Corporate Spin-Off Best Practices for In-House Counsel

In recent years, many multi-industrials have spun off parts of their portfolios. The decision to undertake a spin-off is a significant strategic decision by a board of directors, and each step of the process is an intensely law-driven activity.

For in-house counsel, a transaction of this scale is uniquely challenging and provides a rare and exciting opportunity to exercise significant leadership and organizational capabilities, including team building, project management, and organizational design, as well as sophisticated and diverse legal capabilities.

At the end of October 2011, ITT Corporation undertook a major transformation through the spin-off of two significant businesses, its defense and water businesses, as Exelis Inc. and Xylem Inc., respectively. Early in the planning process, I was designated to serve as the general counsel for the defense spin-off and tasked with helping to launch this new, publicly traded company, which included the establishment of the legal and compliance function for the new company in just under one year.

The following are a few key takeaways from my experience in helping to spin-off and launch ITT’s former defense business, now Exelis Inc.

Design your department from the start

The successful transition from being a division of a larger conglomerate to a stand-alone, publicly traded company requires the creation of a different legal department than that of a division. New capabilities need to be added over a short period of time, in a corporate framework that is smaller and more focused on the needs of a spin-off company.

At the very beginning of the project, ITT undertook a design activity to identify the capabilities and cost-framework of the headquarters functions for the two proposed spin-off companies, as well as the ITT entity that would remain following the spin-offs. We developed cost targets for each function, as well as for the total headquarters organization for each of the two spin-off businesses, and for the remainder of ITT. Finally, we reviewed all the current employees in these functions across ITT, matching people to the necessary areas in each of the three companies.

This rigorous process resulted in the development of a nimble team at Exelis, which had responsibilities as part of the ITT corporate legal team for accomplishing the spin-off, as well as for executing the legal work specific to the spin-off of the defense business. For example, ITT’s chief intellectual property counsel was responsible for managing all intellectual property legal matters for the transaction, as well as setting up the defense business intellectual property framework, as he was designated to become the Exelis chief intellectual property counsel following the spin-off.

Assemble the right team