Prompt Pack Carve Out Transaction Memo

Carve-Out Transaction Memo

A carve-out is structurally among the most complex M&A transactions: the seller must simultaneously create a stand-alone business and execute a sale. This skill produces a strategy memo that advisors use to plan and sequence the full lifecycle of a carve-out, from pre-signing separation through post-closing transition.

When to use this

• A parent company is selling a division, subsidiary, or product line and needs a written strategy memo for board, management, or deal team alignment.
• The legal team needs to identify and sequence all legal workstreams before signing a term sheet.
• A buyer wants to understand the legal complexity of a proposed carve-out target before committing to a price.
• The deal team is preparing for regulatory filings or competition clearances that require a clear separation narrative.

Required inputs

Optional inputs

• Identity of buyer (financial vs. strategic) — shapes exclusivity and TSA negotiating posture.
• Existing third-party contracts in the business unit — flags assignment consent requirements.
• Shared IT / HR / finance systems — defines scope of Transitional Services Agreement (TSA).
• Current employee headcount by jurisdiction — required for TUPE / equivalent worker-transfer analysis.
• Regulatory licenses held by the business unit — some licenses do not transfer; new applications may be needed.

Memo structure

A carve-out strategy memo for a corporate partner should be structured as follows:

1. Transaction overview

• Description of the business unit, its legal and operational perimeter, and the proposed deal structure (asset vs. share deal, with or without a NewCo).
• Key transaction milestones: pre-signing separation, signing, regulatory clearances, closing, TSA period.

2. Legal entity restructuring

• Whether the business unit sits in a dedicated legal entity or must first be carved into one (contribution en nature / hive-down).
• Steps to create a NewCo, including capitalization, directors/managers, and registration timeline in each jurisdiction.
• In civil-law jurisdictions (UAE federal, KSA, LB, EG), note that hive-downs may require notarized asset-contribution agreements and court or ministry approval; allow 6–12 weeks.
• In DIFC/ADGM, a common law Share Sale Agreement can be executed quickly but the DIFC Registrar must approve transfers of shares in DIFC entities.

3. Separation of shared services

• Identify shared functions: finance, HR, IT, legal, procurement, real estate.
• Scope the Transitional Services Agreement (TSA): which services the parent provides post-closing, at what cost, for how long (typically 12–24 months).
• Identify reverse TSA services the carved-out business provides back to the parent.
• Note any "stranded costs" the parent will bear after separation.

4. IP and contract assignments

• Map all IP (patents, trademarks, software, domain names, trade secrets) used by the business unit: owned outright, licensed in from parent, or licensed to third parties.
• Identify which licenses require third-party consent to assign. Counterparty consent rights are common; budget time and negotiation leverage.
• In MENA, trademark registrations are territorial — registration in UAE does not cover KSA; confirm status in each country of operation.
• Draft an IP assignment or license-back agreement where the parent retains IP that the carved-out business will still need.

5. Employee transfers

• In jurisdictions with automatic transfer protections (UAE Labor Law, KSA Labor Law, Lebanese Labor Code, DIFC Employment Law, EU TUPE equivalent):
  • Identify employees by entity, location, and contract type.
  • Flag employees on Saudi Nitaqat quotas, UAE Emiratization requirements, or Lebanese labor ministry registrations — transfers may require regulatory notification.
  • Draft employee notification letters; some jurisdictions require individual consent.
  • Allocate pension / end-of-service gratuity (ESG) liability: MENA jurisdictions impose statutory ESG obligations; allocate accrued ESG to the seller through closing date.

6. Tax structuring

• Assess the cleanest legal route to achieve the desired tax outcome:
  • Asset deal: may trigger VAT (UAE 5%, KSA 15%, EG 14%), stamp duty (LB), and transfer taxes. Some jurisdictions have exemptions for going-concern transfers.
  • Share deal: often more tax-efficient for the seller; buyer gets no step-up in asset base.
  • Holding company interposition: check CFC rules and withholding tax on dividends/royalties in each jurisdiction.
• Identify any internal restructuring steps needed before signing to achieve the optimal structure; timing relative to fiscal year-end matters.
• Flag deferred tax liabilities embedded in the carved-out entity.

7. Regulatory considerations

• Merger control: Assess filing thresholds in all countries of operation. GCC countries (UAE, KSA) have national competition authorities. EG has the Egyptian Competition Authority. Identify multi-jurisdictional filings that could extend timeline.
• Foreign investment screening: UAE, KSA, and EG have FDI restrictions in certain sectors. Identify any restricted sectors and whether ministerial approvals are needed.
• Sector-specific licenses: Banking, insurance, telecoms, and healthcare licenses in MENA typically do not transfer with a share deal and require fresh applications or change-of-control notifications.
• Antitrust / competition: If the buyer is a competitor, prepare a competition assessment early; information-barrier protocols (clean team) may be required pre-signing.

8. Key risks and mitigations

9. Recommended workstreams and timeline

Provide a phased timeline:

• Phase 1 (Pre-signing, weeks 1–8): Legal entity analysis, IP audit, employee mapping, regulatory pre-assessment, TSA scoping.
• Phase 2 (Signing to closing, weeks 8–24+): Regulatory filings, employee consultations/notifications, contract assignment requests, NewCo formation.
• Phase 3 (Post-closing, months 1–24): TSA management, IP migration, system cutover, stranded-cost wind-down.

Jurisdictional notes

Drafting standards

• No [INSERT X] placeholders in the final memo — call out all open items as numbered action points with responsible party and deadline.
• Cite governing law by reference to the named statute or decree-law; do not invent article numbers.
• Use plain language for executive summary sections; reserve technical language for legal workstream annexes.
• State assumptions prominently at the top of the memo.

Common mistakes

• Treating a carve-out as a simple share sale — the separation workstream is as important as the transaction documents.
• Ignoring statutory ESG / end-of-service gratuity accruals, which can be a material liability in MENA.
• Failing to assess license transferability early enough to avoid deal-breaking delays.
• Underestimating TSA complexity — under-scoped TSAs are the leading cause of post-closing disputes in carve-outs.
• Overlooking the interplay between Nitaqat/Emiratization and post-closing headcount changes.

Related skills

• [[prompt-pack-due-diligence-checklist]]
• [[prompt-pack-share-purchase-agreement]]
• [[prompt-pack-business-transfer-agreement]]
• [[prompt-pack-employees-transfer-tupe]]
• [[prompt-pack-transitional-services-agreement]]