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Spin-Offs and Carve-Out Divestitures: Navigating Legal and Tax
Challenges Key Considerations for Deal Structuring, Economic Terms,
Due Diligence, Asset Transfers, and More
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THURSDAY, AUGUST 28, 2014
Presenting a live 90-minute webinar with interactive Q&A
Andrew M. Eisenberg, Partner, Jones Day, Washington, D.C.
Peter E. Izanec, Partner, Jones Day, Cleveland
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Spin-off and Carve out Divestitures – Navigating Legal and Tax
Challenges Andrew M. Eisenberg, Partner – Washington D.C.
[email protected] Peter E. Izanec, Partner – Cleveland, Ohio
[email protected]
mailto:[email protected]:[email protected]
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Note
6
This presentation and the accompanying oral discussion should
not be construed as legal
advice on any specific facts or circumstances. The contents are
intended for general
information purposes only and may not be quoted or referred to
in any other publication or
proceeding without the prior written consent of the Firm, to be
given or withheld at our
discretion. This presentation and the accompanying oral
discussion is not intended to, and
does not, create any attorney-client relationship. The views set
forth in this presentation and
given in the accompanying oral discussion are the personal views
of the authors and do not
necessarily reflect those of Jones Day.
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Subjects
1. Overview – Transaction Types 2. Tax Issues
• Basic Requirements – The As, Bs and Cs
• Traps – North-South; Creating Control; Indemnity Payments
• Planning Opportunities – Cash-rich split offs and REIT Spins
(OpCo/PropCo
structures) 3. Getting It Done
• Overview of SEC filing requirements • Overview of the
corporate issues
7
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1. Overview – Transaction Types
8
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Tax Efficiency in Divestitures • Aims at minimizing taxable
capital gains (and, if applicable, ordinary
income) recognized in the transaction
• A concept of the utmost importance in M&A: if a tax-free
structure can be found that satisfies the non-economic corporate
goals of the divesting parent, then it will often present a
compelling value that taxable structures will be unable to
match
9
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The Basics: Types of Structures
• “Spin-Off” • “Split-Off” • “Split-Up” • “Reverse Morris Trust”
• “Asset Swap”
10
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Spin-Offs (Distribution)
A spin-off is a transaction in which each D shareholder receives
C stock with respect to such holder’s D stock.
11
D
S/Hs
C
(Pro-rata) distribution of
C stock to S/Hs
D
S/Hs
C
Before After
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Split-Offs (Redemption)
A split-off is a transaction in which the D corporation
distributes C stock in redemption of a portion of its stock.
D
S/H1
C
S/H2
Before After
Distribution of C stock to S/H2 in redemption
of D stock (non pro-rata)
D
S/H1
C
S/H2
12
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Split-Ups (Liquidation)
A split-up is a transaction in which the D corporation
liquidates and distributes the C1 and C2 stock in complete
liquidation.
C1
S/H1
C2
S/H2
Before After
Distribution of C stock to S/H2 in liquidation of D (non
pro-rata)
D
S/H1
C1
S/H2
C2
13
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Reverse Morris Trust Transactions
An RMT is a spin-off or split-off combined with a second step
merger in which C merges with another entity
C stock is typically converted into stock of the surviving
entity in the merger
14
D
Legacy S/H
Merged Entity
Legacy/ tendering
D S/H
Before Step 1: Spin/Split Step 2: Merger and Result
D
Legacy S/H
C
D
Legacy S/H
Legacy S/H (or
tendering S/H)
C
RMT Partner
S/H
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Asset and Stock Swaps • As name suggests, structured as a
like-kind exchange of one collection
of assets for another
• Typically would be structured as an exchange of shares in
subsidiaries of the two transacting parties, and potentially
coupled with a right-sizing dividend on one side to make the
transferred values match
15
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Tax Aspects of Asset and Stock Swaps
• Asset Swaps – Could be tax-free if like-kind exchange rules
apply – i.e., the groups of assets are personal properties of a
like class and are considered to be of a “like kind” for purposes
of section 1031
• Stock Swaps – Like-kind exchange rules not applicable to stock
swaps. Section 1031(a)(2)(B)
• Pre-Stock Swap dividend to equalize values – may be tax-free
if both the target subsidiary and the exchanging shareholder are
members of the same consolidated group, but tax-free distribution
results in downward basis adjustment under consolidated return
rules
16
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2. Spin-off Tax Issues & Requirements
17
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Tax-Free Break Ups – Section 355 Transactions/D
Reorganizations
• Section 355
• Spin-Offs
• Split-Offs
• Split-Ups
• Divisive “D Reorganizations” – Section 368(a)(1)(D)
transactions are generally the same as Section 355 transactions,
except that property is transferred to the “Controlled” corporation
in the transaction.
• Like-kind exchanges and asset swaps
18
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General Tax Effects of Qualifying as a Section 355
Transaction
• The Distributing Corporation • Generally will not recognize
gain or loss on distribution of C (or C1 and C2) stock.
– Exceptions for distribution of appreciated property other than
C stock and C stock in Section 335(d) and (e) transactions.
• The Shareholders • Generally will not include any amount in
taxable income, or recognize gain on receipt of C stock.
– Exception for boot – Boot in a spin-off → Section 301
distribution – Boot in a split-off or split-up → Gain = to lesser
of gain realized or FMV of boot
• C stock tax basis = portion of D stock basis based on FMV
(Carryover basis) • Tacked holding period
• The Controlled Corporation • Asset basis = C’s historical tax
basis (Carryover basis) • C may succeed to a portion of D’s
E&P
19
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Requirements of a Section 355 Transaction a. Active Trade or
Business - Both D and C must be engaged in the active conduct of
a
trade or business
b. Business purpose – There is a substantial not-tax purpose for
the distribution
c. Control –D owns C stock satisfying the 80% control
requirement, and D distributes C stock satisfying the 80% control
requirement.
d. Device – The transaction is not principally a device for the
distribution of the E&P to the D shareholders at capital gain
rates.
e. Neither section 355(d) or section 355(e) is violated
f. The distribution must satisfy both continuity of shareholder
interest (COSI) and continuity of business enterprise (COBE).
20
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Active Conduct of a Trade or Business Requirement • Both D and C
must be engaged in the active conduct of a trade or
business (“ATB”) immediately after the distribution
• Trade or Business
• a specific group of activities carried out for the purpose of
earning income or profit, including every operation that forms a
part of the process of earning income or profit, including
collection of income and payment of expenses
• Active Conduct
• perform active and substantial managerial and operational
functions
• Use of independent contractors alone is not sufficient
21
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Active Conduct of a Trade or Business - Five-year
requirement
• A corporation is engaged in an ATB only if:
• The corporation itself is engaged in the trade or
business;
• The trade or business has been actively conducted throughout
the 5-year period ending on the date of the distribution;
• The trade or business was not acquired by D or C in a taxable
transaction within the 5-year period (unless an expansion of
existing trade or business); and
• Control of the C which was conducting the 5-year trade or
business was not acquired directly by D within the 5-year period in
a taxable transaction (unless an expansion of existing D trade or
business).
22
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• A purchased, created, or acquired trade or business is not
acquired in a taxable transaction during the 5-year period if the
trade or business is in the same line of business as an existing
5-year trade or business (the “Expansion Doctrine”)
• The Expansion Doctrine generally applies unless the purchase,
creation, or acquisition “effects a change of such a character as
to constitute the acquisition of a new or different business.”
23
Active Conduct of a Trade or Business - Expansion Exception
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• Historical business of manufacturing and selling potato wash
lines and sorting machinery parts and supplies to potato shippers
expanded to manufacturing and selling harvesters, vine beaters, and
other field equipment directly to farmer – Lockwood's Estate v.
Commissioner, 350 F.2d 712 (8th Cir. 1965)
• Historical brand X automobile dealer expanded its business to
sell brand Y automobiles – Rev. Rul. 2003-18
• Historical retail shoe store business expanded its business to
include a website to sell shoes – Rev. Rul. 2003-38
24
Active Conduct of a Trade or Business - Expansion Exception
Examples
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• Minimum Amount of Trade or Business Assets Required • Safe
harbor – 5% of assets in controlled corporation should be
active trade or business assets – Rev. Proc. 96-30 standard,
replaced with no standard in Rev. Proc 2003-48
• Problem Assets • investment assets: stock, securities, land,
or other property held
for investment purposes • owner-occupied or leased real
property
– Rental activities may constitute an ATB if the owner directly
provides significant management and maintenance services
Active Conduct of a Trade or Business - Substantiality
25
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• For purposes of the ATB requirement, all members of a
corporation's Separate Affiliated Group (“SAG”), are treated as a
single corporation.
• A SAG is generally determined by treating D as the “parent
entity” of the “DSAG” and C as the parent entity of the “CSAG” and
including all corporations for which each parent directly or
indirectly owns at least 80% of the total voting power and 80% of
the total value of the stock of such corporation in such SAG.
• Meaning: A stock acquisition resulting in a corporation
becoming a SAG member is treated as an asset acquisition by that
SAG parent; and transfers within the SAG are disregarded
• Note: This control requirement is different from the control
requirement that governs tax-free distribution treatment, which
requires 80% of the total voting power and 80% of the total number
of shares of all other classes of stock.
26
Active Conduct of a Trade or Business - Affiliated Group
Rule
-
• For 5 years, C directly conducts ATB1 and S directly conducts
ATB2. • In year 8, D distributes the stock of C. Because, D owns
Section 1504(a)(2) control of S (even
though it is not adequate section 368(c) control), D and S are
treated as one corporation for ATB purposes. Therefore, D is
treated as conducting a 5-year ATB. See Prop. Reg.
§§1.355-3(b)(1)(ii) and -3(d)(2), Ex. 3.
27
C (ATB1)
S (ATB2)
S/Hs
D
100% 100% Vote 80% Value
Distribution of C’s stock
Active Conduct of a Trade or Business - Affiliated Group Rule
Example
Individuals
0% Vote 20% Value
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• For 5 years, C directly conducts ATB1 and S1 and S2 directly
conducts ATB2 (similar activity in different geographical
location). In year 6, D acquires 100% of C in a taxable transaction
and then distributes the C stock to the D S/Hs in year 7.
• Because C becomes a member of the D’s SAG, and ATB1 is an
expansion of ATB2, D can distribute C in a tax-free
distribution.
28
S1 (ATB2)
S2 (ATB2)
D S/Hs
D
100% 100%
Distribution of C’s stock
2
C (ATB1)
U Stock for
$$$$
1
Active Conduct of a Trade or Business - Affiliated Group &
Expansion Rule Example
U S/Hs
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Business Purpose
• Generally viewed as the most important requirement for
tax-free treatment under Section 355.
• There must be a business purpose for the distribution of C, in
which there is no impractical or unduly expensive nontaxable
alternative.
• Rarely violated in public spin-off transactions and public or
private split-off transactions
29
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Business Purpose – IRS Approved Purposes
• Approved business purposes include:
• To provide equity interest to key employee
• To facilitate post-distribution stock offering
• Cost savings
• Facilitate borrowings that would yield an increased borrowing
capacity or better non-financial terms
• To address management, systemic, and other corporate related
problems (“fit & focus)
• Regulatory or labor problems
• Required divestiture
• See also Rev. Proc. 96-30, Appendix A
30
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Control
• Control requires direct ownership of stock possessing 80% of
the vote power, and 80% of the number of shares of each class of
non-voting stock. See section 368(c).
• Control of C cannot be acquired within the 5-year period
ending on the date of the distribution in a taxable transaction
(unless the C business is an expansion of the D business).
31
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Distribution Not Principally a Device for the Distribution of
E&P
• The goal of this “requirement” is to prohibit a bail-out of a
corporation's E&P at capital gains rates.
• Purely a facts and circumstances test at the shareholder
level. • Examples of Factors of “non-device”
• Distribution would be treated as a redemption (i.e., capital
gain treatment) instead of a distribution if it was not a Section
355 transaction
• D is publicly traded and there are no 5% shareholders •
Neither D nor C have any E&P • Business purpose for
distribution is substantial
• Examples of Factors of “device” • Distribution is pro-rata or
substantially pro-rata • Subsequent taxable sale of stock of either
D or C
– If pursuant to a pre-arranged agreement – strong evidence – If
not pursuant to a pre-arranged agreement – mere evidence
• Assets spun off are liquid assets that are not needed in the
business 32
-
North – South Transactions – Transactions Between S/H and
Distributing
Shareholder transfers property to D near in time to
a distribution of C stock from D to the D
shareholder.
Are the contribution and the distribution respected as separate
transactions or are they treated as an
exchange? Impact being no distribution of section 368(c) control
(the 80% requirement).
33
D
S/Hs
C
D
S/Hs
C
C Stock
Property
Step 1 Step 2
-
North – South Transactions – Transactions Between Distributing
and Controlled Steps:
•Step 1: C distributes property to D.
•Step 2: D contributes property to C.
•Step 3: D distributes C stock to S/H.
Implications:
•If Steps 1 and 2 are integrated and treated as an exchange,
then the property distributed by C is treated as boot.
•If Steps 1 and 2 are not integrated (i.e., respected as
separate transactions), then the property distributed by C is
treated as a dividend separate from the D reorganization.
34
Taxpayer’s Representation: “There is no regulatory, legal,
contractual, or economic compulsion or requirement that [D] make
part or all of the [D] Contribution as a condition to the
distribution by [C] of the [Property] Distribution.” IRS Ruling:
Steps 1 and 2 are not integrated and so the property distribution
of Step 1 is treated as a section 301(a) distribution, and not as
boot. (PLR 201136009) Impact of Ruling: The taxpayer’s form
matters. If Steps 1 and 2 were documented as an exchange and there
is equivalent value, then it is an exchange and the steps are
integrated for tax purposes, unless the Code says otherwise (e.g.,
302 or 304).
D
S/H
C
D distributes
C stock
C distributes property
D contributes
property
-
Section 355(d) – Recently Acquired Stock • Prevents disguised
sales of C stock • D is taxed on the built-in gain in the C stock
if:
• A “person” (or persons acting in concert) • acquires at least
50% of D • before the distribution • by “purchase” • during the
5-year period ending on the date of the
distribution
35
-
Section 355(e) – Stock Acquired Pursuant to a Plan • Prevents
disguised sales of C stock • Distributing is taxed on the built-in
gain in the C stock if:
• One or more persons • acquires at least 50% of D or C •
Before, as part of, or after the distribution • “pursuant to a
plan”
– Statute presumes that all transactions occurring either 2
years before or 2 years after the spin‐off are part of the
plan.
– Intent is relevant, however …
36
-
Section 355(e) – Stock Acquired Pursuant to a Plan
• The section 355(e) regulations limit this 2-year presumption
by using safe harbors and providing plan/non‐plan factors.
• Whether any of these apply will depend on the facts and
circumstances of the transaction.
• Super Factor: In the case of an acquisition (other than
involving a public offering) after a distribution, the distribution
and the acquisition can be part of a plan only if there was an
agreement, understanding, arrangement, or substantial negotiations
regarding the acquisition or a similar acquisition at some time
during the two‐year period ending on the date of the
distribution.
37
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Recapitalizing into Control
• Change in voting structure must be a “permanent
realignment.”
• No plan or intention for C to realign its voting structure
after the distribution.
• Voting structure can be unwound after the distribution if:
– C did not anticipate the market and business conditions that
ultimately gives rise to the need to revise its capital structure;
or
– at the time of the recapitalization, there is no binding
commitment to unwind the voting structure and subject to
independent shareholder vote.
38
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Recapitalizing into Control – Rev. Rul. 69-407
Before Transaction
C has 1,000 common shares outstanding of which D owns 70 percent
and A and B own 30%. Both D and C have been engaged in an active
business for more than 5 years, and D has owned its stock in C for
more than 5 years.
Recapitalization
Pursuant to a plan of recapitalization: C issues (1) 200 shares
of C Class A voting stock to A and B in exchange for their 300 C
shares, (2) 800 shares of C Class B voting common stock to D in
exchange for its 700 D shares. The value of the stock received is
equal to the value of the stock surrendered and the
recapitalization qualifies as a tax-free reorganization under
section 368(a)(1)(E).
39
D S/Hs A B
D
C
70% 30%
D S/Hs A B
D
C
80% Vote 70% Value
20% Vote 30% Value
-
Recapitalizing into Control – Rev. Rul. 69-407
D distributes its C Class B shares to its shareholders.
Conclusion: D “controlled” C for purposes of section 355 because
the recapitalization that preceded the distribution resulted in “a
permanent realignment of voting control” as opposed to being
“transitory and illusory.” (Rev. Rul. 63-260).
40
S/Hs A B
D
C
Class B 80% Vote 70% Value
Class A 20% Vote 30% Value
Distribution of C Stock
-
Unwinding Prior Recapitalization • Rulings to unwind dual-class
voting structure: “Controlled
did not anticipate the market and business conditions that now
give rise to the need to revise its capital structure” See PLR
200527004 (Mar. 24, 2005); PLR 200403041 (Oct. 8, 2003); PLR
200347013 (Aug. 19, 2003).
• Controlled “presently expects” that, after the distribution,
at the next shareholders' meeting, its Board will consider a
proposal to eliminate the dual-class voting structure. See PLR
200837027 (Mar. 14, 2008).
• No binding commitment • Independent shareholder vote
41
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Indemnity Payments in Spin-Off Transactions: Generally Straight
Forward
When indemnity payments are made between D and C, the IRS allows
such payments to be treated as consideration transferred between D
and C in the Spin-off transaction, not as per se income to the
Indemnitee when received.
IRS Ruling Position: Any Indemnity Payment will be characterized
in the same manner as if such payments had occurred immediately
before the Distribution. See Arrowsmith v. Commissioner, 344 U.S. 6
(1952); Rev. Rul. 83-73, 1983-1 C.B. 84.
42
D
S/Hs
C
D
S/Hs
C
Treatment as if Pre-Spin-off Payment
Post-Spin-off Payment
-
Indemnity Payments in Split-Off Transactions: Make Sure
Corporation is Payee
When indemnity payments are made between D and C, the IRS allows
such payments to be treated as consideration transferred between D
and C in the Split-off transaction, not as per se income to the
Indemnitee when received, but indemnity payments made by D to C
shareholders, or C to D shareholders, may be fully taxable.
43
D
S/H 1
C
D
S/H 1
C
Treatment as if Pre-Split Payment
Post-Split Payment
S/H 2 S/H 2
-
Planning Opportunities Section 355(g) – Cash Rich Split-offs
• Section 355 will not apply, if immediately after the
transaction:
• Either D or C is a Disqualified Investment Corporation,
and
• Any person owns a 50 percent (vote or value, applying section
318 attribution) or greater interest in any Disqualified Investment
Corporation, but only if such person did not hold such an interest
in such corporation immediately before the transaction (excludes
pro-rata distributions from being subject to this rule).
44
-
Planning Opportunities Section 355(g) – Cash Rich Split-offs
• A Disqualified Investment Company is any corporation in which
2/3 or more of the FMV of all of its assets constitute “Investment
Assets”:
• Cash, stock or securities, certain partnership and subsidiary
interests, debt, options, forward or futures contract, notional
principal contract, derivative, foreign currency, or any similar
asset.
• Exception for: – Certain assets used in active conduct of
lending, banking, or
insurance business and – Securities mark‐to‐market assets.
45
-
History of REIT Spin-Offs: Before 2001
• In Rev. Rul. 73-236, D spun off its sales business and assets
as a separate entity, retaining its property rental business and
assets. Immediately after the distribution, D elected REIT
status.
• At the time, section 856(d)(3) prevented entities from
qualifying as REITs if they provided services to tenants or
managed/operated property.
• IRS concluded that, under section 856(d)(3), a REIT could not
satisfy the ATB requirement of section 355(b)(1).
46
-
Rev. Rul. 2001-29 • The Tax Reform Act of 1986 amended section
856(d)(2)(C) to operate in
conjunction with Treas. Reg. section 1.512(b)-1(c)(5), allowing
REITs to provide services usually or customarily rendered in the
ordinary course of renting property.
• Rev. Rul. 2001-29 concluded that REITs could now satisfy the
ATB requirement of section 355(b)(1). Rev. Rul. 73-236 was
obsoleted.
• Rev. Rul. 2001-29 cautioned that ‘‘the obsolescence of Rev.
Rul. 73-236 does not imply a view whether a distribution of stock
involving a REIT election by the distributing or controlled
corporation would otherwise satisfy the requirements of section
355, including the business purpose requirement.”
47
-
REIT Spin-Offs and Business Purpose
• Obtaining favorable U.S. federal tax treatment is not a valid
business purpose for a section 355 distribution.
• IRS will “carefully scrutinize” separations of owner-occupied
real estate for business purpose. • REITs are permitted to deduct,
at the corporate level, any income distributed as dividends,
effectively eliminating one level of tax. • Is the goal of
obtaining REIT status for D or C an impermissible business
purpose?
• Is intent to elect REIT status following a spin-off evidence
of device?
• The IRS will no longer rule on what constitutes a valid
business purpose.
– The IRS has accepted a representation stating that a
spin-off’s business purpose is to increase C’s value to investors
by electing REIT status for C.
– IRS granted tax-free treatment to the spin-off of newly-formed
C, followed by the merger of C with and into a REIT, with the
surviving REIT continuing to operate as such.
– The IRS may be sympathetic to spin-offs where D owns a
substantial amount of real estate, wants to separate the real
estate from its other businesses due to regulatory constraints, but
is not able to effect the separation unless C can compete in the
marketplace as a REIT.
48
-
Recent PLR – REIT Spin-Off
• In its 8K filed November 16, 2012, OpCo announced that it will
contribute all of its real estate assets to newly-formed PropCo,
then distribute PropCo to OpCo’s shareholders.
• As part of the same plan, PropCo will elect to be a REIT,
distribute its historical subchapter C E&P in a taxable
dividend, and lease the majority of its real estate back to
OpCo.
• To comply with REIT income rules that apply section 318
attribution, shareholders will reduce their indirect interest in
PropCo to under 10% as part of the spin-off.
• In the 8K, OpCo disclosed that it had obtained a PLR relating
to “the tax treatment of the separation and the qualification of
PropCo as a REIT.”
• This PLR has not yet been released.
• This planning strategy, the “McREIT,” had not been previously
tested in a PLR.
49
-
Post-Spin-Off OpCo/PropCo Structure
50
Shareholders
OpCo PropCo
Non-REIT Qualifying Assets
Leasehold Assets Real Estate
Taxable REIT Subsidiary
Operating Assets
Lease Payments
Dividends
-
3. Getting It Done – Corporate Considerations
51
-
Why A Spin- Or Split-Off?
• Market undervalues large companies (e.g., “conglomerate
discount”) • Provide investors with more investment options •
Focused management may increase value of each company • Equity
compensation will reflect the efforts of management • Each company
can implement corporate structure that meets its needs
52
-
Fiduciary Duty Considerations
• Absent special circumstances (e.g., director conflicts of
interest or a pending takeover bid), a Board’s decision to
authorize a spin- or split-off should enjoy broad deference under
the business judgment rule
• The Board should meet with its advisors (financial and legal)
and management to discuss the impact of proposed separation
transaction and alternatives
• Liability – Directors should consider obtaining opinions from
advisors as (under DE law) they will be protected in relying in
good faith on the information, opinions and statements presented by
management and by outside experts as to matters they reasonably
believe are within their professional or expert competence
• In Delaware, the Board of Parent does not have a duty to
future stockholders of Spinco
53
-
Legality of Dividend
• Under Delaware law (DGCL 170), dividends must be paid out of a
corporation’s (i) “surplus” or (ii) net profits for the fiscal year
in which the dividend is declared and/or net profits for the
preceding fiscal year
• Under DGCL 174, in the case of any willful or negligent
violation in declaring a dividend, directors may be personally,
jointly and severally liable to the corporation and its creditors
for the full amount of any dividend not in compliance with DGCL 170
(6 year SoL)
• Consider obtaining appraisal and opinions to determine the
value of net assets and statutory surplus
54
-
Common Gating Issues
• In addition to the satisfaction of tax requirements, commonly
encountered gating issues that need to be addressed early in the
spin-off process include:
• Non-transferability issues relating to key agreements •
Restrictive covenants found in parent indebtedness arrangements •
Difficulties in creating financials for Spinco (2 years of
audited
balance sheet; 3 years of audited income statement and cash
flows; 5 years of selected financial data)
• Establishment of formation, capitalization, organization and
structure of Spinco management and resolution of social issues
(location of HQ; division of company names)
• Treatment of shared assets
55
-
Typical Transaction Agreements
• Contribution/Separation Agreement • Agreement and Plan of
Merger (For RMTs) • Transitional Services Agreemnts • Tax Sharing
Agreement • Other Ancillary Commercial Agreements • Conveyancing
Documents (IP assignments, assignment & assumption
agreements, etc.) • Support Agreements (Possibly For RMTs)
56
-
Spin-Offs – The Simplest Execution
• In essence, is a unilateral divestiture – Parent has
significant control over the deal terms
• Spinco will typically retain counsel in the process, and
negotiation of separation, etc. agreements can have a
quasi-adversarial dynamic, but Parent typically is able to
implement the terms that it would like
• Need to be mindful of fraudulent conveyance and similar
issues
57
-
Spin-Offs – The Simplest Execution
• As with all divestitures, clearly defining the deal perimeter
will be essential (“exclusively related” vs. “primarily related”
standard, etc.)
• Subsidiaries
• IP
• Employees
• Personal Property
• Balance Sheet Assets
• Real Property
• Contracts
• Spinoffs generally do not involve the making of reps and
warranties, and Parent retains the right to abandon the spin-off up
to the closing date
58
-
Spin-Offs – SEC filings • Spinoffs do not involve the sale of
securities and do not require ’33 Act
registration statements; they do, however, require registration
for ’34 act reporting purposes, which is accomplished with an
information statement and Form 10
• Staff Legal Bulletin 4: ’33 Act registration not required
where: – Parent’s stockholders do not provide consideration for
Spinco
shares – Spinoff is pro-rata to Parent shareholders – Adequate
information is provided to Parent shareholders
(Form 10) – Valid business purpose – If parent spins off
“restricted securities,” Parent must have
held those securities at least two years 59
-
Spin-Offs – SEC filings
• Form 10s generally require disclosures akin to what would be
needed in an IPO, with some exceptions to reflect the fact that no
sale of securities is taking place
• The review process typically takes at least a couple of months
– not dissimilar to what might be expected with an IPO
60
-
Split-Offs
• In a split-off, a sale is taking place – shares of the Parent
are being exchanged with shares of the entity to be spun out
• As such, a registration statement is needed, as well as the
filings that are necessary for tender offers
• In essence, it is the combination of an IPO of Spinco and an
exchange offer
• Parent’s obligation to consummate the tender offer may be
subject to conditions, but they cannot be so discretionary as to
render Parent’s tender offer illusory
61
-
Reverse Morris Trust transactions
• A Reverse Morris Trust transaction is, in essence, the
combination of a spin-off or split-off with a merger.
• Similar SEC filings, except that a Form S-4 would be needed in
connection with a split-off RMT.
• These transactions, particularly when executed in split-off
form, present a number of added complexities:
• Consideration to be received by parent tied to market
reception of transaction
• Potential lengthy freezeout from share repurchase program due
to application of Rule 14e-5
62
Slide Number 1Tips for Optimal QualityContinuing Education
CreditsProgram MaterialsSpin-off and Carve out Divestitures –
Navigating Legal and Tax ChallengesNoteSubjects1.Overview –
Transaction TypesTax Efficiency in DivestituresThe Basics: Types of
StructuresSpin-Offs (Distribution)Split-Offs (Redemption)Split-Ups
(Liquidation)Reverse Morris Trust TransactionsAsset and Stock
SwapsTax Aspects of Asset and Stock Swaps2.Spin-off Tax Issues
& RequirementsTax-Free Break Ups –�Section 355 Transactions/D
ReorganizationsGeneral Tax Effects of Qualifying as �a Section 355
TransactionRequirements of a Section 355 TransactionActive Conduct
of a Trade or Business RequirementActive Conduct of a Trade or
Business -�Five-year requirementSlide Number 23Slide Number 24Slide
Number 25Slide Number 26Slide Number 27Slide Number 28Business
PurposeBusiness Purpose – IRS Approved PurposesControlDistribution
Not Principally a Device�for the Distribution of E&PNorth –
South Transactions – �Transactions Between S/H and
DistributingNorth – South Transactions – Transactions Between
Distributing and ControlledSection 355(d) – �Recently Acquired
StockSection 355(e) –�Stock Acquired Pursuant to a PlanSection
355(e) –�Stock Acquired Pursuant to a PlanRecapitalizing into
ControlRecapitalizing into Control – �Rev. Rul.
69-407Recapitalizing into Control – �Rev. Rul. 69-407Unwinding
Prior RecapitalizationIndemnity Payments in Spin-Off Transactions:
Generally Straight ForwardIndemnity Payments in Split-Off
Transactions: Make Sure Corporation is PayeePlanning
Opportunities�Section 355(g) – Cash Rich Split-offsPlanning
Opportunities�Section 355(g) – Cash Rich Split-offsHistory of REIT
Spin-Offs: Before 2001Rev. Rul. 2001-29REIT Spin-Offs and Business
PurposeRecent PLR – REIT Spin-OffPost-Spin-Off OpCo/PropCo
Structure3.Getting It Done – Corporate ConsiderationsWhy A Spin- Or
Split-Off?Fiduciary Duty ConsiderationsLegality of DividendCommon
Gating IssuesTypical Transaction AgreementsSpin-Offs – The Simplest
ExecutionSpin-Offs – The Simplest ExecutionSpin-Offs – SEC
filingsSpin-Offs – SEC filingsSplit-OffsReverse Morris Trust
transactionsSlide Number 63Slide Number 64Slide Number 65