In recent years, many multi-industrials have spun off parts of their portfolios. The decision to undertake a spinoff 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 Corp. undertook a major transformation through the spinoff 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 spinoff 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 standalone, 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 spinoffs. 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 spinoff, as well as for executing the legal work specific to the spinoff 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 spinoff.

Assemble the right team

The legal department of the spin-off company is smaller than that of the parent, but when the spin-off company is publicly traded, the legal obligations are much the same. A smaller company, however, cannot support the same cost structure as a larger former parent. The functional teams must be smaller and more agile and flexible — from both a technical and personnel standpoint.

We were fortunate to be able to bring over several lawyers from ITT’s legal department who had significant experience with the legal responsibilities of a public company. But with a smaller team, we needed each in-house lawyer to take on additional specialties. For example, one lawyer with deep experience in M&A and financing volunteered to acquire expertise in the environmental sector as well. Another lawyer with international trade expertise took on the ethics and compliance program and other legal compliance responsibilities.

Ultimately, each attorney who assumed a position in the Exelis law department has also assumed one or more additional responsibilities, allowing us to maintain a cost-competitive and effective law department, while providing new developmental opportunities for the attorneys.

Maintain balance and loyalty

Expectations about the values the team is expected to adhere to throughout the process must be communicated to the team early and frequently. There is an inherent tension between the parent company and the company to be spun off, and a divergence of interests will naturally occur as people think about which company they would be assigned to. It is essential to maintain loyalty to the parent. The leadership team must set the ground rules and adhere to them in order to avoid a battle for talent and resources — and unintentionally limit the success of the transaction.

The in-house lawyers, as the professionals responsible for the documentation and processes that accomplish the spinoff, have a key role in setting the tone and adhering to the values that guide the work. Rather than advocating for the company with which they expect to be employed following the spinoff, they need to lead the teams to work collaboratively to meet their ethical obligation to the parent company and achieve the parent’s strategy until the moment they are no longer part of the parent. Early on, ITT leadership communicated the ground rules and defined the framework for the allocation of assets, risks and liabilities. We resolved not to let expectations about which company we expected to be part of interfere with that loyalty. While there were differing points of view on the spin-off transaction terms, by keeping the ITT strategies at the forefront of everyone’s minds, we were able to efficiently and effectively resolve these differences. Maintaining a professional commitment to the strategic goals of the parent company, along with openness and transparency within the legal team, were essential factors in the success of the transaction.

Encourage learning opportunities

While we had a team with strong public company experience, spinoffs are inevitably a period of "firsts" for the new corporate team — the first board meeting, the first 10-Q, the first 10-K, the first investor day, the first earnings release. These events provide hands-on experience that is only found during a significant corporate transformation. We enjoyed leveraging these milestones as opportunities for team building, and for the satisfaction of meeting the challenge and doing it well.

Setting up and helping to lead a new company provides unique opportunities to learn and enhance personal growth as well as our contributions as lawyers to the success of the company, and naturally occur in close collaboration across all functions — finance, strategy, communications, business development, human resources, IT, purchasing and so on.

In a smaller organization, people need to be able to handle more assignments than in a larger company, allowing them to learn new skills and advance more quickly in their careers. Each of the lawyers at Exelis has more responsibility than he or she previously had. This has been crucial to ensuring the success of Exelis as a standalone company.

Recognize that spin is not a destination

Building a strong public company does not end when you ring the bell at the New York Stock Exchange. It can be easy to get lost in the day-to-day project management and myriad legal obligations that must be addressed. It is important to not lose sight of the big picture. You have very little flexibility to prioritize or to defer the work of managing the new company’s obligations — it all starts on day one.

While corporate spinoffs involve challenging transformations that reward discipline and relentless attention to detail, success is equally dependent on the quality of the leadership and maintaining the right values to not only launch a new public company, but to also ensure the business is able to stand on its own and deliver value to shareholders right from the start.

This article first appeared in Corporate Counsel, a Legal affiliate based in New York. •

Ann Davidson is senior vice president, chief legal officer and corporate secretary of Exelis Inc.