Spin-off Corporations and Cash in Lieu of Fractional Shares
Solventum logo.
I'm one of those weirdos who regularly peeks at our brokerage account, despite all of the advice not to do that. That's how I found out that we now own two shares of SOLV as of April 1, 2024.
Now, I didn't buy these shares and my husband aggressively ignores our brokerage account. I had no idea how these two pieces of a corporation ended up in our brokerage account. A couple of days later, I noticed another unexpected transaction: a deposit of $49.11.
I don't say "no" to free money or free equity, but I was quite interested in why we suddenly had 2 shares from a company I've never heard of and a surprise $49.11 in cash.
Solventum is a “spin-off” corporation
SOLV is the ticker symbol of Solventum, a Delaware corporation. Solventum is a spin-off of 3M's healthcare division. In addition to industrial and worker safety products, 3M produces orthodontics appliances, medical devices, biopharmaceutical filters, surgical supplies, and health information systems. These product and service offerings now fall under the Solventum umbrella.
Solventum is an independent corporation. It is not a subsidiary of 3M, although 3M retains a 19.9 percent stake. The other 80.1 percent of shares were distributed to 3M shareholders as of March 18, 2024. 3M plans to sell off their remaining stake over the next five years.
According to the corporate formation documents, 3M shareholders were granted one Solventum share for every four shares of 3M stock they owned. We own 11 shares of 3M. With that ratio, we could expect to receive 2.75 shares of Solventum, right? Well, not exactly.
Cash in lieu of a fractional share
Instead, we received two whole shares and cash in lieu of a fractional share. The cash in lieu portion of our distribution was specified in Section 3.4, paragraph (c) of the Separation and Distribution Agreement by and between 3M Company and Registrant. I've edited the passage quite a bit for clarity and length.
As soon as practicable after the Effective Time, Parent shall direct the Distribution Agent to determine the number of whole and fractional SpinCo Shares allocable to each Record Holder, to aggregate all such fractional shares into whole shares, and to sell the whole shares obtained thereby in the open market at the then-prevailing prices on behalf of each Record Holder who otherwise would be entitled to receive fractional share interests … and to cause to be distributed to each such Record Holder, in lieu of any fractional share, such Record Holder’s or owner’s ratable share of the total proceeds of such sale, after deducting any Taxes required to be withheld and applicable transfer Taxes, and after deducting the costs and expenses of such sale and distribution, including brokers’ fees and commissions.
That's a horribly-written passage, even for legalese. Here's the simpler version: every fractional share of Solventum was combined with another fractional share to form whole shares. Those whole shares were sold on the open market, and the owners received the proceeds in proportion to their fractional share.
Our 0.75 of a share was combined with someone else's 0.25 of a share. That whole share was sold for $65.48 or so on Solventum's first trading day. Once the transaction settled, we received 75% of the proceeds — or $49.11.
So, do we have to pay taxes?
Luckily for us, the spin-off distribution of Solventum was designed to be tax free. We shouldn't owe any taxes on the share distribution. We may owe capital gains taxes for the cash distribution.
Our new Solventum shares did not affect how many 3M shares we own. We still own 11 shares, but each share's cost basis has been reduced by an amount that roughly reflects the value of 3M's business without Solventum.