positions recovered a portion of their claims; unsecured creditors and shareholders bore the heaviest losses. Dissolution filing fees are minor, generally under $100, but professional costs for appraisals, legal counsel, and liquidation management can run from a few thousand dollars into the tens of thousands depending on the size and complexity of the business.

Government-Mandated Divestitures

Not all divestitures are voluntary. Federal antitrust regulators can force a company to sell off assets as a condition of approving a merger, or to break up an existing monopoly. The legal basis is Section 7 of the Clayton Act, which prohibits acquisitions whose effect “may be substantially to lessen competition, or to tend to create a monopoly.”⁹ Either the Federal Trade Commission or the Department of Justice Antitrust Division can challenge a deal, and the usual resolution is a consent order requiring the merging parties to sell specified assets to a government-approved buyer.¹⁰

The T-Mobile/Sprint merger in 2019 and 2020 is a textbook example. The Justice Department approved the deal only after T-Mobile and Sprint agreed to divest Sprint’s entire prepaid business, including more than 9 million Boost Mobile, Virgin Mobile, and Sprint-branded prepaid customers, to Dish Network. The companies also had to make over 20,000 cell sites, hundreds of retail locations, and certain wireless spectrum available to Dish.¹¹ The goal was a viable fourth national wireless competitor after the merger.

Hart-Scott-Rodino Pre-Merger Filing

Before most large acquisitions reach regulators, federal law requires advance notice. Under the Hart-Scott-Rodino Act (15 U.S.C. § 18a), both the buyer and the target must file notification with the FTC and wait through a review period before closing any transaction above certain size thresholds.¹² For 2026, the minimum transaction size triggering a filing is $133.9 million.¹³ Filing fees scale with deal size:

Under $189.6 million: $35,000
$189.6 million to $586.9 million: $110,000
$586.9 million to $1.174 billion: $275,000
$1.174 billion to $2.347 billion: $440,000
$2.347 billion to $5.869 billion: $875,000
$5.869 billion or more: $2,460,000

Companies that skip the HSR filing or close before the waiting period expires face civil penalties of up to $10,000 per day of violation.¹²

How Tax Treatment Differs Across Divestiture Types

Tax treatment varies dramatically depending on the divestiture method, and the difference can amount to billions of dollars on large deals.

Spin-offs and split-offs that qualify under Section 355 are generally tax-free for both the distributing corporation and its shareholders.⁴ That is the reason companies spend heavily on tax counsel. The five-year active business requirement, business purpose test, and anti-device rules all exist because Congress wanted to prevent spin-offs from being used as a backdoor way to distribute cash to shareholders at favorable rates.

Sell-offs are almost always taxable events. When a corporation sells a subsidiary or business unit, it recognizes gain on the difference between the sale price and its tax basis in the assets sold, and the corporate tax rate applies. The buyer’s basis in the acquired assets then resets to the purchase price, which can create valuable depreciation deductions going forward. That is one reason buyers often prefer asset purchases over stock purchases.

Equity carve-outs fall in the middle. The IPO generates cash for the parent, and the parent typically recognizes gain on the shares sold to the public. As Pfizer showed with Zoetis, a company can follow an initial carve-out with a tax-free spin-off of the remaining shares under Section 355, provided it meets all the qualifying requirements at that later stage.

Liquidations produce taxable gain or loss at the corporate level as each asset is sold. Shareholders receiving liquidating distributions are generally taxed on the difference between what they receive and their basis in the stock. There is no Section 355 shelter available.

Employee Protections During Divestitures

Divestitures that involve closing facilities or laying off large numbers of workers can trigger the federal Worker Adjustment and Retraining Notification Act. If an employer has 100 or more full-time employees, the WARN Act requires at least 60 days’ written notice before a plant closing or mass layoff. A plant closing means shutting down a facility or operating unit that causes job losses for 50 or more employees within a 30-day period. A mass layoff means cutting at least 500 employees, or at least 50 employees if that represents one-third or more of the workforce at the site.¹⁴

An employer that violates the notice requirement owes each affected employee up to 60 days of back pay and benefits.¹⁴ Notice must go to employee representatives (typically a union), each affected employee individually if there is no union, and the state’s rapid response agency and local government. Many states impose additional notice requirements beyond the federal 60-day minimum, so employees facing a divestiture-related layoff should check state rules as well.

In a sell-off where the buyer continues operating the business, employees often transfer to the new owner rather than losing their jobs. When the buyer plans to restructure or consolidate, layoffs may follow the closing. Liquidations almost always trigger WARN obligations because the entire workforce loses its positions.

Creditor Risks and Successor Liability

For a creditor of a company that is divesting assets, the structure of the deal determines whether the buyer can be pursued for existing debts. The general rule is that a buyer of assets does not inherit the seller’s liabilities. Courts in most states recognize exceptions, and the most significant is the “de facto merger” doctrine.

Under that doctrine, a court can hold the buyer responsible for the seller’s obligations if the transaction looks more like a merger than an arm’s-length asset sale. Courts weigh factors such as whether the seller’s owners received equity in the buyer, whether the seller ceased operations after the sale, whether the buyer took on the seller’s ongoing liabilities, and whether management and operations continued essentially unchanged. No single factor is decisive, but when most point the same direction, courts treat the asset-sale label as a formality and impose successor liability.

A separate risk applies to the seller. Under the Uniform Voidable Transactions Act, adopted in most states, a transfer of assets can be reversed if the company was insolvent at the time (or became insolvent because of the transfer) and did not receive fair value in return. Transfers made with intent to put assets beyond creditors’ reach are voidable regardless of solvency. Courts consider whether the sale was to a company insider, whether the seller retained enough assets to cover its remaining debts, and how quickly the seller shed its obligations after the transfer. Companies planning a divestiture while under financial pressure need to document fair market value carefully, because creditors will scrutinize these deals aggressively.

1
The Clorox Company. Clorox Completes Previously Announced Divestiture of Its Better Health VMS Business
2
Unilever. Unilever Combines Unilever Foods With McCormick
3
U.S. Securities and Exchange Commission. EX-99.1 – PayPal Holdings Inc Information Statement
4
Office of the Law Revision Counsel. 26 USC 355 – Distribution of Stock and Securities of a Controlled Corporation
5
Office of the Law Revision Counsel. 26 US Code 301 – Distributions of Property
6
U.S. Securities and Exchange Commission. Zoetis Inc Final Prospectus
7
U.S. Securities and Exchange Commission. Registration Under the Securities Act of 1933
8
Johnson & Johnson. Johnson and Johnson Announces Final Exchange Ratio of 8.0324 in Split-Off of Kenvue Inc
9
Office of the Law Revision Counsel. 15 USC 18 – Acquisition by One Corporation of Stock of Another
10
Federal Trade Commission. Negotiating Merger Remedies
11
Federal Register. United States et al v Deutsche Telekom AG, T-Mobile US Inc, SoftBank Group Corp, and Sprint Corp
12
Office of the Law Revision Counsel. 15 USC 18a – Premerger Notification and Waiting Period
13
Federal Trade Commission. New HSR Thresholds and Filing Fees for 2026
14
Office of the Law Revision Counsel. 29 USC Chapter 23 – Worker Adjustment and Retraining Notification