The process whereby a parent company divests itself of a subsidiary by distributing all shares in the subsidiary proportionally to the parent company’s shareholders. Practically, the parent sheds off the subsidiary, and the shareholders are free to keep or sell the shares at their own discretion. In essence, spin-offs are a type of corporate divestiture in which a subsidiary or division becomes an independent company or is absorbed into the parent company’s shareholding. In general, spin-offs can be carried out through a leveraged buyout (LBO) by the subsidiary’s management, or through anemployee stock ownership plan (ESOP).

Like property dividends, ESOP-based spin-offs are not common. When they do take place, investors consider the financial advantages of holding the new stock or selling it and using the proceeds for some other purposes.