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Stephen Fiamma, Brenda Coleman and Richard Evans 26 November 2008 BS:1633511

Tax and corporate considerations in mergers of UK and US companies. Stephen Fiamma, Brenda Coleman and Richard Evans 26 November 2008 BS:1633511. Structuring UK:US Public Mergers. Basic structural considerations Use of DLC structures US tax issues UK tax issues.

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Stephen Fiamma, Brenda Coleman and Richard Evans 26 November 2008 BS:1633511

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  1. Tax and corporate considerations in mergers of UK and US companies Stephen Fiamma, Brenda Coleman and Richard Evans26 November 2008BS:1633511

  2. Structuring UK:US Public Mergers • Basic structural considerations • Use of DLC structures • US tax issues • UK tax issues

  3. DLC Overview: Thomson Reuters Thomson Shareholders Former Reuters Shareholders Thomson Reuters Corp (Canada) Thomson Reuters PLC (UK) Equalization Agreement Cross Guarantees Thomson Assets Reuters Assets Combined Business (Not suitable for US companies)

  4. Our Transaction(s) • Publicly listed purchaser • Publicly listed target • Consideration is a mix of cash and shares • Use of loan notes? • Financing the acquisition - in the UK or the US?

  5. Buying into the US: Forward/Reverse Triangular Mergers Before: Acquirer Shareholders Target Shareholders Acquirer (UK) Target (US) Rest of Target Group Rest of Acquirer Group Acquirer US Sub

  6. Buying into the US: Forward Triangular Merger After: Original Acquirer Shareholders Former Target Shareholders Acquirer (UK) Rest of Acquirer Group Acquirer US Sub (Target having merged with and into it) Rest of Target Group

  7. Buying into the US: Reverse Triangular Merger After: Original Acquirer Shareholders Former Target Shareholders Acquirer (UK) Rest of Acquirer Group Target (Acquirer US Sub having merged with and into it) Rest of Target Group

  8. UK buying into the US: Basic issues • Issue of shares by a UK PLC requires a prospectus • US merger often requires third party consents • US target shareholder approval • SEC registrations of offeror’s shares • Appraisal (dissenter) rights may be triggered on a merger

  9. Buying into the US: Obstacles Posed by US Tax US domestic reorganization (rollover) rules “Toll charge” on “outbound” transactions “Anti-inversion” rules

  10. US Domestic Reorganization Rules: Share-for-Share Deals/Sec. 351 • Transfers of “property” to corporation tax-free • Transferor group must obtain 80% of vote and 80% of all other classes of stock of transferee • Transferor group must receive “stock” of transferee

  11. Continuing Acquiror Shareholders Former Target US Shareholders Former Target UK Shareholders Former Target UK Loan Note Holders 15% 25% 60% UK Acquiror US Target US Domestic Reorganization Rules: Share-for-Share Deals/Sec. 351 UK Shareholders US Shareholders Former Target US Shareholders US Shareholders UK Shareholders Target US Acquiror UK NO “80% CONTROL GROUP”

  12. US Domestic Reorganization Rules: Share-for-Share Deals/“B” Reorganization • One corporation acquires “control” of another solely for voting stock of acquiror or its immediate parent

  13. Continuing Acquiror Shareholders Former Target US Shareholders Former Target UK Shareholders Former Target UK Loan Note Holders 15% 25% 60% UK Acquiror US Target US Domestic Reorganization Rules: Share-for-Share Deals/“B” Reorganization Former Target US Shareholders UK Shareholders US Shareholders US Shareholders UK Shareholders Target US Acquiror UK LOAN NOTES ARE “BOOT”

  14. “Toll Charge” on Outbound Transactions/Sec. 367 • Transactions otherwise tax-free still taxable if an international element • Last clear chance for US to tax • Series of somewhat arbitrary rules which distinguish taxable from tax-free reorganizations • Control of foreign acquiror by US shareholders of target a problem

  15. Continuing Acquiror Shareholders Former Target US Shareholders Former Target UK Shareholders 55% 25% 20% UK Acquiror US Target “Toll Charge” on Outbound Transactions/Sec. 367 Former Target US Shareholders UK Shareholders US Shareholders US Shareholders UK Shareholders Target US Acquiror UK FORMER TARGET US SHAREHOLDERS CONTROL UK ACQUIROR

  16. “Inversion” Transactions/Sec. 7874 • Designed to discourage expatriation of companies from US • Looks at ownership of acquiror by all former Target shareholders • 60% overlap: Target loses use of tax attributes • 80% overlap: Acquiror becomes US resident

  17. “Inversion” Transactions/Sec. 7874 UK Shareholders US Shareholders US Shareholders UK Shareholders Continuing Acquiror Shareholders Former Target US Shareholders Former Target UK Shareholders Target US Acquiror UK 60% 60% 20% 20% 20% UK Acquiror US Target US Target 60% CONTROL OF UK ACQUIROR BY FORMER TARGET SHAREHOLDERS

  18. “Inversion” Transactions/Sec. 7874 UK Shareholders US Shareholders US Shareholders UK Shareholders Continuing Acquiror Shareholders Former Target US Shareholders Former Target UK Shareholders Target US Acquiror UK 5% 75% 20% UK Acquiror US Target

  19. “Inversion” Transactions/Sec. 7874 Continuing Acquiror Shareholders Continuing Acquiror Shareholders Former Target US Shareholders Former Target US Shareholders Former Target US Shareholders Former Target UK Shareholders Former Target UK Shareholders 5% 75% 20% UK Acquiror UK Acquiror US Acquiror US Target US Target 80% CONTROL OF UK ACQUIROR BY FORMER TARGET SHAREHOLDERS

  20. US buying into the UK Acquirer (US) Acquirer UK Sub Target (UK)

  21. US buying into the UK: Basic issues • Transactions are not effected by merger (merger, SEs and EU cross-border merger options exist) • US purchaser will acquire UK target by offer or scheme • Public offer of securities in the UK: FSA-approved prospectus requirement under FSMA • Takeover of a UK PLC is governed by the Takeover Code: offer document requirement

  22. US buying into the UK: Offer or Scheme? • Key differences • Target co-operation needed for a scheme • Acceptance levels/apathy and dissent • Flexibility • Timing • Competing bids • Presentation as a “merger” • Recent City Code amendments to scheme of arrangement became effective on 14 January 2008

  23. US buying into UK - UK Tax Objectives • Relief for interest in UK (and US?) • Avoid withholding tax in the UK on interest • Minimise stamp duty • Rollover for UK shareholders

  24. US UK Bidco UK Target plc Interest relief in the UK (I) • Form UK acquisition vehicle if relief required for funding costs in UK • Place of incorporation of UK Bidco? • UK Bidco can be funded directly by third party or from within group • Check the box on UK Bidco • Hybrid debt

  25. Interest Relief in UK (II) • Anti avoidance rules • Transfer pricing. • Para 13, Sch 9 FA 1996, s.787 ICTA 1988. • Arbitrage rules – chapter 4 part 2 F (No. 2) Act 2005. • PBR – Worldwide cap on tax deductions for interest – limited to group’s external finance cost. • Late payment of interest, para 2, Sch 9 FA 1996. • Previous practice: funding bonds. • Late interest payment rule disapplied/legislation awaited. • Group relief (avoid trapped losses). • Withholding tax. • Timing Issues. • Where no Treaty/Directive protection – quoted Eurobond.

  26. Stamp Duty • ½% stamp duty on share acquisitions (i.e. offer). • No stamp duty on S.425 cancellation scheme BUT • If cancellation scheme - ensure no impact on rollover relief

  27. Rollover – Cancellation Scheme • On a cancellation scheme • Consideration paper need not be issued by bidder • If shares issued, scheme qualifies as a reconstruction and rollover available (even if also cash consideration) • But reclassify shares if mix and match or cash alternative for shares to satisfy “proportionality” requirement • If cash and loan notes offered (and no shares) need to do part transfer and part cancellation scheme to get rollover relief for loan note

  28. Rollover - Offer • On an offer • Consideration needs to be issued by acquiring company • ‘Double rollover’ if shares to be issued by US parent • Use of put/call options if double rollover • If loan notes to be issued exchangeable for US shares - non QCBs, if shares to be issued - non UK incorporated Bidco. Target shareholder US Parent Target shareholder UK Bidco loan notes/ shares UK Target plc

  29. Dual Headed Structures • Tax treatment of equalisation payments. • Residence issues. • US/UK dual headed structures?

  30. Topco Other subs UK US Redomiciliation of Topco • Is a UK holding company unattractive? • PBR – foreign dividends exempt. • Uncertainty over CFC rules, still subject to consultation. • New Topco may be Jersey incorporated, Irish tax resident with DAS. • Advantage of structure depends on facts.

  31. Questions? These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources. Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings.

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