I need to know, as accurately as one can articulate, if the term “spin-off company” is a legal term and/or an official investment term with a technical definition, or just loose talk? And, is a spin-off company NOT an affiliate? The Investopedia’s definition of spinoff seems very clear-cut to me. However, here is some background in order for the SDopers to formulate their replies:
My current employer formed from a “spin-off” from another company; however, it is important for me to know if that technically makes them an affiliate or completely independent from the parent company. Each company has its own CEO and two separate Boards of Directors (of which I am fairly certain). Especially note the article says the parent company split into two publicly traded companies. Here is a link to this Wikipedia article that may help explain. Especially note the History section of this article.
The SEC informally defines spinoffs a lot like Investopedia. www.sec.gov/answers/spinoffs.htm This isn’t a legal definition though. In other contexts, the SEC staff just says that a spinoff means that a parent company distributes shares of a subsidiary to its shareholders. See Staff Legal Bulletin No. 4 from the Division of Corporation Finance.
Separately, by rule, the SEC defines an affiliate as “a person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the person specified.” See Securities Act Rule 405. A company can be a “person,” so affiliated companies are companies that control, are controlled by, or are under common control with each other.
Thus, under the definitions, a subsidiary is definitely an affiliate of the parent company before the spinoff. Whether it is still an affiliate after the spinoff depends on whether the spun-off company remains under the control of, or under common control with, the parent. Control is a facts and circumstances determination that is hard to answer definitively on the internet.
You described two separate companies after the spin-off with separate managers and separate boards. Assuming this means that there is no control relationship between the two companies, they are no longer affiliates. That is generally the goal of a spinoff but I can’t say in your case whether the two companies are still affiliates because I can’t analyze their control relationship.
Also note that “affiliate” has lots of looser meanings in business speak beyond the SEC one. And may also mean different things under other different laws.
e.g. we’re all familiar with “marketing affiliate” which really means “anyone we can persuade to buy our customer mailing list.”
As another example I had the misfortune to been involved with affiliate determination as it applies to defined pension obligations, Chapter 11 bankruptcies, and the PBGC. The rules there are deep and arcane.
So the answer to the OP’s question depends on what sort of an affiliate relationship he’s interested in analyzing.
Consider the process. Company A makes widgets, some left-hand, some right-hand. It wants to concentrate on the much larger right-hand widget market, so it incorporates a company LHW Inc, takes the plant and lefty patents and associated assets, and moves them to the new company.
So now A owns 100% of shares of LHW, valued at whatever the assets transferred into LHW. It can keep the shares (100%) and the company can be a subsidiary, or it can keep some or none of the shares and sell the rest to the public - trading business complexity an diversity for immediate profit.
If A retained a decent number of the shares, they could tell LHW what to do - i.e. stay out of the right-hand widget market. If they don’t, it’s conceivable it could grow and become a competitor.