PRE-TRANSACTION RESTRUCTURING HANDBOOK
Pre-Transaction Restructuring Handbook
Baker & McKenzie
©Baker & McKenzie 2012 All rights reserved. IMPORTANT DISCLAIMER: This Handbook is not intended to be a comprehensive exposition of all potential issues arising in the context of a pre-transaction restructuring, nor of the law relating to such issues. It is not offered as advice on any particular matter and should not be taken as such. The precedent documents included in the Handbook have not been prepared with any particular transaction in mind. Baker & McKenzie, the editors and the contributing authors disclaim all liability to any person in respect of anything done and the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or part of this Handbook. Before any action is taken or decision not to act is made, specific legal advice should be taken in light of the relevant circumstances and no reliance should be placed on the statements made or documents reproduced in this Handbook. This publication is copyright. Apart from any fair dealing for the purposes of private study or research permitted under applicable copyright legislation, no part may be reproduced or transmitted by any process or means without the prior permission of the editors. Save where otherwise indicated, law and practice are stated as at 29 February 2008. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm. This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.
Table of Contents
Section 1 Introduction ...... 1 Section 2 Pre-transaction restructuring: Overview of key issues and process for managing the project ...... 3 Section 3 Tax planning for the spun-off group ...... 18 Section 4 Tax planning for the separation steps: Which method of separation is best? ...... 25 Section 5 Separation methods: Business and asset sales and capital contributions of assets ...... 31 Section 6 Separation methods: Demergers and statutory spin-offs ...... 43 Section 7 Separation methods: Reverse spin-offs ...... 81 Section 8 Moving companies into the new structure: Sale vs. capital contribution ...... 83 Section 9 Identifying the Most Effective Form of Entity for the Asset or Business Transfer ...... 136 Section 10 Restructuring issues raised by branches and representative offices . .144 Section 11 Employment considerations ...... 146 Section 12 Stock options and other equity compensation issues ...... 160 Section 13 Intellectual Property Considerations ...... 167 Section 14 Transition services and other post-separation matters ...... 178 Baker & McKenzie Offices Worldwide ...... 180
Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 1 – Overview
Section 1 Introduction
The aim of this Handbook is to provide a reference tool for companies that may either be contemplating, or in the process of executing, a multinational spin-off or separation of a division, line of business or other assets into a separate corporate structure. The Handbook provides a guide to the process of identifying the legal and tax issues to be addressed in planning and implementing the restructuring on a global basis. These reorganizations and the related transactions are frequently transformational or “once in a lifetime” projects for a multinational group and one of the major challenges that a company will face is to look ahead to the final transaction and the end state of the group, e.g., the public listing of a division and anticipate early enough the requirements and needs of that final transaction and the resulting business. The following chapters focus on a hypothetical parent company, having subsidiaries and branches in multiple foreign countries, that has identified a target line of business to be separated out from the company’s other businesses. The target line of business has assets and employees in many of these foreign jurisdictions, and, in each relevant jurisdiction, the target assets and employees are initially held by the same legal entities as the rest of the company’s business operations. Thus, for example, in each of twenty jurisdictions the company may have one or more subsidiaries, branches or other business presences, and the target assets are co-mingled in these local legal entities with the assets of the company’s other divisions. In our example, the company intends to establish a new holding company immediately below the ultimate parent company of the corporate group, and to transfer the target assets and employees into that holding company or into subsidiaries and branches beneath it. The eventual goal may be to sell the holding company to a potential buyer or investor, to distribute shares of the holding company to the ultimate parent company’s shareholders in a spin-off transaction, or to accomplish one of many other strategic business goals. In broad-brush terms, the separation process involves: •• determining what type of corporate structure is best for the target business; •• determining the most tax and cost efficient and least disruptive way to separate out the target business’s assets; •• setting up the new corporate structure complete with subsidiaries, branches, and representative offices; •• identifying the assets, employees, intellectual property, liabilities, and other items that have to be moved, kept or shared; •• effecting the transfer while making sure that the operation of the business is not disrupted and all necessary licenses and permits are in place;
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•• putting a process in place to settle any open questions about what assets and liabilities belong to which business unit; and •• putting in place agreements between the existing and spun-off businesses to address shared services, post-split transactions and ongoing business relationships. The issues raised in this Handbook may apply to a parent company in any jurisdiction, though a number of examples highlight issues particularly relevant to companies headquartered in the United States.
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Section 2 Pre-transaction restructuring: Overview of key issues and process for managing the project
This Section provides an overview of the process that typically ensures success in managing global pre-transaction restructuring projects, and then provides a brief summary of the more common substantive issues companies are likely to encounter in planning and implementing such projects. Several of the key issues discussed in this overview are covered in more depth in subsequent Sections of the Handbook.
1. An Open and Interactive Process A large restructuring project raises issues of both process management and substantive expertise. Moreover, once a restructuring plan has been developed, practical implementation issues will often prove critical in determining how quickly the plan can be effected and how soon the benefits of the restructuring can be realized. In particular, human resource concerns, corporate and tax law issues, financial due diligence and all audit requirements regulatory approval and filing requirements should be built into the planning process itself, and not be left to the implementation phase, in order to avoid road-blocks that might otherwise delay or frustrate the realization of restructuring goals in many jurisdictions. Furthermore, the planning process should also extend to the structuring of ongoing business operations for the target line of business. The business that is being separated out should be run with the end goal in sight. So, for example, form customer agreements may need to be revised in order to ensure that they can be readily assigned, and entering into long-term contracts of any kind may need to be subjected to a special review process. Outside advisors are typically used in this type of project because of their specialized experience and expertise, because a company’s permanent staff often is best used in other ways that relate more directly to the daily business operations of the company, and because confidentiality concerns may make it desirable to minimize the number of people within the company who are told about the proposed restructuring and the final transaction, particularly at the outset. However, internal staff are the best (indeed for the most part the only) source of the information that is critical to creating an effective implementation plan. In particular, they have the historical perspective of the operational, tax, financial corporate and business planning background of many of the existing structures and business operations, and ultimately must be sufficiently familiar with the separation plan so that they can both assist in its implementation and be in a position to manage and sustain the structure that results at the end of the process. It is vital to involve individuals in the process who have an intimate knowledge of the business operations being separated so that they can help identify the assets and people to be transferred and help identify key ongoing dependencies between the two corporate groups after separation. It is also important to bear in mind that individuals who are employed in the line of business being spun-off or
Baker & McKenzie 3 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 2 – Pre-Transaction Restructuring: Overview of Key Issues separated out may have divided loyalties, as they may perceive their own interests as being more aligned with the separated business than with the remaining business. Measures may need to be taken to ensure that key decisions are reviewed and approved by a more neutral group, such as a steering committee. Outside advisors and management must therefore work together to strike a balance that makes the best use of internal resources, but adds the particular experience, expertise, and additional resources of the outside advisors and relieves the strain on already scarce management time. Frequently, however, this balance is not struck and advisors and management adopt one of two extreme approaches: the “black box” approach whereby outside advisors gather data, disappear for some period of time, and then present proposals that can fail to take advantage of existing background knowledge possessed by management and, by excluding them from development of the plan, do not put management in a position to manage the end product; or the “shotgun” approach whereby outside advisors gather minimal data, and then subject management to a barrage of ideas that “might” work, which effectively puts too much of the onus on management to place the ideas into the context of their group’s actual circumstances (of which the advisors are unaware) and assess resulting risks. Although there is no “one size fits all” restructuring process, a happy medium can often be achieved if it is first understood that identification of strategic objectives is predominantly a senior management task, and that designated key management personnel should continue to be involved in both a fairly comprehensive information gathering phase and in strategic and tactical decision making during the ensuing analysis phase. A core team with overall responsibility for the project comprising of the key functions, internal and external can be a very valuable project management tool. In addition, it is often necessary to involve the appropriate management personnel in the development of any financial models required to understand the tax impact of the ideas generated by the project team. Ideally, there should be an interim evaluation of a draft plan to gather important feedback from the company on practical feasibility, risk appetite, and business impact, followed by at least one additional opportunity for the key constituents within the company to review and comment on the overall plan. The process can be broken down into seven phases: •• identification of strategic and key objectives; •• information gathering; •• preliminary analysis and overall plan development; •• initial evaluation of overall plan; •• final detailed steplist development; •• evaluation and approval of final detailed steplist; •• implementation of final detailed steplist; and •• ongoing assessment of continuing arrangements. Each of these phases is explained in more detail below.
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1.1 Identification of Strategic and Key Objectives The management team will need to determine the relative significance of achieving certain business goals and the timeline for the implementation and prioritize accordingly. It may be that certain regions of the world or key facilities warrant more urgent attention or require longer lead times for separation because of government approvals, and the restructuring would then proceed on the basis of a planned series of phases. Alternatively, it may be that what is required is a comprehensive solution that pursues all regions or facilities simultaneously with, to the extent possible, a single effective date for the entire restructuring. In many transactions, it is simply not possible to get every piece of the target business separated out by the time of a planned spin-off or other separation, but this can be dealt with by planning to put in place a master separation agreement addressing the obligation to transfer any remaining assets and operations at a later time. Naturally, the more comprehensive the initial plan, the more time it will take to move through the phases of the process. The key issues to focus on include the following:
•• is the end result known, i.e., is it a sale to a third party or investor group such that warranties will be an issue, or is it an IPO or spin-off? •• what are the company’s business goals and priorities in the restructuring? •• what are the company’s plans for employee transfers and workforce reductions, if any? •• what are the constraints on moving assets, entities and people, including operational, legal and other constraints? •• what are the tax and other costs of the separation, and who should bear those costs? •• what are the timing, internal and external to the group, and sequencing priorities? •• what are the ground rules for identifying what is to be separated and what is to stay, and who within the company has authority to resolve disputes over these matters?
1.2 Information Gathering Phase This process must provide for planned, structured input from all relevant constituencies within the company, e.g., human resources, tax, general counsel’s office, strategic business development, sales and marketing, accounting, finance and treasury, real estate, stock administration and information systems. While this adds some time to the process of developing a plan, it will pre-empt problems that could otherwise arise in the implementation phase should a previously uncirculated plan prove unacceptable to one or more of these constituencies. The object of this phase is to develop a clear understanding of the goals of
Baker & McKenzie 5 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 2 – Pre-Transaction Restructuring: Overview of Key Issues the restructuring project and to gather sufficient information and documentation about the entities and assets that are involved in the project in order to allow the planning and execution phases to proceed. The initial information gathering phase of a restructuring project typically involves seeking answers to the following questions: •• in which jurisdictions do the companies within the scope of the proposed restructuring operate? •• where are the revenues being earned? •• where are the taxes being paid? •• what are the tax attributes of the entities involved in the restructuring? •• where are the tangible assets? •• where are the intangible assets? •• what are the current transfer pricing policies? •• which entities hold the key customer and supplier contracts and are those contracts assignable? Whilst thorough pre-planning information gathering is the preferred approach, in many pre- transaction restructurings it is not possible, wholly or in part, due to the need to keep details of the later transaction confidential at this stage and to keep the size of the internal team limited and on a “need to know” basis only. In order to address the limitations of restricted information early in the planning, a specific review of the data provided should be included as a step in the restructuring once confidentiality restrictions have been lifted.
1.3 Preliminary Analysis and Overall Plan Development Once information has been gathered, it is necessary to conduct a preliminary analysis of that information in order to develop an overall restructuring plan. The focus in this phase is on planning a restructuring that achieves the identified goals in the most efficient manner from a tax, cost and corporate perspective. There will often be dual tax concerns: (a) to ensure that the new multinational corporate structure being created to receive the target business is set up in a way that minimizes the worldwide effective tax rate on the target business, and (b) to ensure that, where possible, the steps in the restructuring are free from income and capital gains taxes, while minimizing any capital duty, local transfer and documentary taxes. When these two concerns conflict, which one prevails will likely be determined by the key business objectives in a particular situation. The following tax concerns also often come to bear: •• the separation of the target business may be combined with a change in the intercompany commercial relationships of all or some of the pre-existing group companies so as to minimize taxes globally or fine-tune the tax results of the remaining operations;
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•• the companies involved in the restructuring may have favorable tax attributes, such as net operating losses and unused foreign tax credits, and the restructuring should be conducted in a manner designed to preserve these attributes, where possible; •• the restructuring may be effected in a way to take advantage of existing tax attributes, such as using net operating losses in the existing corporate structure by triggering a taxable sale of assets to the new structure; •• in the United States, there may be opportunities for domestic state and local tax minimization planning; and •• there may be opportunities for minimizing other governmental costs (e.g., transfer tax, customs and VAT planning). In the preliminary analysis phase, management and the outside advisors should consult with one another and develop an overview restructuring plan. To the extent possible at this stage, the plan should specify which of the existing corporate entities will be kept and which will be transferred to the new holding company. It should also, where possible, specify the method of separation (e.g., “Existing France Sarl will sell assets to New France Sarl,” or “Existing Brazil Ltda will demerge the target assets into New Brazil Ltda and then sell the quotas in New Brazil Ltda to Newco”). The overview document should be revised and expanded into a detailed steplist as the planning continues.
1.4 Initial Evaluation of Overall Plan Once the high-level restructuring plan has been developed, it is important to have the key constituencies within the company evaluate the draft plan and provide input on any issues presented by the plan and any refinements that they wish to propose. Depending on the scale of the restructuring project, this evaluation may take place in a single meeting or over several days or weeks. It is important to note that developing the overall restructuring plan is often an iterative process because, as more information is learned about the entities to be consolidated, new issues and opportunities may present themselves and the restructuring goals may change. As the goals change, more fact gathering may be required. With each iteration, however, the restructuring goals become more refined and more detailed.
1.5 Detailed Steplist Development As the overall restructuring plan becomes more refined and is finalized, it should be expanded into a fully detailed list of each step necessary to execute the assigned tasks. The end product will be a complete plan for executing the assigned tasks with names of those responsible for each step and, in the case of documents, the identity of the signatories. Interdependencies and steps that must follow a certain order or require permissions, filings and the like should be noted on the steplist.
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The final detailed step list also can fill a dual role, namely as it is a summary of all steps implemented it provides a work plan for the internal financial accounting team so that all steps are properly recorded in the accounting records of each entity.
1.6 Detailed Steplist Approval As with the high-level restructuring plan, it is important to have the key constituencies evaluate the detailed steplist and provide input. Sometimes issues that were not apparent in the high-level plan become apparent when a person sees the detailed steps that will be taken and considers his or her role in implementing those steps.
2. Implementation of Detailed Steplist There are various ways to manage the implementation of the detailed restructuring steplist. The specific approach will depend on the size of the project, the nature and geographical scope of the tasks involved, the management structure of the company (e.g., whether legal and finance teams exist in different geographical regions or whether key roles are centralized at the global headquarters), the nature of the end transaction (e.g., initial public offering, sale, or spin-off), and even the management styles and personalities of the individuals involved. The key to success in this phase is maintaining open and clear channels of communication about how the implementation is progressing, what issues are surfacing and making sure that there is a central decision maker available who can make executive decisions as and when required. Throughout the execution phase, the detailed restructuring steplist serves to track the status of tasks. Regular scheduled status calls with the key project individuals at the company and the outside advisors keep the restructuring process on track, focus minds on any open issues, and allow advisors and management to help identify what, if anything, is holding up completion of a particular step and take action accordingly.
2.1 Ongoing Assessment of Continuing Arrangements The separation of businesses rarely happens overnight; there is often an extended transition period during which the separated business continues to depend on the original business for services, such as accounting, finance, payroll processing, subleasing of office or manufacturing facilities and the like. Usually these services will be provided under one or more transition services agreements that call for a phasing out of services, and impose an obligation on the separated business to obtain its own facilities and source its own services by some fixed date in the future. As the separated business becomes more independent and its own business goals evolve, what was once an amicable transition arrangement can become more problematic. This may be particularly true if the spun-off business begins to deal with competitors of the original business. Another area of focus should be business joint ventures and how to transfer and transition these to the new group. Transitioning relationships can give an opportunity to revisit the terms of the joint venture and sufficient time should be allowed to effect as smooth a transfer as possible. 8 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 2 – Pre-Transaction Restructuring: Overview of Key Issues
Careful attention must therefore be paid by both parties to observing the terms of the transition services arrangements and to monitoring progress towards the agreed termination of these services. It may be desirable to form a transition team that can help resolve issues before they develop into disputes, and that can propose and monitor any changes to the transition arrangements that are necessary to fit the evolving needs of both parties.
3. Substantive Legal and Tax Issues Certain legal and tax considerations frequently arise in pre-transaction restructurings. The discussion below is not intended to be exhaustive, as additional issues, particularly industry specific considerations and regulations, can also apply.
3.1 Due Diligence As part of the information gathering phase of the transaction, the company will need to undertake an extensive due diligence investigation of each of the entities (e.g., subsidiaries, branches, representative offices) involved in the transaction in order to identify the target business assets, liabilities, contracts and employees to be allocated to the new corporate structure. This can be a complicated process because (a) the target business will usually be integrated with the company’s other businesses, (b) there may be “gray areas” as to whether specific assets belong with the target business or the company’s other businesses, (c) the target business may be dependent to some degree on resources and operations of the other businesses, and (d) the target business and the company’s other businesses may share certain assets. The allocation of assets between the company and the new entity that will receive the target business may be based on a number of different tests. One test, for example, would be that the new entity is entitled only to those assets that are “exclusively” used in the target business. Another test would entitle the new entity to those assets that are “primarily” or “significantly” dedicated to the target line of business. Identifying to what extent specific assets meet such a test can be a complex and painstaking process. Often, the company will prefer to retain as many of the shared assets as possible, but such an approach means that the target business will be less capable of being independent from the company and its market value may be discounted as a result. Once the business assets to be separated out have been identified, most liabilities allocable to such assets will be readily identifiable. However, the allocation of other types of liabilities may be less clear. For example, contingent liabilities relating to “general corporate” matters, such as responsibility for securities law, antitrust and similar claims for pre-separation periods, may be more troublesome. To avoid duplication of work, these lists of assets and liabilities should be developed throughout the restructuring so that they are readily available at the time of execution of local business transfer agreements, as a number of countries legally require very specific lists of assets and liabilities.
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Employees will also need to be allocated between the company and the target business. Generally, operational employees associated with the target business will be transferred with such business. Where general, corporate, administrative or other functions are centralized, a more difficult determination must be made to what extent, if any, personnel engaged in such functions will be transferred to the new corporate structure.
3.2 Evaluating Asset Transfers vs. Statutory Demergers In many jurisdictions, local corporate laws provide for statutory demergers. In such jurisdictions, the alternative approaches of demerger versus asset sale should be compared to see which one best achieves the separation goals. Statutory demergers are often advantageous because the assets and contracts of the demerged business generally transfer automatically to the demerged entity, whereas individual transfers of assets and contracts pursuant to an asset sale can be cumbersome, e.g., there may be a requirement to register any change of ownership of assets, and in certain cases a third party or a governmental authority must approve the transfer of an asset or contract. Local demerger regimes often also have tax benefits. Indeed, even if the only benefit of the local statutory demerger regime is that the transaction is tax-free for local tax purposes, this benefit can be substantial. Demergers can take significantly longer than asset sales, however, and this must be factored into the decision making process. A number of jurisdictions simply do not have demerger statutes that allow local companies to demerge. In these jurisdictions, the only choice available for separating out the target business is selling (or otherwise transferring) the target business assets from one company to the other. Jurisdictions that do not have demerger statutes tend to be common law countries such as Hong Kong, Singapore and the UK. These jurisdictions often allow for asset sales within a local group to occur without taxable gain, or do not tax capital gains, which means they achieve the objective of separating out the target business in a manner that is functionally equivalent to a demerger from a local tax perspective. However, this approach can require that the retained business is transferred to the new company, and that the target business will retain the pre-existing company. Moreover, an asset sale can usually be effected as a tax-free reorganization from a U.S. tax perspective.
3.3 Incorporating New Entities In cases where businesses are inter-mingled in the same legal entities, a new corporate structure will need to be established to acquire the operations of the target business around the world. First, a new holding company would be set up immediately below the ultimate parent company of the corporate group. The new company will subsequently need to establish or obtain a presence in every jurisdiction in which it wishes to conduct activities after the separation. The form of such a presence would typically be a subsidiary or branch, either newly formed or acquired from the parent. Since the parent will continue to operate its other businesses throughout the world, it is likely that new subsidiaries or branches will need to be set up in numerous foreign jurisdictions. Unlike forming a Delaware
10 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 2 – Pre-Transaction Restructuring: Overview of Key Issues corporation, which can be done in one day, forming a subsidiary in many jurisdictions can take weeks, if not months. Detailed information must be provided by the company with respect to the new entities to be formed, including such details as the amount of authorized and paid-in capital, registered address, identity and personal information of directors or managers, financial and accounting information, etc. In addition, many jurisdictions impose formalities not found in the U.S., such as minimum capital requirements and government review and approval mechanisms. Certain jurisdictions require government approval (e.g., Thailand) or registration (e.g., Argentina) of the foreign shareholder company before foreign ownership of the local company is permitted.
3.4 Keeping Assets vs. Keeping Subsidiaries The company will need to make a determination on a case-by-case basis whether an existing local subsidiary will be transferred to the new corporate structure or whether a new subsidiary will be established and the target business assets transferred to the new subsidiary. If an existing subsidiary only owns assets related to the target business, then it is simpler to transfer the shares of that entity to the new group. Typically the target business will need to be separated out from the existing subsidiaries’ other businesses. If an existing subsidiary owns primarily assets relating to the target business and few assets relating to other businesses, it may be more efficient, both from a corporate and tax perspective, to transfer the shares of the existing subsidiary to the new structure, set up a new entity under the existing structure and transfer the relatively small proportion of other business assets from the existing subsidiary to the new entity. Certain other considerations may also weigh in favor of transferring an existing entity to the new group. For example, if an existing local subsidiary has a valuable license, permit, contract, or tax position that relates to the target business and cannot be easily transferred, it may be preferable to transfer the shares of that subsidiary into the new corporate structure. As mentioned above, to the extent such a subsidiary also houses operations relating to the company’s other businesses, the company would need to form a new entity in the local jurisdiction and the assets and liabilities relating to such other businesses would need to be transferred from the existing subsidiary to the new entity.
3.5 Permits, Foreign Investment and Regulatory Approvals Regulatory consents may be required in connection with the transfer of licenses or special permits that might apply to the target and/or the company’s other businesses, as well as approvals related to a special status such as bonded warehouses and tax holidays. Such regulatory authorizations must be identified early in the process since effecting transfers of licenses and permits can require a long lead time may in some cases involve negotiations with government authorities and if not handled correctly have an adverse impact on the local business, e.g., obtaining new import and export licenses. Further, government grants and other special concessions may be lost upon a change of control or transfer of assets and advance planning and negotiation may be required to secure the continuation of such privileges. Separating the businesses of the company may impact not only the ability of the
Baker & McKenzie 11 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 2 – Pre-Transaction Restructuring: Overview of Key Issues target business to qualify for special permits or status, but may also impact the ability of the remaining businesses of the company to retain special privileges or permits if, for example, headcount numbers are reduced due to the separation, thereby making it harder to meet government conditions for such privileges or permits.
3.6 Transferring Assets Where the chosen local spin-off method requires the individual transfer of assets, local legal formalities must be observed to effect the transfer, and sometimes registration, of the legal ownership of the assets. The steps required will depend on local law and the type of assets involved. In many cases, a simple asset purchase and sale agreement will suffice to transfer title. In the case of some assets such as real property, automobiles or certain types of intellectual property, the change in legal title may have to be recorded with governmental or regulatory authorities. One example is in Russia, where a separate such transfer agreement for each vehicle must be registered with the government authorities. In certain jurisdictions, even a general asset transfer agreement may have to be filed with local authorities and may have to be drafted in local language. Bulk sales laws may apply to significant asset transactions with the effect that liabilities and creditors’ rights transfer by operation of law with the assets. Local insolvency and creditor protection laws also need to be taken into consideration (e.g., those prohibiting transactions at an undervalue). In addition, the asset transfer may give rise to issues of corporate benefit and directors’ fiduciary duties. Also, separate formalities are almost always required to effect the transfer of shares of subsidiaries. A key issue in asset transfer jurisdictions is ascertaining the purchase price to be paid for the assets to be transferred. Often the interests from a tax, corporate law, accounting and treasury perspective will compete. For example, a sale by a subsidiary to its parent at less than market value may be an unlawful return of capital to the shareholder. However, a sale at market value may result in significant goodwill being recognized by the acquiring company for local tax and statutory accounting purposes which could limit the company’s ability to make distributions in the future.
3.7 Transferring Shares In some cases the shares of an existing local subsidiary will be transferred to the new corporate structure (as opposed to a transfer of the target business assets to a new subsidiary). There are a number of different ways the shares can be transferred and the chosen method will often depend on the location of the subsidiary in the group structure. If the subsidiary is held directly by the ultimate parent company of the group, the parent can simply contribute the shares of the subsidiary to the holding company of the new group. One corporate law consideration of such a transfer is whether the company that is receiving a contribution consisting of shares has to issue new shares for local tax or company law reasons. If the subsidiary to be transferred is located several tiers down in the existing group structure and/or if its ultimate destination is several tiers down in the new
12 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 2 – Pre-Transaction Restructuring: Overview of Key Issues group structure, transferring through each of the shareholding tiers may create considerable work. In such cases, it may be more efficient for the shares of the subsidiary to be sold to the new shareholder, in particular where there are local requirements for valuations and/or auditor reports. Sales of shares may, however, have different local and parent company tax implications that need to be evaluated.
3.8 Novating and Assigning Contracts In a local asset sale or demerger, existing contracts such as distributor agreements, customer agreements, supplier agreements, office leases, equipment leases, service agreements, utility and telephone accounts and a host of other operational agreements will have to be transferred to the entity that is the recipient of the target business. In a demerger, these assignments often occur by operation of law, but in other cases, steps have to be taken to effect the novation or assignment. These steps may range from giving a simple notice of assignment to obtaining written consent from all parties to effect the novation of all of the rights and obligations under a contract to the transferee entity. It may be prudent, though not practically desirable, to review contracts, particularly key arrangements, in order to determine whether they are freely transferable or whether permission is required. Even in a demerger between affiliates it is advisable to review the third party contracts of both affiliates to determine whether they contain any provisions that may be triggered by the demerger, such as provisions giving the other party the right to terminate upon a demerger or change in control. In planning this review it is a good idea to bear in mind the end goals of the final transaction. For example, if the end-goal is a sale or spin-off, it may be important to also review the contracts to check whether that end event will trigger termination rights. Form customer contracts should also be reviewed and if necessary revised to ensure that they allow assignment or contain other provisions necessary to facilitate the planned restructuring.
3.9 Preserving Tax Attributes Favorable local tax attributes, such as net operating losses or current year or carried forward tax losses (“NOLs”) can provide a permanent benefit to the company if preserved. In many jurisdictions, how a spin-off is executed will have an impact on whether the NOLs survive. For instance, in many jurisdictions, transferring the shares of a subsidiary may impact the survival of the NOLs (e.g., Germany). In other cases, a mere change in the business may be sufficient to restrict or eliminate the NOLs (e.g., the United Kingdom and Australia). Finally, in many countries it may be advisable to obtain an advance ruling with respect to the NOLs to confirm that the NOLs, or at least some portion of them, will survive the spin- off (e.g., France). In the UK, the degree of change which will result in loss of NOLs is less where there has also been a relevant change of ownership. Other key attributes which must be identified early in the due diligence and planning process are tax holidays, tax incentives and other grants and benefits, as these can have a very influential effect on the detail of a reorganization.
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3.10 Minimizing Corporate and Shareholder Level Income Taxes In the transactions undertaken to spin-off the target business, it may be important to avoid, or at least minimize, foreign income taxes. Foreign income taxes can be imposed on the local entities with respect to the transfer or disposition of their assets. Similarly, income taxes can be imposed on the shareholders in connection with stock transfers or distributions. If structured properly, foreign corporate level income taxes can often be avoided either by separating out the target business through a demerger, if available, or through the local form of separation with group relief. Stock transfers, on the other hand, may be exempt from income tax due to the appropriate double tax treaty, an EU Directive, or local law. It is also important to consider who will pay any taxes that are triggered. For example if they are triggered for the local subsidiary and that subsidiary is being transferred to the spun- off group (i.e., in the scenario where assets are being bought back from a subsidiary that is spinning off), this may affect the value of the subsidiary and hence the value of the spun-off group of companies, or may run counter to representations and warranties being made in a master separation agreement.
3.11 Transfer Taxes, Stamp Taxes and Real Estate Taxes Many countries have stock transfer or stamp taxes on the transfer of shares (e.g., Hong Kong and Singapore at 0.2%). Although such taxes are generally small, they are generally not creditable against income taxes and thus create a real out-of-pocket cost to the company. For the same reason, capital taxes and documentary taxes should be avoided whenever possible. Steps should be taken to avoid or minimize these taxes, and exemptions will often be available for intra-group transactions. It is important to bear in mind that transactions which appear to be exempt initially because the transfer is intra-group, could later become taxable or dutiable when the acquiring entity is spun-off and the group affiliation is broken. Some countries, such as Austria, tax the transfer of real estate where the entire issued share capital of a company is transferred, which can result in tax arising both with respect to a share transfer and the subsequent demerger. Note that stamp duty relief in the UK for intragroup transfers will be lost if the transferee leaves the group within a specific period, but can be preserved if the assets to be retained on a split-up of a company are transferred to another group company that stays within the original group.
3.12 Foreign Tax Planning Opportunities A variety of foreign tax planning opportunities may arise in connection with any foreign business separation. For instance, in many jurisdictions there will be an opportunity to obtain a tax basis increase or “step up” in the assets of the local company transferring its assets, sometimes without any local tax cost. It may also be possible to leverage the recipient company with debt in connection with the business separation. The interest deductions can then be used to reduce the local tax base. In addition, if the parent is the lender, the principal repayments can generally be used to repatriate earnings without income tax and without withholding tax.
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3.13 Severance and Restructuring Costs Most business separations result in some employee severance or other restructuring costs. In most jurisdictions, provided appropriate precautions are taken, these costs are deductible for local income tax purposes. There are nevertheless a number of strategic considerations that should be taken into account when deciding when and how to incur restructuring costs such as those arising from the elimination of employees. Domestic and foreign tax consequences are among these strategic considerations.
3.14 Employment Law Considerations In the United States, most employees do not have employment contracts and are not members of unions. In general, such “at will” employees can be dismissed, or the terms of their employment can be changed, with relative ease. In many foreign jurisdictions, on the other hand, workers have significantly more rights, and in many cases, any purported waiver of such rights is invalid. If an employer changes an employee’s working conditions or terminates an employee in connection with a business separation, the employee may be entitled to compensation or reinstatement. Furthermore, any changes made to the terms of employment may simply be ineffective, allowing the employee to demand the old terms at any time. In addition, depending on the jurisdiction and the number of employees, there may be a works council, union or similar representative body to consider. Such bodies may have a right to be formally notified of, and in some cases, approve the plans for the local spin-off before they are implemented, and it may be a significant violation of local law to make changes in the management of the local company or undertake a spin-off transaction without formally consulting with them. It should also be noted that transferring substantially all of the assets of one entity to another can result in the automatic transfer of employees along with their existing terms of employment.
3.15 Stock Option and Other Equity Compensation Issues The company will need to consider how to treat employees of the target business who are entitled to stock options and other equity compensation. In addition to U.S. securities law implications of granting stock options to employees of the target business, many foreign law issues will need to be addressed, including strict filing and other requirements that must be met before stock options may be granted or exercised. Further, the effect of the transactions on different classes of employees needs to be addressed as there can be real cash costs to individuals triggered in certain circumstances.
3.16 Intellectual Property Issues Intellectual Property (“IP”) frequently gives rise to the most challenging issues in a spin- off or divestiture due to the intangible nature of IP, the varied legal regimes that apply to different forms of IP and the use of specific IP throughout an organization. The continued use in the operation of the target business of IP such as trademarks, trade names, patents or
Baker & McKenzie 15 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 2 – Pre-Transaction Restructuring: Overview of Key Issues other technology owned by the parent will have to be accommodated through assignment or license agreements between the company and the new holding company of the target business. Identifying and allocating IP to be transferred with the target business as well as shared IP is not an easy task and is often complicated by the fact that rights to use third party IP may also need to be assigned. The assignment of rights to any such third party IP is more involved due to the need to obtain consent from the IP owner prior to the assignment. It is important to identify any restrictions or impediments on the use or transfer of the relevant IP owned or licensed by the company early in the planning process. Note also that moving IP between companies, particularly when the movement is offshore, can trigger significant tax costs.
3.17 Appointing Directors and Officers The persons to serve as the directors, managers and officers of the subsidiaries that make up the new corporate group should be identified early in the separation process. These individuals will typically represent the interests of the new company during the planning and implementation phases of the separation and in doing so may realize that their interests and loyalties are not in complete alignment with the parent company. This can create delicate situations in which the management of the new group may find itself negotiating terms of the agreements relating to the separation with the management of the parent while they are still employed by the parent. Another issue to bear in mind when selecting new directors and officers is that it is preferable to avoid having the same individuals sign on both sides of the transaction. This can be done by taking care not to appoint the same individuals that are serving as directors/officers of the existing subsidiaries as directors/ officers of their new counterpart entities. If the target business is ultimately spun-off, the company may want to appoint new directors and officers immediately prior to the spin-off. Implementing such a change of directors and officers cannot be done instantaneously in many countries and therefore requires advance planning.
3.18 Waiting Periods and Notices In many jurisdictions, government or tax clearances are required prior to the demerger of local entities. Even in jurisdictions where government clearances are not required, public notices may be necessary and statutory waiting periods often apply. These formalities can delay the business separation. Accordingly, it is important to identify the jurisdictions where immediate separation is desired so that the required applications and notices can be filed as soon as possible. In cases where statutory or practical delays in implementing the spin-off are likely to occur, alternative strategies may be available to minimize operational inconvenience or tax exposure, such as having one company operate the other’s business under a management contract during the interim period, or selling the assets with a subsequent demerger, and making the demerger retroactive for tax and/or accounting purposes under local law. In any case of significant delay, these alternatives should be explored.
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3.19 Corporate Compliance Status As part of the spin-off transaction, it is important to identify any deficiencies with the corporate compliance status of the entities spinning off assets and it may be necessary to take corrective action before the business separation can be started or concluded. For example, if the entities involved in the spin-off have not complied with their annual corporate filing or other maintenance requirements, it will typically be necessary to correct these deficiencies before any significant business separation steps, such as demergers, can be undertaken. Business separations may be delayed because the entities that are spinning off assets have not been properly maintained and there is a need to create statutory accounts, hold remedial annual meetings and make the necessary delinquent tax and corporate filings. Any deficiencies found may need to be logged for later disclosure to a potential buyer or public shareholders.
3.20 Branches and Other Business Registrations It is important not to overlook any branches, representative offices and other business registrations of entities involved in the business separation. In many cases, it would be a mistake to simply demerge a subsidiary on the assumption that any branches of the demerging entity will automatically result in branches of the new entity. Many government authorities view a branch as being a branch of a specific entity and the recipient of the demerged business will have to register a new branch to account for its assets and activities in the branch jurisdiction. Similar complications can ensue if it is assumed that shares of subsidiaries will automatically transfer when the original parent company undergoes a demerger. Effecting the local registration of branches or legal transfer of shares of subsidiaries can be problematic if not planned in advance.
3.21 Corporate Approvals Business separations typically involve extraordinary or non-routine transactions (e.g., selling a significant portion of a subsidiary’s assets to an affiliate). The individual directors or officers of the entities involved may not have the necessary corporate authority to effect such transactions. Therefore, it is often necessary to consult applicable local law and the articles or other constitutional documents of the entities involved to determine if the proposed transactions are subject to any corporate restrictions and to then take appropriate steps to authorize the transactions, such as adopting board resolutions, shareholder resolutions or amending the articles. Thorough documentation recording corporate decisions assists in memorializing the intentions of the parties and can be helpful where the transactions are reviewed as part of accounting or tax audits.
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Section 3 Tax planning for the spun-off group
1. Introduction When setting up a new multinational corporate structure in the context of a pre-transaction restructuring, opportunities arise to minimize the worldwide effective tax rate of the business that is being separated out. Management and tax counsel should therefore start the tax planning for the new structure at an early stage. It may, for example, be advantageous to set up a shareholding structure that allows for tax efficient repatriation of earnings from foreign subsidiaries or branches to the ultimate shareholder. Other examples of opportunities arising at the time a new corporate structure is set up are creating a global group cash management function, setting up a tax efficient structure for the use of IP, and implementing efficient sales or distribution models (supply chain management). All of these are potentially helpful in minimizing the new group’s global effective tax rate. One of the first relevant tax questions in the planning exercise is whether the legal ownership of the subsidiaries should be centralized in one or more holding companies. The use of finance and royalty companies should also be considered. By using holding, finance and royalty companies located in the right jurisdictions, withholding taxes on certain categories of income (dividends, interest, royalties) may be reduced under tax treaties, EU Directives and domestic law (e.g., participation exemption). The legal form of the foreign entities in the new structure is not only relevant from a legal point of view, but also from a tax perspective. In general, a company has access to the tax treaty network of its country of residence, while a branch or a representative office in principle does not have such access (excepting EU branches of EU resident companies). However, branches in low-tax countries may be useful to minimize the effective tax rate of the group. An alternative is to make use of hybrid entities or partnerships that qualify as companies from one country’s perspective and as disregarded (transparent) vehicles from another country’s perspective. The US “check-the-box” entity classification rules facilitate such planning. If the target business is engaged in the sale and distribution of products, consideration should be given to the most efficient supply chain model for the new structure from a legal and tax perspective (e.g., a distributor, commissionaire or agent model). In this respect, VAT/GST should be taken into account in order to minimize compliance burdens and to avoid or reduce cash flow losses and non-recoverable tax. Also, customs duty planning opportunities should be taken into consideration.
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2. Holding Company When choosing the location for a holding company, several factors should be taken into account. The factors of key importance can be divided into tax and non-tax advantages. The tax advantages which can be offered by a holding company in a specific jurisdiction depend mainly on features of domestic law, applicable tax treaties, or EU legislation. Examples of particular provisions in domestic law that are relevant to the operation of holding companies are: (a) low tax rates; (b) reduced withholding tax rates on dividends, interest and royalties; (c) availability of a participation exemption; (d) possibility to apply tax consolidation; (e) thin capitalization rules; (f) CFC legislation; (g) tax benefits for expatriates; and (h) advance rulings practice with domestic tax authorities. In addition to the tax advantages of a jurisdiction, other non-tax factors may also be relevant such as: the legislative and political framework of a jurisdiction, its geographical position and its logistics and communications infrastructure.
2.1 Participation Exemption In general, under the participation exemption dividends received by a holding company from qualifying subsidiaries, and capital gains realized on the disposition of shares in such subsidiaries, may be (wholly or partly) exempt from tax. Capital losses and interest expense may be deductible at the level of the holding company under certain circumstances. Examples of countries where some form of participation exemption is available are: Belgium, Denmark, Luxembourg, the Netherlands, Spain, the United Kingdom, and Switzerland.
2.2 Tax Treaties and EU Directives Under tax treaties and certain EU Directives, the domestic withholding tax rates of a jurisdiction can be reduced if certain conditions are met. By setting up a holding company in one of the EU Member States, a group may also benefit from EU Directives, such as the Parent-Subsidiary Directive and the Interest and Royalty Directive. Pursuant to these Directives, dividends, interest and royalties distributed between qualifying EU companies are exempt from withholding taxes.
2.3 Tax Consolidation In a tax consolidation regime, participating companies (the members) can consolidate their corporate income tax position. The most common advantage of a tax consolidation regime is the possibility to set off profits and losses among the members. Furthermore, members of a consolidated tax group can avoid realization of income or gains on transactions within the group. Tax consolidation is also often used as a tax planning tool to set off interest on acquisition financing against operating income from the acquired company. Denmark,
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Luxembourg, the Netherlands, the United Kingdom, and Spain each have tax consolidation regimes for holding companies and their subsidiaries. The conditions and advantages of each of these regimes vary. A tax consolidation regime for VAT also may be available in some countries. However, different rules and conditions apply than those that apply for corporate income tax purposes.
2.4 Repatriation Techniques A key benefit of a holding company is to collect profits repatriated by its subsidiaries and possibly repatriate all or part of such profits to its shareholder. Generally three repatriation techniques are commonly used: (a) profit distributions (dividend); (b) return of capital; and (c) capital gains on the disposition of shares. Repatriation techniques often combine elements of profit distribution and return of capital, such as a buy-back of shares by a company from its shareholders, a repayment of share premium, a reduction of the par-value of shares, or a dissolution and liquidation of a company. Depending on the jurisdiction of the repatriating company and the recipient company, the dissolution or liquidation of a company may be treated in whole or in part as one of the three main types of repatriation techniques. For example, a repayment of share premium or a reduction of the par value of shares may in many jurisdictions be considered a dividend distribution to the extent that the distributing company has retained earnings. This may, for instance, result in dividend withholding tax on the distribution. From the perspective of the recipient, the very same transaction may be treated partly as dividend income and partly as a divestment of the original amount invested. Some repatriation techniques, such as buy-backs or dissolutions, may be treated partly as a capital gain or a capital loss in the hands of the recipient. Since some jurisdictions do not extend their participation exemption to capital gains, this distinction may be relevant. Furthermore, legal restrictions may influence the choice for certain repatriation techniques. Examples are statutory waiting periods for liquidation or for the reduction of the par value of shares, minimum equity requirements, or the requirement in many civil law jurisdictions that a company may not perform a buy-back of its own shares if a certain number of months have lapsed since the end of the fiscal year without adopting the statutory accounts. In summary, when contemplating repatriation techniques, careful consideration should be made to assess if the holding jurisdiction allows flexible and tax-efficient profit repatriation.
3. Financing Company If it is anticipated that funds will be needed to finance the working capital of the foreign entities of the group, the new structure may use a company that raises funds from the international capital market (for example, in the form of a bond or note issuance) or from group entities, which funds are lent on to the foreign group entities. The ideal location of a finance company depends on a number of tax and non-tax factors.
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First, interest payments to and from a finance company ideally should not be subject to withholding taxes. The jurisdiction where the finance company is resident for tax purposes should not levy withholding tax on interest to be paid to the related or third party lenders. Furthermore, withholding tax, if any, imposed on interest payments received by the finance company from its borrowers should be reduced under applicable tax treaties. A financing company generally reports as its taxable profit a relatively modest margin between inbound and outbound interest flows. Therefore, a withholding tax burden on inbound interest generally creates a non-creditable tax burden, which may decrease the tax-effectiveness of the financing company. Given these considerations, the jurisdiction of the finance company should more than anything else provide for an extensive treaty network. Secondly, if the interest paid by a finance company is tax deductible, then the finance company will be subject to corporate income tax on only a small arm’s-length spread, which sometimes may be secured by means of a tax ruling. Consequently, the statutory corporate income tax rate of the jurisdiction of the finance company is of less importance, as it will be levied on a relatively modest portion of the income of the group. In some jurisdictions, the finance company needs to have a certain amount of substance and equity, and should incur risk on its financing transactions. Other points worthy of attention are currency exchange regulations, central bank reporting requirements, and the communication and banking infrastructure of a jurisdiction.
4. Intellectual Property Planning / Royalty Company IP planning focuses on where the IP of a multinational group, such as patents, copyrights or know-how, should be located within the group and how the remunerations to use such IP (e.g., royalties) should flow through the structure, including the use of a royalty intermediary company. The decision where to locate the company owning the IP depends on a number of considerations. A key consideration is the current value of the IP and the potential for this value to increase/decrease significantly in the future. Also important are the nature and magnitude of the investments (e.g., R&D expenses) expected to be made to maintain or improve the IP. The attractiveness of a potential IP holding jurisdiction depends in part on (a) whether capital gains are taxed upon a sale of the IP; (b) whether it is possible to deduct currently rather than capitalize R&D expenses; and (c) whether, if capitalized, the resulting intangible asset can be amortized for local tax purposes. Obviously, one should avoid transferring IP that currently has a low value, but which is expected to increase substantially in value, to a jurisdiction with a high corporate income tax rate. Generally, companies owning IP are therefore located in low-tax jurisdictions. The IP rights can be licensed from the company owning the IP to an intermediary company that subsequently sublicenses the rights to another related or third party company. Similar to a finance company, the advantages of a royalty intermediary are no (or reduced) withholding
Baker & McKenzie 21 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 3 – Tax Planning for the Spun-Off Group taxes on the royalty payments and the fact that the royalty company is only taxed on a small arm’s-length spread (the margin between the royalties received and the royalties paid). It is important to consider where to locate the direct and/or indirect ownership of the shares in the IP company. Many jurisdictions will deny the benefits of a participation exemption with respect to the direct or indirect ownership of shares in an IP company, or use anti- base erosion legislation to tax the income of IP companies directly or indirectly owned by a holding company in their jurisdiction. Such legislation may undermine the efficiency of a holding company regime and thereby neutralize the tax benefits of the IP company. Therefore, the tax regime of an IP company and its location within a multinational group should be carefully reviewed in order to avoid triggering adverse tax consequences in another part of the group.
5. Sales/Distribution Structures In the event that the target business consists of unincorporated foreign sales operations using an office space and employees, it is very likely that these sales activities give rise to a taxable permanent establishment in that jurisdiction. A company with a permanent establishment will be subject (as non-resident taxpayer) to corporate income tax in the jurisdiction where it performs such sales activities. Therefore, it is often preferable to establish a subsidiary in each sales jurisdiction. Even if a separate subsidiary is used, flow-through treatment for U.S. tax purposes will still be available under the U.S. entity classification (i.e., the check-the-box) regulations provided that the correct type of corporate entity is used. Historically, local sales subsidiaries usually operated as full-blown distributors. More sophisticated supply chain models are now being used. As an alternative to the classic distributor model, a local sales entity may act for a base company (often established in Ireland or Switzerland) as (a) a sales representative or agent that does not have authority to conclude contracts, (b) a limited risk distributor, or (c) a commissionaire.
5.1 Agent When operating as an agent (i.e., a sales representative, not a legal agent), the foreign entity solicits sales orders in its territory in the name of and for the account of its principal. Consequently, the function of an agent is reduced to being an intermediary. Its function is merely to provide information about products, market the product to potential customers, and otherwise solicit sales orders. To customers, it will be clear that they enter into an agreement with the principal and not with the local sales company. As long as the foreign subsidiary has no power to, and does not in fact, bind the principal, it should not constitute a permanent establishment of the principal. The foreign subsidiary should receive an arm’s- length fee from the principal for its activities in promoting the products in its jurisdiction.
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From a VAT/GST compliance perspective, this type of sales agent structure may be burdensome, since it is the principal who is considered to make the supplies that are subject to the tax VAT/GST. This may result in registrations and compliance obligations in various countries for the principal.
5.2 Limited Risk Distributor Under this model, the foreign company (the distributor) purchases the product from its supplier (the principal) and subsequently sells the products to the local customers. The distributor contracts with local customers, takes legal title to the product in question, and enters in its books the sales revenue derived from selling that product to the local customers. As the distributor contracts on its own account, and its actions neither bind nor purport to bind the principal, it typically does not constitute a permanent establishment of that entity. The distributor can be either a full risk distributor (classic model) or a limited risk distributor. A full risk or ‘fully-fledged’ distributor usually purchases and distributes the products, exercising all related functions and bearing full economic risk (such as price risk, volume risk, foreign exchange risk, bad debt risk, warranty risk and product liability risk), in its own name and for its own account. A limited risk distributor only purchases and sells the products, and only assumes those risks necessary to its sales function. Under a limited risk distributor scenario, the profit margin will be lower than under a full risk distributor scenario due to the fact that fewer functions and less entrepreneurial risk are assumed by the local entity. Under the limited risk structure, certain business risks and functions are transferred to the principal, which is commonly located in a low-tax jurisdiction (e.g., Switzerland). The reduced risk borne by, and limited functions carried out by, a limited risk distributor generally justify a reduced remuneration for the distributor in the high-tax jurisdiction. This reduces the overall tax burden in a profit situation (but not in a loss-making situation). From a VAT/GST point of view, the local distributor is treated as a buy-sell entity in the supply and distribution chain. This generally implies that the non-resident principal should not have any registration and compliance requirements in the distributor’s country. Generally, this is regarded as a beneficial situation.
5.3 Commissionaire A commissionaire does not conclude sales contracts in the name of the principal, but in its own name, even though it sells on behalf, and for the account, of the (undisclosed) principal. As a consequence, the foreign company does not legally bind the principal, but legally binds itself vis-à-vis the customer. A commissionaire resembles a buy-sell distributor in that it generally sells and invoices goods in its own name, although a commissionaire generally sells at prices fixed by its principal rather than by itself. As
Baker & McKenzie 23 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 3 – Tax Planning for the Spun-Off Group distinguished from an ordinary commission agent, a commissionaire acts in its own name, and therefore may be able to sign contracts with customers without causing its principal to have a permanent establishment. A commissionaire is a legal concept that only exists in civil law jurisdictions, such as France, Germany and The Netherlands, and not in common law countries such as the United Kingdom, although an undisclosed agency can be created in common law jurisdictions to mirror some of the legal characteristics of a commissionaire. Most civil law jurisdictions accept that the commissionaire does not constitute a permanent establishment of its principal, because the commissionaire contracts in its own name (a characteristic of a buy-sell distributor). Accordingly, its actions should not result in the principal being subject to corporate income tax in the jurisdiction in question. That said, to minimize the permanent establishment risk, a commissionaire must be careful not to act outside the scope of its authority, must refrain from purporting to bind its principal, and must earn an arm’s length commission. An undisclosed agent in a common law jurisdiction exercising contracting authority in its own name but on behalf of its undisclosed principal will create a permanent establishment for the principal. Generally the VAT/GST treatment of a commissionaire is similar to that of a distributor because the local commissionaire is regarded as a buy-sell entity. Although this has clear advantages from a VAT/GST compliance point of view, in ERP systems it may be hard to implement the deemed sale between the principal and the commissionaire as it is not in line with legal (and commercial) reality.
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Section 4 Tax planning for the separation steps: Which method of separation is best?
1. Introduction The primary tax concerns in planning the implementation of a pre-transaction restructuring is to ensure that, where possible, the steps in the restructuring are free from income and capital gains taxes in any jurisdiction, while also minimizing any capital duty, local transfer and documentary taxes.
1.1 Tax Planning Opportunities At an early stage of the separation process, management and their tax advisors should consider how the target business’s assets can be separated and transferred to the new structure in the most tax-efficient and least disruptive way. A variety of foreign tax planning opportunities may arise in connection with any global separation transaction. For instance, in many jurisdictions there will be an opportunity to obtain a tax basis increase or “step up” in the assets of the target business, sometimes without any local costs. It may be possible to leverage the new structure with additional debt in connection with the transfer of the target business. This reduces the cash outlay required from a buyer, and the interest deductions can be used to reduce the local tax base. In addition, if the parent company is the lender, the principal repayments can generally be used to repatriate earnings without income tax and without withholding tax. In general, the most straightforward and least time-consuming way to proceed, such as a sale of assets, may not be the most attractive route to follow from a tax perspective. Other separation methods, such as legal demergers, may take more time but also usually yield a better tax result.
1.2 Preserving Tax Attributes In many cases, local subsidiaries have valuable tax attributes, such as net operating losses (“NOLs”). Preserving these tax attributes is an important goal of any restructuring project. Favorable tax rulings that were obtained for a certain legal entity usually may not be transferred to another legal entity without prior approval from the tax authorities. Furthermore, local tax laws often contain anti-avoidance legislation which can limit the transfer of existing NOLs from one company to another. The separation of the target business should be carefully planned in order to preserve the ability to use existing NOLs against profits of either the existing company or the new company in a separation.
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2. Separation Methods The separation of the target business’s assets and transfer to the new structure can be effected in different ways depending on local tax and legal constraints and the facts of the particular transaction. If all or part of the target business in a country consists of business assets, as opposed to shareholdings, these assets can be transferred to the new structure by sale, contribution or demerger. Alternatively, if the target business consists of a company or companies wholly owning the target business assets (and no non-target business assets), the shares in these companies can be transferred to the new structure by distribution, contribution or sale.
2.1 Asset Transfer Often the most straightforward method of separating the target business from one of the existing companies to the new structure is simply to transfer the target business assets to a new company. This transfer will take the form of either a sale or a contribution of assets or a business. If the target business assets are sold, the transaction should, if possible, be structured as follows: (1) the shareholder of the existing company housing the target business contributes cash or a promissory note to the capital of a new subsidiary company that has been incorporated to receive the target business, (2) the new company uses the cash or note to purchase the target business assets from the existing company, and (3) the existing company distributes the cash or note to its shareholder, either as a dividend or a return of capital, with the consequence that the cash or note moves in a complete circle and returns to its origin. This “circular flow” can often be disregarded for U.S. tax purposes and the remaining steps typically can qualify as a “tax-free” reorganization from a U.S. tax perspective. In some cases, it may not be possible to distribute the cash or note from the existing company because of local rules impacting the amount of available distributable reserves. If the consideration for the purchase of the target business assets does not move in a complete circle, then it will not be disregarded for U.S. tax purposes and the United States likely will view the transaction as a “taxable” asset sale with potentially negative U.S. tax consequences to the existing company and its direct or indirect U.S. shareholders. The target business assets should generally be sold by the existing company for an arm’s length purchase price. For local tax purposes, a sale of assets typically triggers a capital gain or loss (based on the difference between the book value/tax basis and fair market value) for the selling company, unless a tax exemption applies. In order to mitigate the tax consequences of an internal restructuring, the laws of the jurisdiction of the selling company may provide for roll-over relief. In case of roll-over relief, the acquiring company may enter the acquired assets on its balance sheet at their previous book value. The taxation of a capital gain is therefore deferred. Roll-over relief generally only applies if certain conditions are met. Such requirements may include that the assets are transferred in exchange for shares, constitute a business or an independent part thereof or that the transfer is not solely tax driven. In EU jurisdictions, the provisions for roll-over relief are
26 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 4 – Tax Planning for the Separation Steps modeled on the EU Merger Directive. If no roll-over relief applies, the selling company realizes a capital gain (or loss), and the acquiring company accounts for the purchased assets (including goodwill, if any, which can be capitalized separately) at the arm’s length price agreed upon. The assets can subsequently be depreciated by the acquiring company. Sometimes a capital gain may be desirable to effectively use NOLs that would be lost in any case due to a change in control. In that case, the subsequent possibility to amortize the assets on a stepped-up basis effectively results in a transfer of the losses to the new structure. Instead of selling the target business assets, the existing local company may be able to incorporate a new subsidiary (instead of the parent company or new holding company incorporating the new subsidiary), contribute the target business assets to its new subsidiary and then distribute the shares of the new company to its shareholder. This transaction will often qualify as a “tax-free” reorganization from a U.S. tax perspective. The assets may be contributed at fair market value and in those cases would in principle create a basis step-up for local tax purposes. The contribution may trigger capital tax in certain jurisdictions, but certain exemptions could be available. The local tax consequences of the distribution of the shares of the new company are addressed in Section 2.2 below. Specific attention must be paid to the transfer of a business activity that is not so much a set of individual assets as an operation based on certain long-term contracts with third parties and other group companies. An example would be the sales operation of a limited risk distributor company. In these situations, the tax authorities may try to claim that such a transfer of business activities gives rise to a deemed transfer of goodwill, resulting in a taxable gain in the amount of the goodwill. In many instances, a key defense mechanism against such a deemed transfer of goodwill is a timely and properly documented termination of long-term agreements within the group in accordance with applicable terms and notice periods. When the target business assets are sold, in principle value added tax (VAT) or goods and services tax (GST) will be due on each separate asset transferred. However, some countries have special schemes when assets are sold as part of a going concern. The applicability and the conditions for such schemes vary from country to country. Ongoing VAT issues must also be considered when separating businesses as there can be significant practical impacts for companies if they have to change their VAT number, such as the time it takes to obtain a new number, changing invoices and potential disruption to VAT audits. Sale of stock is generally subject to VAT/GST in the country where the stock is physically stored. Sale of stock as part of the separation restructuring may therefore trigger local VAT/ GST. In order to avoid or minimize cash flow losses or irrecoverable tax at the level of the purchaser, VAT/GST registrations should be initiated before or very soon after the stock is transferred. Finally, certain assets, such as real estate, may be subject to stamp duty, transfer tax or similar levies, although an exemption may be available under the laws of certain jurisdictions, notably for transfers within a corporate group. It is important to consider, however, whether subsequent planned transactions, such as an eventual disposition or
Baker & McKenzie 27 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 4 – Tax Planning for the Separation Steps spin-off of the target business, will later disqualify the company from such intra-group exemptions or trigger a claw-back of the transfer tax exemption. Real estate transfer taxes can be significant in certain jurisdictions, for example, in Germany the RETT is 3.5% of the purchase price of the real estate (or, in the case of an indirect purchase, the tax assessment value of the real estate) and they may be triggered more than once in a restructuring as assets and shares are moved around. Real estate and other transfer taxes also raise the issue of obtaining a defensible valuation for the asset being transferred, and appropriate lead time should be allowed to obtain a valuation.
2.2 Demerger and Reverse Spin-Off A statutory demerger or spin-off is the opposite of a legal merger and can usually be effected without triggering corporate income tax liabilities. This type of transaction will typically also qualify as a “tax-free” reorganization from a U.S. tax perspective. In instances where most of the target business assets are already located within an existing company, it may be more efficient to spin-off the minority of the assets that are not target business assets. In such cases, the non‑target business assets are demerged into an entity that will remain with the existing group in a transaction referred to as a reverse spin-off.
2.3 Share Transfer The separation of the target business in a particular country may involve the transfer of shares of an existing group company. As noted in Section 2.1 above, the sale or contribution of target business assets to a new company is usually only necessary if the existing company has operations relating to both the target business and the retained business. If an existing company only owns target business assets, then there is no need for a sale or contribution of assets, and instead it will be necessary to either distribute, contribute or sell the shares of the existing company in order to make it a member of the new corporate group. From a corporate law perspective, an upstream distribution of shares can be achieved either by declaring a dividend in kind out of distributable reserves or by way of a capital reduction, the latter likely being a more cumbersome, time-consuming and costly procedure. A distribution of shares in a company can give rise to tax consequences in the country of incorporation of the distributee, the distributor and/or the distributed company. First, the distribution may be taxable in the jurisdiction of the company receiving the distribution. The distributee may be treated as receiving taxable dividend income. Second, in the country of incorporation of the distributor, the distribution may be subject to withholding tax and could also be treated as a taxable disposal of the shares. The disposal of shares in principle results in a taxable capital gain or loss for the shareholder of the transferred company. In some countries, the gain may be exempt from tax depending on the facts of the circumstances. If no exemption applies, the capital gain on the shares could be deferred in case roll-over relief applies, which functions similarly to roll-over relief in the context of an asset transfer as discussed in Section 2.1 above. If gain is recognized
28 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 4 – Tax Planning for the Separation Steps on a share distribution, the acquiring company is generally not allowed to capitalize any available goodwill separately. The goodwill has to be capitalized as part of the participation and can consequently not be depreciated. Finally, the distribution may be taxable in the jurisdiction of incorporation of the company being distributed. The transfer of legal ownership in the distributed company may be subject to local transfer taxes, notarial fees and/or registration fees. There may also be capital gains tax on a non-resident shareholder disposing of shares in a company incorporated in the jurisdiction. The taxing rights of the local jurisdiction may be limited under double tax treaties entered into with the jurisdiction in which the company making the distribution is resident, but this is not always the case. Mexico, for example, taxes non-resident shareholders disposing of shares in Mexican companies and the Mexico-Germany tax treaty allows the Mexican tax authorities to tax gains arising on a disposal of Mexican shares by a Germany company. Certain jurisdictions, for instance France, South Africa and Switzerland, impose tax on gains arising on the transfer of shares in property rich or real estate holding companies. The transfer of real estate or real estate companies may also be subject to a real estate transfer tax in certain jurisdictions. In the Netherlands, for example, a transfer tax of 6% applies to the acquisition of real estate situated in the Netherlands, certain rights related to Dutch immovable property (e.g., leasehold) or, in some cases, on shares constituting a substantial interest in a Dutch real estate company. Certain exemptions may be available for transfer tax purposes (such as a business merger exemption). In the case of Austria, any transfer of the entire issued share capital of an Austrian company to a single shareholder is subject to a real estate transfer tax that applies to the value of any property that the company owns. Many countries have stock transfer or stamp taxes. Although these transfer taxes may appear to have a small nominal rate, in many cases they are not a deductible cost in the jurisdiction in which they are incurred and are not creditable in a parent jurisdiction because they are not income taxes, making them a real out-of-pocket cost to the company. In many jurisdictions, relief from transfer or stamp taxes is available where the transfer qualifies as a tax-free reorganization. Particular care should always be taken to analyze the conditions necessary in the relevant jurisdiction to qualify for relief from transfer or stamp taxes. For example, the transfer of a company incorporated in New South Wales, Australia is subject to a 0.6% stamp duty, but relief is granted where the transferor and transferee company have been associated for at least 12 months prior to the transfer.
3. Opportunities to Create Leverage A sale of shares and/or assets to a group company as part of a separation transaction may be utilized to achieve certain ancillary benefits. For example, where the original acquisition has been substantially funded by debt, the borrowing company may not have sufficient domestic tax capacity to absorb deductions for the entire financing costs. A primary objective in this situation is to enable maximum tax relief to be obtained in those jurisdictions that have companies with significant tax capacity. This can be achieved by
Baker & McKenzie 29 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 4 – Tax Planning for the Separation Steps having the borrowing company sell shares in subsidiaries and/or assets to relevant local subsidiaries with tax capacity. It is important to examine whether local law will permit a deduction with respect to interest paid in connection with a debt incurred in such a manner. Some countries disallow the deduction under certain circumstances. For example, Singapore does not permit deductions for debts incurred to acquire assets that produce income that is not taxable in Singapore. This includes shares in Singaporean and foreign companies. However, it is possible to obtain a deduction for debt incurred to purchase a Singaporean business. In many jurisdictions, deductions are not permitted for debt which is incurred for the sole purpose of creating tax deductions. A pre-transaction restructuring that is effected in anticipation of the divestiture of a business in the near future may provide a sufficient commercial business purpose for this type of planning. Other techniques that can be used to create tax deductible interest in a local jurisdiction may include declaring a dividend and leaving the dividend amount outstanding as a debt or undertaking a capital reduction with the payment left outstanding as a debt. In other jurisdictions, however, such interest could be non‑deductible by reason of anti base-erosion provisions. The sale of assets and/or shares across the group also provides an opportunity to rationalize or make more tax efficient the group’s intercompany debt position. For example, a company may assign an intercompany receivable as consideration for the purchase of assets or shares.
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Section 5 Separation methods: Business and asset sales and capital contributions of assets
Although a number of countries have statutory spin-off or demerger procedures that will allow a company to spin-off assets or transfer a business by operation of law (see Section 6 below), where such statutory procedures are not available or not appropriate, the assets or business will have to be separated from the remaining businesses and transferred to the new structure by way of a business transfer or sale of individual assets and liabilities. Even where statutory methods are available, an asset or business sale may still be the most desirable approach.
1. Principal Features The principal features of a business or asset sale are: •• flexibility; •• speed; •• privacy (usually); •• no statutory procedure; •• no requirement for accounts; and •• assets and liabilities to be transferred must be clearly identified. In general, a business or asset sale has the advantage of being very flexible. In an asset sale, specific assets can be “cherry picked” to be transferred to the new corporate structure. Similarly, a business sale allows for the transfer of a specific business, i.e., a defined group of assets and liabilities which constitute a distinct business in preparation for a spin-off or sale to a third party or retention by the group after the sale of other businesses to a third party. The main attraction of a business or asset sale is that they can be completed relatively quickly. The documentation required to implement these types of transfers is generally less extensive than that required for a statutory spin-off or demerger. For example, accounts and regulatory filings are not necessary and in most jurisdictions a basic asset or business purchase and sale agreement is all that is required to effect the transfer (in addition to corporate approval documentation). Although, as discussed below in more detail, early consideration must be given to how the business or assets to be transferred will be valued. Another possible attraction is that asset sales are usually private intra-group transactions implemented with a private sale agreement. Thus, the terms of the sale, and the identity of the assets and liabilities being transferred, can be kept confidential and generally do not have to be vetted by third parties.
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One potential drawback of a business or asset sale is that the items being transferred or the items being retained should ideally be identified very clearly and carefully, in contrast to a spin-off or demerger where the specific business is transferred in its entirety by operation of law. The precise identification of the assets or business to be transferred is of utmost importance to ensure that the appropriate items are retained by the company or transferred to the new structure. A further drawback of the business or asset sale approach is that it is more likely to require third party consents and notifications, such as the need to notify or seek permission from contracting parties for the assignment of contracts.
2. Differences Between Business Sale v. Asset Sale In many jurisdictions, the terms business sale and asset sale are used synonymously. The two process can, in some jurisdictions, have important differences, however. The key differences between a business sale and an asset sale relate to the following considerations: (a) tax, (b) employees, and (c) documentation.
2.1 Tax The corporate tax consequences of a transfer will be different depending on whether the transfer involves specific “cherry-picked” assets or an entire business. Furthermore, the VAT treatment of the transfer may vary between a business transfer, which is usually considered to be a transfer of a going concern and therefore exempt from VAT, and a transfer of a collection of individual assets, which is likely to be subject to VAT at the applicable local rate. In addition, many jurisdictions have rules with respect to the transfer of tax liabilities that may influence the structure of the business or asset transfer. For example, in Italy, the purchaser of a business becomes jointly and severally liable with the seller for all debts of the business as reflected on the accounts of the seller at the time of the transfer, together with any tax liabilities. An asset sale may therefore be preferable to a business sale as it would allow the parties to isolate the new corporate structure from liabilities of the retained business, which may be of particular concern if the new corporate structure will be sold to a third party. Similarly, in the United States, a number of federal and state tax statutes provide that certain tax liabilities will pass to the purchaser upon the transfer of a business. These nuances may have a significant influence on the choice between a business transfer and an asset sale and should be borne in mind during the planning stages of the transaction, with particular regard being paid to the sensitivities of a potential third party purchaser.
2.2 Employees Whether a transaction is considered a business sale or a sale of individual assets can also have employment consequences. In the EU where a “business” is transferred, this is very likely to be considered a transfer of an “undertaking” (effectively an EU employment law
32 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 5 – Separation Methods: Business and Asset Sales definition of a business). Where there is a transfer of an “undertaking,” then the contractual rights and benefits of individuals employed by the company immediately prior to the transfer are transferred automatically by operation of law to the buyer without modification. This has the benefit of not requiring the consent of the individual employees to the change of their employer, but it does bring with it obligations of prior notification and, in certain circumstances, consultation and additional protection for the rights of the transferring employees. As whether an undertaking is being transferred is a question of fact, the individual circumstances of each transaction need to be considered. However, as the purpose of the EU legislation is to protect employees, it is difficult to structure a transaction in a way that would have the effect of prejudicing the rights of the employees, and it is possible to have transaction which is considered to be a sale of individual assets, but which is also a transfer of an undertaking and thus provides protection to the employees. So, aggressive planning is not recommended in the EU in this area. Additionally, in some jurisdictions, like South Africa, for example, employees’ rights must be transferred by way of separate agreement appended to the business sale agreement in order for the business transfer to be valid. Therefore, it is essential that additional local formalities are reviewed in advance to ensure they are properly observed. Further discussion of employment law issues is set out in Section 11, below.
2.3 Documentation In many jurisdictions, a business sale and an asset sale will be documented in much the same format. However, in some jurisdictions, specific documents are required for the two separate methods and such documentary requirements must be carefully observed to ensure that the correct form of transfer is effected. For example, in France there are three types of procedures by which to transfer a business or certain specified assets: •• Asset sale. An asset sale requires very thorough identification and documentation of the assets to be transferred, is generally used to “cherry pick” certain specified assets and is not available where a party wishes to transfer an economic function as a going concern. The documentation for this type of transfer involves extensive schedules identifying the assets that are being transferred. •• Convention de successeur. This process does not allow the seller to transfer a going concern, but is a more straightforward statutory procedure by which all the assets that are the means to carry on a certain business are transferred. A convention de successeur assumes that all assets are transferred, however, a party can identify certain assets to exclude or certain liabilities to include. This is subject to the restriction that tax and employee liabilities cannot pass under a convention de successeur. The documentation for a convention de successeur is more straightforward than for an asset sale and may be preferable in situations where
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the company desires to transfer all assets of a business function. However, this option is only available where the business is not continuing on the same terms, and requires registration with the French tax authorities. •• Business transfer. A business transfer allows for the transfer of a going concern and means that the business in its entirety is transferred, removing any requirement to identify specific assets. However, the drawback with this procedure is that additional documentation such as balance sheets and evidence of the last three years of turnover must be attached to the business transfer agreement. The most significant drawback of a business transfer in France is the requirement of a 1 month creditor notice period, after the expiration of which creditors of the business have 20 days to oppose the transfer. As these examples illustrate, it is essential in some jurisdictions to review all of the options available in order to select the most appropriate and effective solution for the company’s circumstances. These issues should be addressed as early as possible to minimize the risk of additional delay and costs due to changes to the plan later in the process. It should also be noted that some jurisdictions provide for “bulk sales” laws or automatic transfer of liabilities when an asset sale takes place. This is particularly true in certain U.S. states and in various Latin American countries. These laws are intended to regulate the sale of large quantities of assets outside the ordinary course of business so as to prevent the seller from defrauding creditors. If such laws do exist in a jurisdiction where it is intended to implement the separation by way of an asset transfer, be aware that a future third party buyer may require an indemnity against such liabilities and the asset transfer agreement should provide for this protection. In many U.S. states, a bulk sale will not have effect against any creditor of the business unless the seller has complied with the terms of the Uniform Commercial Code. This involves obligations such as furnishing a list of creditors to the purchaser that must be maintained for 6 months and sending a notice to all creditors at least 10 days before the sale takes place. These issues should be considered when deciding how to structure the separation in a particular jurisdiction as they may affect logistics and timing.
3. Main issues The following Section highlights the key considerations to take in to account prior to embarking upon a business or asset sale. Commonplace issues include: •• what to transfer? •• what entity? •• due diligence •• documentation •• purchase price and valuations
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•• consents •• transfer taxes
3.1 What to Transfer Obviously, the first step is to identify the assets that will be retained by the company and the assets that belong to the target business and will be separated out into a new structure and, at a later date, spun-off or sold to a third party. This requires careful review and identification of the assets that are essential to the retained business(es) and the target business. Following this, it will be important to properly document the transfers. It is likely that certain assets may be required by both businesses and a business decision must therefore be made as to the precise scope of assets to be separated from the company’s retained business. This can be especially important with respect to real estate or employees and certain sharing arrangements may have to be considered so that each business can continue to operate effectively in the near and long term. Similarly, it is of utmost importance to ensure that liabilities are either transferred or retained appropriately. Liabilities must be reviewed carefully to identify exactly to which business or asset they relate. Generally where an asset transfers, the corresponding liability should also transfer, though consideration must be given to the end goal for the separation, such as the effect of including liabilities upon the value or purchase price of the target business. Again, this will have to be documented carefully (with indemnities where appropriate) in order to avoid any later complications. It is worth noting that, although the identification of what should be transferred is a very obvious issue, this often gives rise to significant problems in practice, for example, if those planning the spin-off do not have the intimate knowledge of the target business that is required to correctly identify which assets go with which business.
3.2 What Entity? One of the first decisions that must be made is whether to maintain the retained business or assets in the existing entity or whether to transfer them to a new corporate vehicle. One of the main considerations in making this decision will be the tax implications of the transfer, which are discussed in more detail in Section 4, above. Before effecting the transfer of the business or assets to be separated, the appropriate vehicle for housing the business or assets must be identified, be it a subsidiary, branch or representative office. This will involve various considerations including timing, capital requirements, the scope of the local operations and applicable local regulations, all of which will have an effect on the logistics and cost of the transfer. Another contributing factor will be the existence of historic liabilities in the transferring corporate entity. Clearly when planning this type of transaction, due care must be given to a potential future purchaser’s sensitivities to the existence of liabilities in the corporate structure. A future purchaser
Baker & McKenzie 35 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 5 – Separation Methods: Business and Asset Sales will primarily be concerned with inherent tax liabilities, but litigation and environmental concerns may also be significant factors. To mitigate these issues, the starting preference is that the business to be transferred is placed into a new vehicle.
3.3 Due Diligence In order to identify the assets and liabilities to be transferred, some level of due diligence must clearly be conducted. However, it is advisable that a more focused due diligence review be carried out, particularly as the transfer may ultimately involve a third party. The commercial importance of due diligence is to protect the remaining businesses of the company from inadvertently transferring out any desired assets or retaining any unwanted liabilities. It will also be essential, if preparing a disclosure letter or schedule in relation to a third party sale, that the seller properly understands the consequences of granting requested warranties and indemnities and is able to negotiate from the strongest possible commercial position. It is important when undertaking the due diligence exercise to collect appropriate copies of all relevant information and create easily accessible files. During this process, care may need to be taken in relation to alerting employees to the potential spin-off or other restructuring prior to a public announcement. A party may want to consider collecting the information under the auspices of an internal audit/internal review in order to minimize the risk of alerting employees to the proposed plan and creating unnecessary disturbance. Alternatively, it may be preferable to be open with a core team of employees as to the process in order to obtain their best cooperation. Employment considerations are reviewed further in part 3.5 of this Section. A due diligence review, if executed poorly, can be a costly, time consuming and difficult process. Planning for the due diligence should therefore be done in advance and the review should be conducted in the context of the ultimate goals of the spin-off to avoid duplication of work. A full review may include the following: •• corporate information – specifically, constitutional documents, status of corporate filing obligations, and up-to-date corporate information, such as identity of shareholders and directors, registered address; •• financial – review of accounts, regulatory filings, audit representation letters; •• foreign investment regulation – consideration of what approvals or consents are required and identification of any conditions, ongoing restrictions or repayment; •• banking and financing arrangements, including collateral agreements and bond indentures; •• taxation – consideration of tax rulings, tax holidays and consents, and obtaining details of any ongoing tax audits or disputes;
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•• employment – review of standard contractual terms and working practices and procedures, potential difficulties/consequences of terminating senior employees, details of arrangements with unions or other employee representatives, terms of lay offs or redundancies; •• property – investigation of title to real property and of all leases and other licenses including details of material permits, easements and other rights on which the use of the property is dependent and of any disputes with landlords, neighboring owners, local authorities and enforcement agencies; •• business/operational – review of all necessary business licenses, permits, material assets and market position, as well as operating problems, including product returns, antitrust and customer complaints; •• significant business contracts – examination of all joint venture, shareholder, share or business acquisition or disposal, consortium, partnership, distribution, agency and other non-ordinary course of business contracts, as well as key customer and vendor contracts; •• IP – review of all intellectual property (i.e., trademarks, service marks, trade names, patents, designs, copyrights, domain names, computer software, know-how and other similar rights) used by the business, consideration of IP owned by the business and IP licensed to it and a review of any related complaints, disputes or challenges; •• legal proceedings and disputes – specifically material litigation; a more extensive investigation will be required where the business has significant product liability exposure; •• pension and other employee benefit plans and arrangements, taking into consideration both unfunded liabilities and the potential for problems and delays in splitting up funded arrangements; •• insurance policies – a review to ensure that the material properties are covered by the appropriate type and amount of insurance and if there is sufficient product liability, employer’s liability, business travel, key man or director’s and officer’s insurance, as appropriate; and •• environmental – specifically any licenses or permits relating to storage, handling, processing, discharge or transport of materials, substances or waste and any history of environmental problems or liabilities.
3.4 Documenting the Business/Asset Transfer In addition to detailed due diligence, it is important when preparing to undertake a pre- transaction restructuring to consider the necessary documentation and the desired goals. Not only will asset/business transfer agreements need to be prepared, but frequently third
Baker & McKenzie 37 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 5 – Separation Methods: Business and Asset Sales party consents, sub-licenses and permits will have to be obtained. It is vital to remember that these spin-off documents may be scrutinized by third parties and, in due course, that they may be challenged if not executed on arms’ length terms. Prior to undertaking a business transfer or asset sale the following should be drafted, obtained, negotiated or ruled unnecessary as appropriate: •• purchase agreement; •• due diligence report and/or disclosure letter; •• accountant’s or valuer’s report; •• corporate approvals; •• schedule of inventory and other assets; •• schedule of employees and pension arrangements; •• new service contracts; •• contract assignment notices and consents; •• tax clearances; •• certificates of title for real estate, leases or licenses; and •• environmental reports. Of course the necessity for any of these documents will depend upon the structure of the business transfer or asset sale and the particular type of business or assets being transferred.
Business Transfer Agreement / Asset Purchase Agreement When planning a business transfer or asset sale in the context of a pre-transaction restructuring, one of the tensions that arises is that, although the transaction will take place in an intercompany context, the parties must remain focused on future plans, e.g., an IPO, third party sale or separate structure for other business reasons. As a result, the key commercial terms and precise allocation of assets are likely to be more important than in a straightforward intercompany transaction where the plan is to keep both the retained and transferred business within the group. As discussed earlier, careful consideration must be given to ensuring the assets are clearly identified and are neither transferred nor retained inadvertently.
Purchase Price and Valuation Reports Early consideration should also be given to the basis upon which the purchase price for each transferring business will be determined and the need for valuation reports. The starting principle will be that business or assets should be transferred at their “fair market value.” The methods of calculating this value will depend on the nature and industry of the
38 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 5 – Separation Methods: Business and Asset Sales business being transferred and these are usually a range of methodology available. The information required by valuation experts can be extensive and the implementation deadline of a spin-off can easily be put in jeopardy by the valuation process. Therefore, it is key that any required valuations are identified early in the separation process, that the progress of such valuations is monitored proactively and sufficient time is built into the implementation timetable for the values to be reviewed before they are incorporated into the separation documents. This review is particularly important where the assets being transferred at this stage, will then be transferred to a third party buyer. As future tax consequences and the potential impact upon later negotiations should be factored into the reorganization at this stage.
Corporate Approvals Selling a significant portion of a company’s assets to an affiliate is usually considered an extraordinary or non-routine transaction. The directors or officers of the entities involved may not have the necessary corporate authority to effect such transactions. Therefore, it is necessary to consult applicable local law and the articles or other constitutional documents of the entities involved to determine if the proposed transactions are subject to any corporate approval requirements and to then take appropriate steps to authorize the transactions, such as adopting board and/or shareholder resolutions. Ensuring that the appropriate corporate approvals are undertaken and documented is also important for purposes of creating a clear evidentiary trail that a third party purchaser can rely on.
Practical Legal Considerations A number of jurisdictions require business transfer or asset purchase agreements and ancillary documents to be notarized locally upon execution. This means that the company will either have to arrange for signatories to travel to the appropriate jurisdiction or, more likely, to put in place appropriate powers of attorney or proxies. Certain jurisdictions may also require legalization of documents or an apostille, which will involve additional time. Notarization and legalization requirements should therefore be identified and addressed as early as possible in the process to ensure that they do not jeopardize target dates for implementing the separation.
3.5 Consents and Registration Requirements Another important area to consider relates to the third party consents or registration requirements that must be complied with before the business or asset sale can be effected. Potentially applicable consents/registrations may include: •• third party consents for contract assignments, e.g., customer and supplier consents; •• third party consents relating to real estate or leases; •• transfer and registration of IP rights, domain names, etc.; •• notification and consent of employees;
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•• transfer of pension rights; and •• transfer and registration of business permits, licenses or grants. Set forth below is a more detailed discussion of the types of consents and registrations most likely to be required.
Assignment of Contracts Minimizing business disruption is an important objective in a separation or spin-off transaction. Therefore, identifying the contracts to be transferred and developing procedures for “transferring” contractual relationships to the new entity must be a key element of the separation plan. Although many contracts will include a requirement for third party consents to be obtained in advance of an assignment to a third party, legal issues should not overwhelm business considerations. Identifying the key contracts of the business is of primary importance. Then, the company must consider whether the separation will give key customers or suppliers an opportunity to improve their commercial position. If so, then a proactive plan must be developed to ensure the continuity of those key contracts, without saddling the separated business with damaging fiscal or commercial terms. Although not without risk, it may often be sensible from a business perspective to deal in a less burdensome manner with third parties that are not key to the business or those that can be relied upon to remain with the business after a separation. This would mean, for example, simply notifying a third party of the contract assignment without seeking consent, even though consent may be required under the strict terms of the contract. This procedure does not constitute a valid legal assignment; however, in many circumstances, the vast majority of third parties will continue their relationship without any adverse consequences.
Leases / Real Property A key determination for both the retained and separated businesses will be what office or manufacturing space and other premises will be required in the future. Once this has been determined, a review of the legal and practical steps needed to secure the space for each entity will be necessary. Leases should be reviewed thoroughly to identify what landlord consents may be required and whether sub-leases will be permitted and, if so, on what terms. Consideration must also be given to the longer term in order to identify which party will be responsible for extraordinary costs such as early surrender of the lease and restoring the property upon the termination of the lease. If the separated businesses require the same premises and need to share them going forward, the request for consent should be undertaken as early as possible in order to avoid any undue delays. Institutional landlords lack the commercial incentive to move quickly, and can be notoriously slow in responding. As well as third party consents, the allocation of responsibilities (such as maintenance and liability for repairs) should also be made well in advance.
40 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 5 – Separation Methods: Business and Asset Sales
In many countries, additional documentation other than the business/asset transfer agreement will be required to transfer legal ownership of real property. Again, where properties will be shared for an interim period, careful consideration should be given as to the plan for retention or transfer of the property. This may be extremely important where employees are involved as relocation may cause employment issues if employees are expected to move sites.
Intellectual Property Please see Section 13 for a discussion regarding the transfer of intellectual property and related registration requirements.
Employees/Pensions Issues relating to both employment rights and pensions rights of any employees involved in a business or asset transfer must be addressed. In Europe, upon a transfer of an undertaking or business, certain employee rights will be transferred automatically to the new company. Employees will often also have a right to be consulted for a set period of time (depending upon the size of the workforce) and will be protected for a certain period from dismissal in connection with the transfer. These matters should be analyzed well before the transfer takes place to ensure that all obligations are fulfilled on a timely basis and that no liabilities are inadvertently incurred. In addition to having notification obligations, entities in a number of jurisdictions are likely to have works councils, unions or employee representatives with more specific consultation requirements. These must all be complied with to avoid penalties being imposed. In the Netherlands, for example, a works council even has the power to seek judicial reversal of a transaction where the works council is not properly consulted. See Section 11 for further discussion of these issues. In addition to legal requirements, consideration must also be given to managing employee expectations and the transparency of any planned transfers. To ensure that the workforce remains cooperative, it is advisable for the human resources department of the company to be intimately involved with the planning process. As separation plans are developed and reviewed, it is likely that employees will have to be updated regularly as to the effects of the proposals on their future working environment, not just in relation to large scale proposals such as downsizing, but also in relation to smaller issues such as relocation and re-employment with different business units. This will be especially important in cases where employee consent is required prior to the transfer. Many countries require that employees are provided with similar pension and other benefit entitlements post-transfer as those enjoyed pre-transfer. This may involve a deed of adherence to existing pension plans or in some cases the establishment of a new pension plan. Under certain German pension schemes, pension rights can only be transferred to certain specific pension entities. These can take time to set up and may delay matters if not dealt with at the outset of the separation process.
Baker & McKenzie 41 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 5 – Separation Methods: Business and Asset Sales
Permits, Licenses and Grants Additional approvals to transfer or obtain licenses, permits or grants from government agencies and departments may be required in connection with a separation transaction. In many jurisdictions, business licenses and permits are required to operate a business and should be reviewed for assignment and registration requirements. It is possible that certain of these permits may be required by both businesses. If so, the possibility of sharing arrangements should be reviewed as this may be more time and cost efficient than obtaining duplicate permits. The need for environmental permits, visas and work permits should also be evaluated prior to the transfer to avoid any complications at a later date. A business separation can also impact import and export permits and procedures, as well as customs arrangements. When establishing a new entity a detailed plan should be developed to ensure that obtaining new permits etc does not adversely affect the day to day trading of the transferring business. The terms of any government grants and incentives should be examined in light of the proposed transaction, as it is not unusual for these to contain termination and/or claw- back provisions that may be triggered by an asset transfer or a reduction in the size of the business operations or workforce. Government permission can often be negotiated where such provisions exist.
3.6 Transfer Taxes The applicability of transfer taxes will depend on the manner in which the separation transaction is effected. Transactions involving the transfer of shares or assets by way of a sale will normally be subject to transfer taxes where such taxes exist (albeit that relief may be available to reduce or eliminate such transfer taxes). Even if the business or asset transfer would normally be exempt from transfer tax as an intra-group transaction, in a pre- transaction restructuring, the plan to eventually separate the new structure may mean that minimum holding periods may not be satisfied and tax will be payable. Please see Section 4 for a further discussion of the tax issues.
42 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs
Section 6 Separation methods: Demergers and statutory spin-offs
In many jurisdictions, local corporate laws provide for some form of statutory demerger. In these jurisdictions, such demerger procedures should be considered as an alternative to asset sales or contributions when determining which structure would most efficiently achieve the spin-off goals. Please refer to the summary chart beginning on page [62] for a brief overview identifying local corporate laws that provide for demerger procedures and what is involved in such procedures. For comparisons of the various demerger laws from a tax perspective, please refer to the chart beginning on page [56]. While the terminology may vary from jurisdiction to jurisdiction, the company laws of most civil law jurisdictions provide for a procedure by which certain assets and liabilities of an existing entity are transferred by operation of law to one or more newly established or existing entities. In some jurisdictions, such a procedure is called “spin-off.” In these jurisdictions, following the transfer of the assets and liabilities from the original company to the spun-off company/ies, the shares of both the original and the spun-off companies are held by the same shareholder, with such shareholder typically having to surrender a number of shares, or an amount of capital, in the original company equal to the percentage of assets transferred to the spun-off company/ies. In other jurisdictions, the laws make a distinction between a (i) a “demerger” or “split-up” in which, following the transfer of assets and liabilities, the original entity ceases to exist and the businesses are continued by one or more new entities (the “demerging entities”), and (ii) a “partial demerger” or “split-off” in which the original entity remains in existence and continues one or more lines of business while one or more new or existing entities continue the demerging lines of business. To simplify this discussion, we refer to all of the above procedures collectively herein as “demergers,” but the legal differences between these types of transactions can be critical and should not be overlooked. Where local corporate laws provide for statutory demergers, the tax laws of such jurisdictions will always allow for such a transaction to be structured as tax-free from an income tax and value added tax (VAT) perspective, provided that the demerger meets certain conditions. For example, statutory demergers in Brazil are exempt from income tax and VAT as long as there is no physical transfer of assets. A demerger, however, may still be subject to other taxes, for example, real estate transfer taxes (e.g., in Germany). Further, in many jurisdictions, demergers do not enjoy tax-free treatment if the demerged business is divested to a third party prior to the expiration of a waiting period (e.g., two years in Australia, three years in France, and five years in Germany). Tax rulings are typically available, and obtaining such tax rulings is often advisable to ensure that the tax authorities agree that the conditions for tax-free treatment are met, in particular in situations where it may not be quite clear that the demerging business is indeed a separate line of business from the demerged business.
Baker & McKenzie 43 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs
From a tax point of view, another advantage to the tax-free treatment of demerger in some jurisdictions is that it can be made retroactive for tax and sometimes also accounting purposes. Where a demerger may be made retroactive, special attention should be paid to time constraints. For example, in the Netherlands, the earliest retroactive date for tax and accounting purposes is the beginning of the current fiscal year. In other jurisdictions, a demerger may be made retroactive for tax purposes only within a specific window of time (e.g., eight months after the beginning of the current fiscal year in Germany). From a corporate perspective, the most important advantage of a demerger versus a transfer of assets to an existing or newly formed subsidiary is that in a demerger procedure the contracts, assets and liabilities allocated to the demerging entity are transferred by operation of law. Even though a proposed demerger typically has to be published and/or notified, creditor consents or renewals of regulatory licenses (e.g., business licenses and industry specific licenses) may not be required in connection with a demerger procedure, whereas such consents or renewals would certainly be required in case of a transfer of assets. Although most demerger procedures are not particularly complicated, they typically take several months to complete. A demerger will normally require local management (i.e., the board of directors) of the demerged and demerging entity/ies to execute demerger proposals. Such demerger proposals usually involve the preparation of balance sheets of the demerged and demerging entities and the certification of such balance sheets by a third party auditor or appraiser. This process alone may take several weeks if not months. In most jurisdictions, the board of directors is free to select third party auditors or appraisers. There are, however, jurisdictions, where the auditor or appraiser has to be appointed by a local court (e.g., in France and Italy), which typically adds another few weeks to the overall timing for completion of the demerger. The courts with jurisdiction over the demerged and demerging entities usually have to approve the proposed demerger, either prior to or following shareholder approval of the transaction. The corporate laws of many jurisdictions further require the demerger to be published or otherwise notified to the creditors of the demerged entity and permit the demerged entity’s creditors to object to the demerger within a certain period of time (e.g., four weeks in the Netherlands, 45 days in Mexico and two months in Italy). The demerger will become effective only once court approval (in the absence of any creditor objections) and shareholder approval have been obtained and the demerger has been registered by the relevant commercial registry. Given the above procedural requirements, it is not surprising that most demerger procedures take at least 2-4 months to complete. Many jurisdictions (e.g., Belgium, Germany and Sweden) allow the demerger procedure to be simplified in case of intra-group demergers. The conditions necessary for a simplified demerger should be met in most pre-transaction restructurings involving global enterprises. The time saved in implementing simplified demergers (approximately 4-6 weeks) makes them an even more appealing alternative to a transfer of assets.
44 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs
In other jurisdictions, a demerger may the preferred alternative even though it takes several months to implement, due to local law requirements that can complicate and delay a transfer or sale of assets to a newly formed entity. In Japan, for example, appraisals or audits are not required in connection with a demerger but are required in the case of an asset sale, and have to be conducted by a court-appointed appraiser, if the recipient Japanese K.K. is less than 2 years old at the time of the transfer. In some jurisdictions, labor or regulatory requirements may complicate the completion of a demerger. In many European jurisdictions, for example, the works council of the demerged entity has to be consulted with regard to a demerger. Although works councils typically are not able to prevent a demerger from being completed against their objection, in certain jurisdictions the employees allocated to the demerging entity may not be transferred to the demerging entity against their will. In such cases, the objecting employees have to remain employed by the demerged entity and possibly terminated by the demerged entity, which can be a costly undertaking. The transfer of employees as part of an asset sale is subject to similar consultation requirements. Other regulatory hurdles to overcome in order to implement a demerger may be related to local tax issues. In Brazil, for example, the demerged entity has to obtain tax clearance certificates from various tax authorities, which can take time depending on the tax compliance status of the demerged entity. In many jurisdictions, demergers may not be desirable because the demerging company remains liable for the debts of the demerged company for a certain period of time (e.g., in Hungary). Similarly, in such jurisdictions, third party creditors may successfully obtain guarantees from the demerging company for debts of the demerged company, rendering the demerger alternative a less attractive precursor to a spin-off to a third party. Whether a demerger procedure turns out to be the best separation method will always depend on many factors, most importantly time constraints. Further advantages and disadvantages may be summarized as follows: Advantages of Demerger •• tax-free treatment (if conditions under local law are met) •• transfer of contracts, assets and liabilities by operation of law Disadvantages of Demergers •• time consuming •• preparation of interim financial statements •• appraisal/audit procedures (including court-appointed appraiser in some cases) •• complexity of demerger procedure
Baker & McKenzie 45 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs
In summary, on the pro side, demergers can typically be structured tax-free and, therefore, are the preferred separation method from the point of view of tax advisers. Also, in demergers, contracts, assets and liabilities associated with the demerging business transfer by operation of law, significantly simplifying the process for separating the assets of the demerging business from the retained business. The reason many companies ultimately decide not to proceed with demergers is that the procedures for effecting demergers are typically quite complicated and time consuming, sometimes taking several months longer to complete than other separation methods. In many transactions, in particular divestitures to third parties, tax savings may have to be sacrificed due to urgency of the transaction. Often, there is simply not sufficient time to obtain tax rulings and engage an appraiser or have an appraiser appointed by the court, as required in some jurisdictions. Preparing interim financial statements, which may be required if the demerger is planned to occur during the later parts of a fiscal year, enduring idle periods during creditor waiting periods, or obtaining tax clearance certificates may also often lead to the conclusion that there is not enough time to proceed with a demerger.
46 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Can losses be transferred from the transferring / demerging company to the receiving new company? / if the demerger itself Yes, qualifies as tax-free. No, and in addition the NOLs of the demerging entity will be cancelled in proportion to the net worth transferred upon the demerger. No No in proportion to the Yes, net worth transferred. N/A N/A May a demerger / split- May a demerger / procedure be made off retroactive for accounting and tax purposes? Yes No No No No N/A N/A Can a ruling with respect to the tax consequences be of a demergersplit-off / obtained? Yes Yes Yes although in general Yes, this is not necessary. Several rulings have been issued by the Chilean Internal Revenue Service in this regard. however it can take a Yes; long time to obtain a ruling. N/A Yes If a demerger / split-off is a demergersplit-off If / tax-free, is such demerger subject to split-off / conditions? multiple conditions Yes, including minimum shareholding period after requirement for demerger, to maintain entity split-off same activities and demerging entity to conduct an active business. if there is no physical Yes, transfer of goods and equipment. multiple conditions Yes, apply for various taxes. No multiple conditions Yes, including and asset tests minimum shareholding periods for shareholders of the demerged entity. N/A N/A Is a demerger / split-off a demergersplit-off Is / tax-free? Yes Yes Yes statutory demergers are Yes, tax free and do not trigger or other income tax, VAT sales taxes. Only some notarial, registration and publication fees will apply. Yes law does not U.S. N/A. provide any statutory procedure for a demerger, or split-off. spin-off No Country Argentina Brazil Canada Chile Mexico United States (Delaware law) Venezuela SUMMARY OF STATUTORY DEMERGERS/SPLIT-OFFS (PART I: TAXATION) I: (PART DEMERGERS/SPLIT-OFFS STATUTORY OF SUMMARY 1. AMERICAS
Baker & McKenzie 47 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Can in a demerger / procedure losses split-off be transferred from the demerging transferring / company to the receiving / new company? No and other tax Yes, attributes as well. N/A No. if a demerger However, is a qualified split-off / separation-type corporate separation similar to merger and certain conditions NOLs are met, can be transferred. N/A No May a demerger / split- May a demerger / procedure be made off retroactive for accounting and tax purposes? No No N/A No N/A No Can a ruling with respect to the tax consequences be of a demergersplit-off / obtained? Yes There is no uniform practice. Many local tax authorities are reluctant to issue a ruling in this regard. N/A Yes N/A Yes If a demerger / split-off is a demergersplit-off If / tax-free in your jurisdiction, split-off is such demerger / subject to conditions? numerous conditions Yes, apply. The tax-free treatment is only available if the assets, liabilities and shareholders’ equity of the post-division enterprises be booked at book value of the pre- division enterprise. N/A certain conditions Yes, need to be met. N/A multiple conditions Yes, including shareholder tests. Immediate sale following the demerger may jeopardize the exemption. Is a demerger / split-off in a demergersplit-off Is / your jurisdiction tax-free? with respect to Yes, income tax. with respect to income Yes, taxes and deed tax. may be possible with It VAT, respect to Land VAT, Stamp Duty and Business Tax. Hong Kong law does N/A not provide any statutory procedure for a demerger, or split-off. spin-off split-off No, a demerger / is, in principal, a taxable event. taxes can However, be deferred if certain conditions are met. Malaysian Generally, N/A provide any law does not statutory procedure for or spin-off a demerger, split-off. but there are minimal Yes, registration and local There is transfer taxes. also documentary stamp tax on the issued shares of stock. ASIA PACIFIC ASIA Country Australia China Hong Kong Japan Malaysia Philippines 2.
48 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Can in a demerger / procedure losses split-off be transferred from the demerging transferring / company to the receiving / new company? N/A both NOLs and Yes, other tax attributes can be transferred to the receiving/new company. N/A May a demerger / split- May a demerger / procedure be made off retroactive for accounting and tax purposes? N/A No N/A Can a ruling with respect to the tax consequences be of a demergersplit-off / obtained? N/A Yes N/A If a demerger / split-off is a demergersplit-off If / tax-free in your jurisdiction, split-off is such demerger / subject to conditions? N/A No N/A Is a demerger / split-off in a demergersplit-off Is / your jurisdiction tax-free? Singapore law does N/A not provide any statutory procedure for a demerger, or split-off. spin-off Yes Thai law does not N/A provide any statutory procedure for a demerger, or split-off. spin-off Country Singapore Taiwan Thailand
Baker & McKenzie 49 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Can in a demerger / procedure losses split-off be transferred from the demerging transferring / company to the receiving / new company? under certain Yes, conditions. if the demerger is Yes, tax-free, the NOLs can be transferred in proportion to worth transferred. the net but only to losses Yes, incurred after May 1, 2004. Not clear. if the demerger itself Yes, is tax free and subject to certain other conditions. May a demerger / split- May a demerger / procedure be made off retroactive for accounting and tax purposes? up to 9 months Yes, retroactively. subjectto certain Yes, conditions (in practice retroactivity of more than 7 months is unlikely to be accepted). for accounting and Yes, corporate income tax purposes. No back to the opening Yes, the current fiscal date of the entities year of benefiting from the contribution of assets and liabilities. Can a ruling with respect to the tax consequences be of a demergersplit-off / obtained? but it is not legally Yes, binding (only binding according to the principle of good faith). Yes No Yes Yes (s) If a demerger / split-off is a demergersplit-off If / tax-free in your jurisdiction, split-off is such demerger / subject to conditions? the shareholder Yes, needs to hold the demerged entity for at least two years. the in particular, Yes, legitimate existence of needs of a financial or economic nature for the split-off. demerger / No Yes multiple conditions Yes, including business activity requirement and minimum shareholding requirement. Is a demerger / split-off in a demergersplit-off Is / your jurisdiction tax-free? if the regulations Yes, of Austrian the Tax Restructuring Act (Umgründungs- steuergesetz) apply. both for corporate Yes, income tax and VAT. the For corporate tax, exemption is subject to certain conditions. Demergers are also Yes. stamp not subject to VAT, transfer capital tax, duty, tax or similar duties. the provided that Yes, Company is re-evaluated on the book value at the demerger. time of (no corporate income Yes and minimal no VAT tax, registration duty of Euro 375). EUROPE AND MIDDLE EAST EUROPE Country Austria Belgium Czech Republic Egypt France 3.
50 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Can in a demerger / procedure losses split-off be transferred from the demerging transferring / company to the receiving / new company? No losses can be the receiving/ transferred to Demerger/ new company. procedure, a pro split-off rata portion of the tax the transferor are of NOL cancelled. the transferor No losses of are cancelled in a drop- down procedure, which can also be conducted tax-free. NOLs of the transferring/ demerging company may be carried forward to the receiving/new company. NOLs incurred in 2004 and thereafter may be carried forward without any time limitations on Time limit. carry forwards may apply to losses incurred before 2004. if the demerger is Yes, tax-free, the NOLs can be transferred in proportion to worth transferred, the net subject to certain conditions. May a demerger / split- May a demerger / procedure be made off retroactive for accounting and tax purposes? up to 8 months for Yes, income tax purposes. No, for legal, accounting, wage tax and VAT purposes. No prior to the but not Yes, the incorporation of date of companie(s) which are the beneficiary of the merger. Can a ruling with respect to the tax consequences be of a demergersplit-off / obtained? although a ruling Yes, is normally sought with respect to the conditions required to be met for a tax free demerger/split-off. Yes ruling could be obtained A to prevent the application of the anti-abusive rule and obtain acknowledgment of the presence of a business to the presence of a business. If a demerger / split-off is a demergersplit-off If / tax-free in your jurisdiction, split-off is such demerger / subject to conditions? numerous conditions Yes, including business test and anti-abuse provisions. No The demerger is tax free by operation of the tax However, law. administration is entitled to disallow the demerger for tax purposes if it was carried out for the sole purpose of achieving tax benefits and without any business purpose (anti- abusive rule). Is a demerger / split-off in a demergersplit-off Is / your jurisdiction tax-free? is The demerger/split-off tax free with respect to income tax and VAT. is not tax free for It real estate purposes of transfer. is demerger/split-off A not subject to corporate or stamp income tax, VAT provided that there duty, is no revaluation of assets during the demerger/ split-off. Yes Country Germany Hungary Italy
Baker & McKenzie 51 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Can in a demerger / procedure losses split-off be transferred from the demerging transferring / company to the receiving / new company? In case of a demerger whereby the demerging entity ceases to exist, the losses can be transferred. the In case of a split-off losses remain with the original and cannot entity be transferred to the acquiring company. No but only if the original Yes, entity ceases to exist. in a partial but not Yes, demerger/split-off. May a demerger / split- May a demerger / procedure be made off retroactive for accounting and tax purposes? up to 1 year and Yes, subject to conditions. No No but only in total Yes, demerger/split-off Can a ruling with respect to the tax consequences be of a demergersplit-off / obtained? mandatory in some Yes, cases. Yes Generally not. Yes If a demerger / split-off is a demergersplit-off If / tax-free in your jurisdiction, split-off is such demerger / subject to conditions? mainly pertaining Yes, to anti-abuse such as and business motive test a three year minimum holding period with regard to the shares that were obtained in relation to In the demerger/split-off. some cases a ruling is mandatory. it must be No, but supported with business reasons and must not be made only in order to avoid taxation. No Yes Is a demerger / split-off in a demergersplit-off Is / your jurisdiction tax-free? Yes VAT for income tax, Yes, and transfer tax. but the also for VAT, Yes, demerger will generally trigger a full tax audit for all companies involved. in case the special Yes, regime derived from the EU Directive 90/434 applied to the operation, will the split-up/split-off be tax-free and only registration and notary fees would be due. Country Netherlands Poland Russia Spain
52 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Can in a demerger / procedure losses split-off be transferred from the demerging transferring / company to the receiving / new company? but only in part and Yes, conditions. subject to strict subjectto tax abuse Yes, if the demerger is theory, motivated essentially by tax reasons. subjectto certain Yes, conditions. subjectto conditions. Yes, May a demerger / split- May a demerger / procedure be made off retroactive for accounting and tax purposes? for tax and accounting Yes, purposes the recipient companies are deemed to have run the transferred business from the day commencing the day after the end of last demerging company’s financial year. maximum 6 months Yes, retroactive effect. No No Can a ruling with respect to the tax consequences be of a demergersplit-off / obtained? Yes Yes but only with limited Yes, application. Yes If a demerger / split-off is a demergersplit-off If / tax-free in your jurisdiction, split-off is such demerger / subject to conditions? important the most Yes, being that the transferring company must cease to exist. multiple conditions, Yes, including and activity tests in some cases minimum holding requirements. Requirements may vary for cantonal and federal taxes, as well for VAT. subjectto certain Yes, conditions, including business motive test. potential minimum Yes, shareholding requirement in certain situations. Is a demerger / split-off in a demergersplit-off Is / your jurisdiction tax-free? Yes certain provided that Yes, conditions are fulfilled. Cantonal real estate transfer taxes may still be due in certain cantons. certain provided that Yes, conditions are fulfilled. may be applied in VAT certain situations. Yes Country Sweden Switzerland Ukraine United Kingdom
Baker & McKenzie 53 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Non-taxation pros and a demerger/spin- cons of as compared to other off methods None. Employment/labor concerns Notice to employees is required. Also, consent would be required from employees if the demerger does not involve /spin-off the transfer of assets and only involves transfer of employment contracts. How long does it take to implement a demerger/ spin-off? 12 months 6 months / BOD meeting Special balance sheets preliminary Execution of demerger/split-off agreement Notice to and consent from employees EGM Statutory publications period for Waiting objections creditors’ final Execution of demerger/split-off agreement and notarial deed Registration with the Public Registryof Commerce and tax authorities Filing with other registries and government agencies • • • • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • • • • • Is there a local statutory Is demerger/spin-off/split-off procedure? Yes Country Argentina SUMMARY OF STATUTORY DEMERGERS/SPLIT-OFFS (PART II: NON-TAX ASPECTS) NON-TAX II: (PART DEMERGERS/SPLIT-OFFS STATUTORY OF SUMMARY 1. AMERICAS
54 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Licenses and registrations transfer by succession Registration of foreign investment apportioned on a pro-rata bases The receiving company may be exposed to liability for obligations transferred to it only, without any joint liability toward the distributing company. consuming Time • • • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods Pros: • • • Con: • Contractual allocation of labor liabilities might not be enforceable against third parties right must Employees’ not be affected Employment agreements must not by change be affected of corporate ownership structure • • • Employment/labor concerns • • • How long does it take to implement a demerger/ spin-off? 20-30 business least At days Protocol of split-off Base balance sheet Obtain appraisal report or an from 3 experts independent auditing firm good standing Tax certificates meeting EGM Amendments of the Articles of Organization: (i) of the company to be terminated upon the merger approving, among other issues, such termination as a result of the merger; and (ii) of the surviving company approving, among other issues, the appointment of experts/accounting firm, the Protocol of Merger and • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • Is there a local statutory Is demerger/spin-off/split-off procedure? Yes Country Brazil
Baker & McKenzie 55 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Non-taxation pros and a demerger/spin- cons of as compared to other off methods Employment/labor concerns How long does it take to implement a demerger/ spin-off? Justification, the merger itself, the change in the corporate capital resulting from the merger (if that is the case), the change in the purposes of company if necessary to include the activities of the company to be terminated Filing with Companies’ Commercial Register Publication For corporations, approval and recommendation of Board of Officers’ approval required and public notice requirements for EGM there is foreign If investment made in the companies register the merger with electronic systems of the Central Bank of Brazil (SISBACEN) within 30 calendar days as of the date Amendments to the Articles of Organization of the companies, under penalty of fine • • • • What procedure steps a are required to effect demerger/spin-off? • • • • Is there a local statutory Is demerger/spin-off/split-off procedure? Country
56 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Simpler, less time Simpler, consuming, and less expensive Shareholders/quota- holders are generally free to distribute the assets and liabilities among the companies as long certain general are limits respected • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods N/A Pros: • • Employment/labor concerns Canada is an offer/ acceptance jurisdiction. No prior consultation with representatives/ workers’ council is required. The new employer assumes the labor relationship in replacement The of the old employer. rights and liabilities of the employees shall remain with the new in effect employer. How long does it take to implement a demerger/ spin-off? No specific time line as to the corporate implementation. But a tax ruling may take 2-3 months to obtain. 1-2 weeks Approval of BOD Shareholder approval if required by bylaws Assets and share transfer agreement Specific transfer documents in registrable form in case of real property or intellectual property rights Entry in shareholder registry Issuance of share certificates and notarization of EGM its minutes Registration of EGM Minutes with the Commerce Register Publication of EGM Minutes Approval of the Chilean Internal Revenue Services public deed is A required instead of special shareholders’ meeting • • • • • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • Stock corporations: • • • • Limited liability companies: • Is there a local statutory Is demerger/spin-off/split-off procedure? No statutory procedure, but a tax-free “butterfly” can be achieved spin-off through an asset transfer agreement followed by a share transfer agreement. statutory demerger Yes; procedure for stock corporations. Non-statutory but similar procedure for limited liability companies. Country Canada Chile
Baker & McKenzie 57 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Can be time consuming and expensive Joint liability for labor obligations of other companies consuming. Time • • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods Pros: Usually easier process to licenses transfer contracts, etc. Flexible, good method to release trapped cash General clearance regime has reduced time involved Cons: • • Con: • Employment/labor concerns “Substitution of employers” occurs automatically by Labor law. operation of contracts are transferred on an “as is” basis. The companies are severally and jointly liable for obligations related to existing labor contracts. avoid joint liability, To existing labor contracts must be terminated before The the split-off/split-up. new company may re-hire the workers post split-off/ split-up. The new employer is responsible for post- substitution obligations. upon the Legal effects work force vary depending on whether none, some or all of the employees are transferred by operation of law to the new company. Employees can be transferred through an employer substitution notice procedure where their working conditions will remain identical. Both the substitute and substituted employers How long does it take to implement a demerger/ spin-off? 6 months From 45 calendar days to 18 weeks Audited special purpose financial statements Split-off/split-up proposal meeting Shareholders’ Public notification Notification to creditors Dissenting or absent shareholders may exercise withdrawal rights Approval of Company when Superintendency, required (General clearance regime now available) Notarial deed Registration with Commerce Chamber of meeting Shareholders’ Financial statements audited by an external auditor Notarize and file the resolution in spin-off the Public Registry of Commerce. Publish the spin-off resolution 45 days waiting period where shareholders or creditors may judicially contest the spin-off • • • • • • • • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • • • • • • • • • Is there a local statutory Is demerger/spin-off/split-off procedure? Yes Yes Country Colombia Mexico
58 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Non-taxation pros and a demerger/spin- cons of as compared to other off methods N/A N/A Employment/labor concerns are jointly liable for any pre-substitution liabilities for a period of 6 months. If these requirements are not satisfied, the substitution is unenforceable and the employee may terminate for cause. employees or Generally, unions can not legally oppose to a demerger unless their or split-off acquired rights are affected. The new company must social security notify labor, and housing agencies of the employer substitution. N/A N/A How long does it take to implement a demerger/ spin-off? N/A N/A Notarize and register the by-laws of new company in the Public Register of Commerce Cancel the registration company, of the extinct if applicable • • What procedure steps a are required to effect demerger/spin-off? • • N/A N/A Is there a local statutory Is demerger/spin-off/split-off procedure? No No Country United States (Delaware) Venezuela
Baker & McKenzie 59 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs No additional registered capital needs to be invested to establish the new company if structured properly. Time-consuming Complex • • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods N/A Pro: • Cons: • • Employment/labor concerns N/A The labor contracts with the transferring entity must be terminated and new labor contracts must be signed with the new an employee If company. refuses to be transferred, the employer may unilaterally terminate the employee. Labor union notification The is required. management is required to listen to the opinions of labor union. How long does it take to implement a demerger/ spin-off? N/A 180-240 days for FIEs Full capital contribution to the transferring company Apply for government approval File the application for preliminary approval with the original approval authority of the transferring company Notice to known creditors Public announcement to creditors at large Creditors submit claims for full payment or security File applications for final approval with the original approval authority of the transferring company and obtain final approval • • • • • • • What procedure steps a are required to effect demerger/spin-off? N/A rules apply to Different domestic enterprises and foreign-invested enterprises (FIEs). of FIEs (1) Spin-off • • • • • • • , the , i.e. Is there a local statutory Is demerger/spin-off procedure? but generally not Yes, applicable to wholly-owned corporate groups. Yes division with Spin-off: continuance of the existing entity. division by Split-off: dissolution ( transferring entity dissolves transfers its assets after it to two or more entities). Country Australia China 2. ASIA PACIFIC PACIFIC ASIA 2.
60 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Consents of employees Consents of (who are substantially engaged in work for the business that will be transferred) or third parties are not necessary • Non-taxation pros and a demerger/spin- cons of as compared to other off methods N/A Pros: • If the company follows If certain procedures under the Labor Contracts Transfer Laws, employees who are substantially engaged in work for the business that will be transferred may compelled to transfer the receiving entity. • Employment/labor concerns N/A • How long does it take to implement a demerger/ spin-off? N/A Minimum two months. The new company obtains its approval certificate Register the changes in the transferring company with the registration authority Register the new company with the registration authority Same as above, with additional liquidation procedures required. plan Prepare spin-off Consultation with employees when required Disclose plan and related documentation Notify employees/ employees who are object to transfer/ exclusion meeting Shareholders’ Shareholders opposing plan request the spin-off the company to buy out their shares • • • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • of FIEs: (2) Split-off N/A • • • • • • Is there a local statutory Is demerger/spin-off procedure? No Yes Country Hong Kong Japan
Baker & McKenzie 61 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Non-taxation pros and a demerger/spin- cons of as compared to other off methods N/A Where employees are transferred with the business assets, distributing company must file a termination notice and the receiving company must file a corresponding employment notice with the relevant Social Insurance and Unemployment Insurance offices. Collective bargaining agreements may require consent or prior union’s consultations with the union. Protection of privacy: employee’s the “disclosure due to corporate merger” exemption allows information to be disclosed to the receiving company. • • • Employment/labor concerns • • • N/A How long does it take to implement a demerger/ spin-off? N/A Announcement Notice to creditors with Register spin-off Legal Affairs Bureau Continue disclosure of documentation spin-off for another six months • • • • What procedure steps a are required to effect demerger/spin-off? • • • • N/A Is there a local statutory Is demerger/spin-off procedure? No (limited exceptions available) Country Malaysia
62 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs The transferring entity retains all assets and liabilities otherwise not acquired or assumed by the purchaser. to be more Tends complex because the transaction could involve the transfer of various categories of assets and liabilities to the transferee Each transfer of a category of assets and liabilities may require legal treatment different and documentation • • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods Pro: • Cons: • • Employment/labor concerns Consent of employees to be transferred the entity is required. spin-off however, Generally, entity is the spin-off not required to absorb the employees of the transferring entity. How long does it take to implement a demerger/ spin-off? Approximately 2-3 months, but can take longer under certain circumstances Incorporate the spin-off entity and have the same registered with the Securities and Exchange Commission Obtain approval of shareholders and board of directors the transferring entity and the entity spin-off Comply with prior notice or consent requirements under existing contracts, licenses, permits, or registrations of the transferring entity requirementswith Comply under the Philippine Bulk if necessary Sales Law, byImplement the spin-off transferring the relevant business and assets to entity the spin-off Amend the existing contracts, licenses, permits, or registrations of the transferring entity, as may be necessary; comply with relevant noticepost-spin-off requirements Obtain the relevant permits, licenses, and registrations for the spin- entity off • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • • Is there a local statutory Is demerger/spin-off procedure? Yes Country Philippines
Baker & McKenzie 63 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Non-taxation pros and a demerger/spin- cons of as compared to other off methods N/A Con: consuming. Time N/A Employment/labor concerns N/A Employees may request severance pay if they refuse to be transferred. N/A How long does it take to implement a demerger/ spin-off? N/A Approximately 2-3 months. N/A Board meeting or meeting. shareholders’ Execution of the spin-off agreement, if applicable. Fairness opinion. Approval by the Investment Commissions if foreign investors are involved. Application to the government agency to incorporate or amend the registration of receiving company. Employee transfer. certification of CPA capital increase. • • • • • • • What procedure steps a are required to effect demerger/spin-off? N/A • • • • • • • N/A Is there a local statutory Is demerger/spin-off procedure? No Yes No Country Singapore Taiwan Thailand
64 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Automatic transfer of assets and liabilities Time-consuming compared to other separation methods • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods Pro: • Con: • Employment/labor concerns Employees are transferred to the new company by Transfer law. operation of has no retroactive effect. How long does it take to implement a demerger/ spin-off? 2-3 months depending on the structure of and the demerger/spin-off entities involved. type of Spin-off plan and spin- Spin-off agreement (Austrian off notarial deed) plan Audit of spin-off of the report Written supervisory board of the the company effecting spin-off Shareholder’s resolutions of each involved entity (notarized minutes) Notification to the commercial register balance sheet Spin-off and the final balance sheet if the company is the spin-off effecting liquidated Filing of documents with the relevantcommercial Court and Austrian Tax Authorities • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • • Is there a local statutory Is demerger/spin-off procedure? Yes Country Austria 3. EMEA 3. EMEA
Baker & McKenzie 65 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs , no consent , i.e. Automatic transfer of assets and liabilities ( necessary in principle) (6 Time-consuming weeks waiting period) • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods Pro: • Cons: • Formality requirements Employment/labor concerns the business If to be transferred is a stand- alone business, all employees automatically transfer with all existing rights and obligations. the transferred business If is not a stand-alone business, employee transfers are subject to individual consent. The company needs to comply with necessary information and consultation obligations. How long does it take to implement a demerger/ spin-off? 3 to 6 months Demerger proposal Filing of demerger proposal with the commercial court Demerger report by the Board Report by the statutory auditor Make relevant reports and information (including interim accounts, if necessary) available Extraordinary meeting of shareholders’ each involved company in the presence of a notary public (6 weeks after filing of demerger proposal) • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • of File extract resolutions shareholders’ with the relevant commercial court. Is there a local statutory Is demerger/spin-off procedure? Yes Country Belgium
66 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Non-taxation pros and a demerger/spin- cons of as compared to other off methods All methods are generally very similar in terms of timing, complexity and costs. Obligation to inform and consult with trade unions (if applicable) regarding transfer of employees In the absence of trade union, must inform and consult with individual employees who will be by the transfer affected Individual employees have no right to reject the transfer All terms and conditions of the employment must remain the same • • • • Employment/labor concerns • • • • How long does it take to implement a demerger/ spin-off? 2-4 months Approval by Board of directors Closing financial statement and opening balance sheet prepared by auditors Evaluation of assents and liabilities by court appointed expert Consent of the competent tax office for deregistration of the dissolving company Detailed reports on the demerger prepared by the board of directors and the supervisory board respectively File collection of documents with the Commercial Register; publication of such filings and notice to creditors Provide additional information to the of theregistered office dissolving company Inform and consult with the trade unions, works councils and/or employees • • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • • • Is there a local statutory Is demerger/spin-off procedure? Yes Country Czech Republic
Baker & McKenzie 67 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Non-taxation pros and a demerger/spin- cons of as compared to other off methods Demerger allows unbundling the business, either horizontally or However, vertically. demerger can be expensive and time- consuming. Employment/labor concerns All employees will remain a part of the surviving unless an company, agreement is reached with some of the employees to be transferred the resulting company(ies). the employees to Usually, be transferred to the new company(ies) will request that their treatment remain the same and period of employment with the surviving company(ies) to be calculated as part of their service duration in the new company(ies). How long does it take to implement a demerger/ spin-off? Around one year ., notify state ., e.g Approval by meeting shareholders’ Register company dissolution, delete the dissolved company from the Commercial Register and register the demerger Post demerger actions ( authorities) • • • What procedure steps a are required to effect demerger/spin-off? • • • board meeting to A approve the demerger in principal and refer the matter to the Extraordinary General Meeting of the Company (“EGM”), Extending the invitation to all the shareholders to an EGM to approve the demerger in principal and appointing an auditing firm to perform the re-evaluation of the Company, Holding the EGM adopting the above-mentioned resolutions, a demerger Preparing contract between the shareholders where they agree on the terms of the number of split-off, resulting companies and the assets and liabilities that will be part of each the resulting companies, Is there a local statutory Is demerger/spin-off procedure? Yes Country Egypt
68 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Non-taxation pros and a demerger/spin- cons of as compared to other off methods Employment/labor concerns How long does it take to implement a demerger/ spin-off? What procedure steps a are required to effect demerger/spin-off? Re-evaluation report to be concluded by the appointed auditor(s) for each proposed resulting company and approved by the Board, Re-evaluation report to be presented to the GAFI, refer which will, internally, for the report to CMA its review, Decree of the Chairman on the of the GAFI preliminary approval on the split-off, Re-evaluation report as reviewed to by the GAFI be presented to the EGM for final approval, Presenting the minutes of the above meeting for authentication and approval by the GAFI, Once the minutes are approved, the shareholders of the proposed resulting company/ies shall prepare Articles of the proposed Association, and The normal incorporation procedures of the resulting company/ies are then concluded. Is there a local statutory Is demerger/spin-off procedure? Country
Baker & McKenzie 69 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Time consuming and Time more complicated compared to other separation methods. Provides for statutory transfer of liabilities and payables - no consent required from creditors (universal succession rules) • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods Con: • rare in practice. Very Pro: • Employment/labor concerns Prior information and consultation with the works council is required before any definitive decision is taken. But a negative opinion will not stop the demerger project. Proper steps need to be taken in order to have a clear partition of the employees engaged in the business to be transferred. Allocation/transfer of existing work force by law. operation of Employees may object to transfer. How long does it take to implement a demerger/ spin-off? minimum 3-4 months At Approx. three months plus one month waiting period for the works council (entire period can be short as required in the individual case) Prior information and consultation of the works council (if any) Intervention of a court appointed appraiser (unless exempted) Interim accounts may be required Prior authorization of Directors the Board of File the demerger agreement with the Registries Trade and publish in a legal announcement newspaper meeting Shareholders’ approves the demerger Draft demerger/split-off agreement or interim Yearend balance sheet (must be audited if the annual financial statement requires audit) Submit the draft demerger/split-off agreement to works council • • • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • Registration, publication and filing formalities with the French tax authority Registers. and Trade • • • Is there a local statutory Is demerger/spin-off procedure? Yes the transferring Spin-off: entity dissolves. Contribution of an autonomous branch of activity: the transferring entity continues its existence. Yes Country France Germany
70 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Normally more costly Risky because of statutory transfer of liabilities (which would otherwise remain with transferor) Involves more complex procedures legal Generally, succession by operation of law (including automatic transfer of contracts, licenses and employees) Requires more complex documentation Accounting costs Time-consuming Creditors are entitled to guarantees under certain circumstances • • • • • • • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods Cons: • • • Pro: • Cons: • • • • Inform and consult with the trade union, works council or employee committee Probably need to obtain a written opinion of the union or works council. Failure to do so might invalidate the demerger/ split-off. • • Employment/labor concerns • • How long does it take to implement a demerger/ spin-off? Approx. 6 months Execute notarial deed embodying demerger/ agreement and split-off approval resolution by shareholders meeting following expiry of one month from submission to works council of draft Obtain independent appraisal if the CPA receiving company issues new shares Additional procedures for listed companies Demerger/spin-off proposals Shareholders meeting Draft balance sheets and inventory of opening assets, draft inventory of assets and other relevant financial statements Prepare a settlement proposal with respect to any departing shareholders Prepare the demerger agreement Prepare Articles the Association of the of company involved • • • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • • • • Is there a local statutory Is demerger/spin-off procedure? Yes Country Hungary
Baker & McKenzie 71 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs The procedure is straightforward. Time-consuming • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods Pro: • Cons: • Employment/labor concerns Must give Union prior notice. Employees should be transferred under the same conditions. How long does it take to implement a demerger/ spin-off? 3-5 months Prepare transformation plan, if necessary Second shareholder’s meeting to approve the demerger agreement and other related corporate and financial documents Public announcement Apply to register the Trade demerger in the Registry The Court of Registration registers the demerger Prepare final balance sheets and inventory of assets Board of Director’s meeting to approve the demerger plan File the demerger plan with the Company’s Registry and other government agencies Deposit the demerger plan and financial statements for inspection shareholders’ Register the demerger plan with the Registry Companies’ • • • • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • • • • • Is there a local statutory Is demerger/spin-off procedure? Yes Country Italy
72 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Assets and liabilities are transferred by operation of law Save contractual restrictions, no third party consent or notification is required liabilities Post-spin-off are separated between two legal entities External auditor required • • • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods Pros: • • • Cons: • Request advice Council from Works in a timely manner in advance of the decision to be taken. Representation Staff A meeting is and Staff entitled to give advice if the demerger/split- the jobs or affects off employment conditions of at least 25%of the employees. Council Only the Works can take legal actions to oppose the demerger/ split-off. • • Employment/labor concerns • • How long does it take to implement a demerger/ spin-off? 6-8 weeks Extraordinary meeting shareholders’ to approve the demerger in favor of a new company File the shareholder’s resolution with the and the Registry Office Registry Companies’ 2-month period for the creditors to oppose the demerger Execute and file the demerger deed with the Register Companies’ Request advice from Council Works Prepare spin- proposal and off explanatory notes Obtain auditor’s statement (if required) Prepare articles of association and apply for statement of no-objection of Dutch Ministry of Justice for incorporation of new entities proposal File spin-off with exhibits (including latest three annual accounts, annual reports and interim statements) • • • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • • • • Is there a local statutory Is demerger/spin-off procedure? Yes Country Netherlands
Baker & McKenzie 73 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Possible delays in case creditors and other third parties file an objection against the spin-off The transferring company can be held liable for the non-performance of contracts that are transferred to the new entity The works council has formal advisory powers • • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods • • • In case of a transfer of undertaking the employment contracts existing at the time of transfer will be transferred by operation of law to the acquiring The former company. employer will remain jointly and severally liable one year after the transfer date for all obligations that have occurred before the transfer. collective dismissal A requires the notification and permission of the and Centre for Work Social Plan A Income. should be negotiated. if provisions Verify following the Dutch SER Merger Code apply to demerger/split-off. • • • Employment/labor concerns • • • How long does it take to implement a demerger/ spin-off? Publication of filing which initiates a one- month period during which creditors may object againstthe proposed spin-off resolution by Spin-off Shareholder’s meeting or Board of Directors Execute notarial deed Update registration with Registry Dutch Trade • • • • What procedure steps a are required to effect demerger/spin-off? • • • • Is there a local statutory Is demerger/spin-off procedure? Country
74 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Permits and licenses are generally automatically transferred Time-consuming Complicated Expensive Creditors may demand acceleration of outstanding debts Antimonopoly law issues and Time-consuming cumbersome • • • • • • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods Pro: • Cons: • • • Cons: • • • Employment/labor concerns The new employer assumes all liabilities and becomes solely liable for these liabilities (except by separation, split-off where the responsibility is joint and severable). The new employer becomes a party to the collective bargaining agreements to which the former employer was a party. Must notify the trade unions in writing advance. Must obtain written consent of employees to continue employment with Terms the new company. of the new employment contracts should be similar 2-month to prior ones. prior written notice required where terms of employment are changed. Employees who refuse to be transferred may terminated, but will have all rights as in the case of a formal termination. How long does it take to implement a demerger/ spin-off? 5 months 1 year Prepare the demerger plan Filing with the registry court and application for examination by an expert Receive the expert’s opinion Notice to shareholders Shareholders general meeting approves the demerger File the shareholders’ resolutions with the respective registry courts Remove the company to be dissolved from the commercial register meeting Shareholders’ to approve the demerger plan and the balance sheet Notify tax authorities and pay outstanding taxes Notify creditors and demands settle creditors’ Deregister the demerging company (if applicable) and register the new company relevant assets, Transfer employees, and files to the new company • • • • • • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • • • • • • • Is there a local statutory Is demerger/spin-off procedure? Yes Yes Country Poland Russia
Baker & McKenzie 75 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Flexible as to whether separate business units (as opposed to merely assets) need to be transferred • Non-taxation pros and a demerger/spin- cons of as compared to other off methods Pro: • Employment/labor concerns council has the Works statutory right to issue a non-binding report. Statutory labor notification required. Substantial changes in work conditions may trigger statutory labor consultation requirements. How long does it take to implement a demerger/ spin-off? 3-4 months Balance sheet (must be audited under certain circumstances) plan Split-up/Split-off Report by external expert officially appointed by the Commercial Registry may be necessary under special circumstances if any of the companies involved is an SA in the spin-off company “sociedad anónima” Issue and deposit report Directors’ Labor notifications meeting Shareholders’ Publication opposition Creditors’ Formalization of the public deed File tax form Notification to the tax authorities Filing with the Spanish General Directorate of Commerce Registration of the deed with the Commercial Registry • • • • • • • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • • • • • • • • Is there a local statutory Is demerger/spin-off procedure? Yes Country Spain
76 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Flexibility Time-consuming • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods Pro: • Con: • Employment/labor concerns Requires union consultations. Employees are transferred on the same terms and conditions. consent is Employee’s required for amendmentof employment conditions. employmentis of transfer A not deemed a “termination of employment.” How long does it take to implement a demerger/ spin-off? both companies are If private wholly-owned limited liability companies, about 4-5 months, otherwise 6-8 months. Board of directors each company prepares a demerger plan. auditor Each company’s to review demerger plan. The demerger plan to be registered with the Companies Registration (not required if Office both companies are private limited liability companies and all shareholders have signed the demerger plan). meeting Shareholders’ of each company to approve the demerger plan (not required if both companies are private limited liability companies and all shareholders have signed the demerger plan). Furthermore, meeting shareholders’ of the surviving company only required if at least five percent of the shareholders require the demerger issue to be referred the meeting. shareholders’ • • • • What procedure steps a are required to effect demerger/spin-off? • • • • Is there a local statutory Is demerger/spin-off procedure? for limited liability Yes, companies. Demerger may take place through (i) all of the assets and liabilities of the transferor company being acquired by two or more other companies, whereupon the transferor company shall be dissolved without liquidation taking place; and (“split”) (ii) part of the assets and liabilities of the transferor company being acquired by one or more other companies without the transferor company being dissolved (“spin-off”). Country Sweden
Baker & McKenzie 77 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Non-taxation pros and a demerger/spin- cons of as compared to other off methods Employment/labor concerns How long does it take to implement a demerger/ spin-off? Each company shall notify its creditors of Thethe demerger plan. creditors of the surviving company need not be notified unless the auditor has found the creditors’ rights to be at risk should the demerger plan become effective. Application to the Companies Registration to implement theOffice demerger plan. The Companies shallRegistration Office summon the companies’ creditors. If no creditor opposes the demerger plan, Companies Registration shall approveOffice the application for implementation of the demerger plan. (If a creditor has opposed the the demerger demerger, shall be referred to the District Court). Once the application to implement the merger plan has been approved, the board of directors the surviving company shall file a notification to the Companies Registration Office regarding registration of the demerger. • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • Is there a local statutory Is demerger/spin-off procedure? Country
78 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs
, e.g. uno actu Transfer of assets of Transfer and liabilities to the newly created legal entity as from registration with the Register of Commerce Simplified proceeding for the creation of ( the new entity contribution in kind) Time-consuming as compared to other restructuring proceedings • • • • Con: • Non-taxation pros and a demerger/spin- cons of as compared to other off methods Pros: • Employment/labor concerns Obligation to inform and consult with the employees or with the representation of the employees. The employees to be transferred can oppose In such such transfer. event, their employment agreement will be automatically terminated at the end of effective legal notice period. the event of non If compliance with the consultation requirement, the employees or the representation of the employees may request from the competent judge to proceed an order not with the registration of demerger with the Register of Commerce. How long does it take to implement a demerger/ spin-off? Regular proceeding: approximately 4-5 months (may be slightly shortened in event of simplified proceeding applicable to small and mid-size enterprises). Preparation of interim statutory(if sheets balance balance sheets are older than six months from the date of the demerger project/agreement) Demerger project/ agreement (including inter alia a detailed inventory of assets and liabilities); Demerger report prepared by the Board of directors/ managers; Review of the demerger project/agreement, demerger report and (interim) balance sheets and issuance of a confirmation report by specially qualified auditors Notification to the creditors; meetingShareholders’ deciding on the demerger and approving the demerger project/ agreement (in front of a public notary) Application to the Register of Commerce If a new company is incorporated, legal requirements for such incorporation shall be complied with, except for contribution in kinds and the number of founders. • • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • • • Is there a local statutory Is demerger/spin-off procedure? as from 1 July 2004 Yes, Country Switzerland
Baker & McKenzie 79 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 6 – Separation Methods: Demergers and Statutory Spin-Offs Can effect any kind of Can effect demerger structuring All shareholders are bound by the terms of the scheme Financial assistance can be approved as part of the scheme costly and lengthy Very Rarely used Any subsequent change to the arrangement must be approved by the court Uncertainty because of the court approval requirement Applicable only where creditors are involved • • • • • • • • Non-taxation pros and a demerger/spin- cons of as compared to other off methods No significant pros or cons. Pros: • • • Cons: • • • • • Employment/labor concerns No particular labor concerns. Obligation to inform and consult with the employees may be required by “change of ownership” provisions individual of employment contracts or collective agreements with trade unions or works council. How long does it take to implement a demerger/ spin-off? Uncertain. 2 months Shareholders’ meeting Shareholders’ Evaluation and buy- out of shares by the company Registration of changes in the corporate structure with government agencies Application to the Companies Court The Registrar convenes the meeting of creditors the proper, and, if general meeting of shareholders Disclose the explanatory statement Approval by class meetings of shareholders Court sanction Filing of the court’s order • • • • • • • • • What procedure steps a are required to effect demerger/spin-off? • • • • • • • • • Is there a local statutory Is demerger/spin-off procedure? (extraction) spin-off Yes; and split-up (separation). No statutory procedure except the “scheme of arrangement” under Section 895 of the Companies Act 2006. Board of Directors Board of Shareholders General Meeting Extraordinary Enterprise Foreign-Invested Country Ukraine United Kingdom BOD EGM FIE Table Abbreviations of Table
80 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 7 – Separation Methods: Reverse Spin-Offs
Section 7 Separation methods: Reverse spin-offs
In a reverse spin-off scenario, the assets and liabilities comprising the retained business are removed from the existing entity that will be transferred to a third party. Such reverse separation can be structured in various ways. One way is for the existing subsidiary to distribute the assets comprising the retained business to its parent as an in-kind dividend (and have the parent assume related liabilities). Alternatively, the existing company can incorporate a subsidiary (“Newco”), contribute the assets comprising the retained business to Newco (either at the time of incorporation or shortly thereafter) and at the same time have Newco assume the relevant liabilities. Thereafter, the existing company would distribute the shares of Newco to its parent. A reverse spin-off can also be structured as a demerger (see Section 6, above). Depending on the value of the retained business, it may turn out to be most time and cost efficient for the existing subsidiary to sell the assets comprising the retained business to its parent or an affiliate (in the same jurisdiction) and have the parent or an affiliate assume the liabilities associated with the retained business. Each structure requires a careful analysis of various tax, corporate, labor and regulatory issues. For example, if a parent company incorporated in a jurisdiction different from the jurisdiction of its subsidiary acquires assets and assumes liabilities comprising the retained business from the subsidiary, the parent might be considered to have a permanent establishment in the jurisdiction of its subsidiary and consequently be subject to tax in that jurisdiction. Also, many jurisdictions require local employees to be employed by a local company, branch or other presence of a foreign company. Accordingly, it might be preferable to incorporate a subsidiary or register a branch or other presence to acquire and operate the retained business in the relevant jurisdiction. With respect to the employees who have to be transferred as part of the retained business, labor laws of many jurisdictions require such employees to be terminated and rehired. In other jurisdictions, the transferring employees would have to consent to their transfer, and existing works councils would have to be consulted (see discussion in Section 11). In many jurisdictions, the local labor law requirements depend on whether local law considers the retained business to be an independent business separate from the remaining business or part of the remaining business. Each reverse spin-off alternative should also be examined from a regulatory compliance standpoint in order to determine which approach raises no or the least significant regulatory issues (e.g., obtaining new business licenses and product registrations for the new owner of the retained business). If the reverse spin-off approach involves a dividend distribution, the planning team should analyze various restrictions imposed by local laws on dividend distributions. In most jurisdictions, directors of a company are under a fiduciary duty to declare and
Baker & McKenzie 81 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 7 – Separation Methods: Reverse Spin-Offs pay dividends only if the company meets certain conditions generally designed to ensure the financial integrity of the company. In most common law jurisdictions (e.g., UK), the directors must ensure, taking into account the company’s current financial position, that the company has sufficient distributable reserves, i.e., accumulated realized profits. In most civil law jurisdictions, dividends may be declared from net profits plus retained profits (e.g., Germany) minus legal reserves (e.g., Italy, Mexico, and Spain). In those jurisdictions, dividends may not be paid if such payment would reduce the company’s capital below the amount stated in the relevant statutory balance sheet of the company, and the directors of the relevant company would be personally liable for the amount by which the stated capital has been reduced as a result of a dividend distribution. The laws on dividends are very specific by country and should be confirmed in each case. For example, not all countries permit interim dividends for all types of company (e.g., Belgium and Italy only allow annual dividends once a year) and in Korea whilst interim dividends are allowed a company may only pay one in each financial year. In common law jurisdictions, the proposed reverse spin-off structure should also be reviewed to determine whether it raises any financial assistance issues. Whether a reverse spin-off approach is the most time and cost efficient separation method depends on various factors, including the value of the retained business compared to the value of the business to be transferred to a third party and various labor and regulatory issues to be addressed as part of the implementation of the chosen approach.
82 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure
Section 8 Moving companies into the new structure: Sale vs. capital contribution
Once the assets or business operations in a given jurisdiction have been segregated into their own subsidiary, it is often necessary or desirable to move that subsidiary into a separate corporate chain, e.g., to place all the entities containing the separated business under a single parent company in preparation for a spin-off or sale. Moving the shares can be done in the form of a capital contribution to the new holding company (perhaps preceded by a distribution up the chain to the ultimate parent company in the corporate group) or in the form of a sale of the subsidiary’s shares from their initial owner to the new holding company. The choice between sale and contribution should be made after due inquiry into the tax and other consequences. For example, is a contribution or sale taxable? Do capital duties apply to contributions? Must the shares being contributed be valued under local law, and if so by whom? The table following this section sets out general answers to some of these important questions for a variety of jurisdictions at the time of this writing. This should not be viewed as an exhaustive listing of the issues that influence the choice between sale and contribution, however.
1. Overview - sale or contribution of shares
1.1 Contribution of Shares Contributions may be made in return for the issuance of shares or they may be given for no consideration. In the latter case, the value of the contribution may increase the share premium or surplus amount on previously-issued shares or may be added to some other equity account or corporate accounting reserve. In some jurisdictions it is not permissible to make a contribution without the issuance of shares, and even in jurisdictions where this is permitted, attention should be paid to the possibility of gift tax or other adverse tax consequences. Corporate benefit or director fiduciary issues may arise when planning share contributions where the contribution is to a subsidiary that is not wholly owned. This type of transaction could be considered as a disposal of value by the transferring company without receipt of adequate benefit in return, opening the door to potential liability for the transferor company directors and for the transferee company.
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1.2 Sale of Shares A sale of shares may be effected for cash payment or debt, or may be structured as an exchange for other property. The starting point for determining the price at which the shares are sold is the fair market value of the shares. However, there are situations where shares can be sold at their book value, i.e., the carrying value of the shares in the accounts of the transferor (assuming this is different than fair market value). If shares are sold at less than their market value this can raise corporate benefit or fiduciary duty issues for the directors of the transferor company and the transferee company. Naturally, the sale price, whether at, above or below book value is also likely to have important tax implications. When a value must be determined it can sometimes be established by an informal assessment of value carried out by the directors, but in some cases may have to be determined by an expert appointed by the company, or appointed by the courts. A summary of valuation and pricing requirements is set out later in this Section and in the accompanying table. If shares are being sold in exchange for debt, care may be required to confirm that the additional debt taken on by the issuing company does not violate any restrictions on thin capitalization and allows it to remain within any restrictions on its debt to equity ratio. Violating such restrictions can result in tax deductions for interest payments being disallowed or give rise to an obligation to capitalize the company. In Spain the rules that regulate the equity position of a company can lead to the dissolution of a company if its net equity falls beneath certain thresholds on a long term basis. Selling shares in exchange for debt raises a number of other points that will need to be addressed, such as whether interest will be charged on the debt, whether the debt must be paid on demand or by some fixed date, and how the debt will be evidenced, e.g., by loan agreement, promissory note or simply a bookkeeping entry.
1.3 Issues common to both a contribution of shares and a sale of shares The sale of shares and the contribution of shares will raise similar issues in relation to the mechanics of changing registered share ownership in the local jurisdiction of the transferred company. Share transfer mechanics can vary significantly between jurisdictions, notably between civil law and common law jurisdictions. The mechanics can also vary within a jurisdiction as between entity types. For example, under French law the shares of an S.A.S. are transferred in a different way from those of an S.A. When transferring the shares of multiple group companies by way of a sale or a contribution, it is useful to record the terms of the transfer in an umbrella agreement, even if this is not always strictly required to complete the local formalities. The terms of transfer are thereby memorialized and the intentions of the parties recorded in writing in case of a future review of the transaction, for example by auditors or tax authorities. The agreement may also serve as the transfer document fulfilling part of the local transfer mechanics for several jurisdictions. However, care must be taken to ensure that even where the transfer has been
84 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure properly recorded in a transfer agreement, the local transfer formalities are completed. There have been examples where an overseas parent company documents the sale or contribution of shares between group companies, but the local transfer formalities are not completed. This results in a mismatch between the share structure set out in the accounts of the parent and the true legal ownership structure. In many civil law jurisdictions, a notarial deed is required to transfer shares, whether by sale or contribution. A notarial deed raises two key issues: first, it usually increases the complexity of the legal transfer process, and second, it can add significantly to share transfer costs. Examples of costs related to share transfer are: •• Stamp duties or transfer taxes •• Registration fees •• Notarial fees, which can increase based on the value of the shares being transferred •• Real estate transfer tax, which can be triggered even by the transfer of shares if the company being transferred owns real estate Considering these costs at the initial planning stage can allow mitigating steps to be taken in certain circumstances. Even though there are provisions under local tax laws in many jurisdictions which provide for exemptions from stamp duties or transfer taxes in an intra-group transaction, it is not always straight forward to obtain these exemptions. The requirements may include a holding period for the shares before transfer, or a post-transfer period during which the transferee company must remain associated, from a group structure perspective, with the transferor company. It may not be possible to satisfy this latter type of requirement when the restructuring is to prepare a division for sale or an IPO. Usually there are no exemptions from notarial fees based on an intra-group restructuring, and these fees themselves can be even more significant than stamp duty in certain cases.
1.4 Solvency Issues It is important to note that the concerns over receipt of fair value in exchange for shares and corporate benefit are considerably heightened if the transferor company is insolvent or likely to become insolvent. Under these circumstances creditors of the insolvent company may be able to challenge and seek to undo the transfer, and may also be able to assert damages directly against the directors involved in the transaction.
2. Tax considerations Section 4 of this Handbook deals generally with the tax consequences of share transfers, and the table at the end of this Section summarizes the tax treatment of share transfers for a range of jurisdictions.
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3. Requirements for valuation of sold or contributed shares The sale of shares often requires some type of valuation in order to determine the transfer price of the shares, any corresponding taxable gain or loss, and the amount of any transfer tax. Contributions of shares, whether for a return of shares or for no consideration will sometimes require valuations similar to sales of shares. However, in many common law jurisdictions and in the US, contributions are generally more straightforward and formal valuations are not required to implement the transactions, although internal valuations may be required later in order to properly account for the transactions. For example, under English law, the contributed shares may be transferred from the transferor company to the transferee company at their carrying value on the transferor company’s accounts. Where shares are issued in exchange for a share contribution, a formal valuation of the issued shares may also be required and this can also involve a valuation of the contributed company in order to determine how many shares need to be issued.
3.1 Fair Market Valuations A fair market valuation of the shares being transferred may need to be obtained for various reasons, such as: •• to allow shares of equal value to be issued by the recipient to the contributor, •• to ensure shares are not being issued at a discount, •• because a valuation is required for local tax purposes e.g., to calculate income or stamp tax payable or to ensure that the ratio of par to premium on the number of shares issued is at the correct level, •• to permit the proper statutory accounting for the transaction, or •• for corporate benefit or director fiduciary reasons. Although the analysis can vary by jurisdiction, generally the corporate benefit issues raised by the sale of shares can be summarized by two concepts: the directors of the transferor company should not sell assets at less than fair market value and the directors of the transferee company should not acquire assets at more than fair market value. The directors in question may gain protection from future liability by ensuring that the current shareholder ratifies and approves the transaction. However, this type of protection will not be valid in the event that it is deemed the transaction was a fraud on the creditors of the company, in particular in cases of insolvency. The sale of shares at less than fair market value could be analyzed as a deemed gift of the difference between the transfer price and the fair market value if the transaction is downstream, or as a deemed distribution if the transaction is upstream or sideways in the group. The sale of shares at more than fair market value could itself be construed as a deemed distribution if the transaction is downstream, and conversely as a deemed
86 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure contribution if upstream. In addition to concerns of directors’ breaching their fiduciary duties to a company, another reason that care is taken in applying the correct transfer price is due to the potential tax issues raised by a gift or a distribution, and the possibility of triggering income tax, gift tax or withholding tax on a deemed distribution or contribution. Where shares are issued in exchange for a contribution, the correct number of shares issued will need to be calculated to ensure that any minority shareholders’ rights are not prejudiced and that the directors of the issuing company do not issue a disproportionate number of shares to the transferring company. Where the issuing company is a wholly owned subsidiary concerns about minority shareholder requirements are generally not relevant, and the possibility of dilution of shareholder interests by issuing too many shares is not an issue. The correct number of shares to be issued in return for the contribution can, however, still be relevant to address any concerns about the issue of shares at a discount, as issuing too many shares may breach local corporate rules. Issuing too few shares may not be acceptable from the receiving company’s perspective where a fair market transaction is required. When shares are contributed to a company, a decision may need to be taken as to how that contribution is recorded in the receiving company’s accounts. For example, in some jurisdictions it may be beneficial to contribute the shares in a manner that creates a distributable reserve which may be called “share premium”, “capital surplus” or some other term, as this can make it easier to distribute assets from the company in the future if the company has no retained earnings.
3.2 Different valuation methodologies. There are a number of valuation methodologies, and the choice of which methodology to use will depend on the type of industry the company is involved in and who will be carrying out the valuation. It is probably preferable to employ a consistent method of valuation across the corporate group globally to demonstrate an internal consistency of approach. In the event a value is challenged by a tax authority, it will provide more substance to the chosen methodology if this has been used throughout the restructuring, and if possible, throughout the group for other reasons or transactions. Thus, it is useful to take account of methods of valuation adopted previously by the group.
3.3 Who must conduct the valuation. Various legal requirements or other considerations can influence who should conduct the valuation. As mentioned briefly above there are three main options: •• internal valuation – e.g., by internal finance personnel •• external valuation – by company appointed expert
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– by company’s statutory auditor – by court or government appointed expert The local corporate law will generally determine whether the valuation needs to be carried out by a court appointed expert, the company’s statutory auditor or by the company’s own expert, the company’s statutory auditor. Even where local corporate rules do not require a third party valuation to be prepared for a particular jurisdiction, if a global valuation of the group or the division is being prepared, it may be prudent to do so in any event as the incremental cost to including one additional jurisdiction is unlikely to be significant, and the valuation can be used to substantiate the value of the contribution if there are any questions raised later. If a company is required to use a court appointed expert to carry out the valuation, this may delay the timetable for executing a contribution as court appointed experts often have prescribed period to carry out the valuation and are unlikely to be persuaded to deliver their reports early. The third party valuations were often previously carried out by the company’s auditors, however following the restrictions upon the role of audit firms set out in the Sarbanes- Oxley Act, the auditors are often prevented from completing this type of service. Alternative service providers include other accounting firms, valuation firms and economists. If there is no plan to instruct a firm to carry out a global valuation and no requirements from a local corporate law perspective or by the officers of the companies involved, an internal valuation by the group may be sufficient and should be less costly.
88 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? The timing depends on many factors. (a) 15 days for shares of both corporations and limited liability companies; and (b) 2-3 days for shares of corporations and 15 days for shares of limited liability companies. Is there Is any capital duty on the issue of new shares? In general, no (a few provinces have capital duty). No What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Income tax - 35%. relief is Tax available if the transfer qualifies as a tax free reorganization. Contribution of shares is considered a sale for tax purposes. Therefore, the same taxes and rates apply. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Income tax - 35%. relief is Tax available if the transfer qualifies as a tax free reorganization. Capital gains of a Brazilian legal entity on the transfer of shares held in a Brazilian company are taxed at 34%. Withholding income tax at 15% (25% for low tax jurisdictions) is imposed on non-residents. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? (a) third party; and (b) third party. No specific requirements. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Yes The shares can be sold at net book value, but only in the context of a tax free reorganization. No, valuation is not required. the Yes, shares can be sold at net book value. Upon contribution to local company, must contributed shares be valued / appraised? Yes Valuation is required for shares issued by corporations. No valuation is required for shares issued by limited liability companies. Is it Is possible to sell shares (in return for cash/ loan note)? Yes Yes Are shares transferable by contribution in return for the issue of shares? Yes Yes Are shares transferable by gift? Yes Yes (donations tax may apply). CONTRIBUTION This column refers to sales by an entity incorporated in the relevant jurisdiction, rather than sales of share such a company. jurisdiction, in the relevant incorporated This column refers to sales by an entity
Jurisdiction AMERICAS Argentina Brazil 1 SUMMARY OF ISSUES RELATING TO INTRAGROUP TRANSFER OF SHARES BY SALE OR SHARES BY TRANSFER OF INTRAGROUP TO ISSUES RELATING OF SUMMARY CAPITAL
Baker & McKenzie 89 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 3 days, and (b) 3 days. Complicated transactions require more time. A non-resident of Canada must generally apply for a Is there Is any capital duty on the issue of new shares? Some provinces impose annual capital tax of up to 0.5% per annum; but these are all proposed to be eliminated by 2012. What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Contributions are treated as dispositions. there is no If applicable relief, then proceeds of the disposition will be included in computing the gain. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? the shares If are held as capital then property, only 50% of the proceeds are included in taxable income of the Income seller. tax rates are around 35%. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? No specific requirements. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? In related- party transactions, sales must be at fair market value. Shares cannot be sold to third parties for cash at net book value. Upon contribution to local company, must contributed shares be valued / appraised? the However, partners are jointly liable for the amount of any assets (including shares) contributed an appraisal of the value of the contributed shares is recommended. Shares must be contributed either at net book value or appraised value. the No, but tax authorities have the right to challenge the contribution if it is not at fair market value. Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes Jurisdiction Canada
90 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? clearance certificate within 10 the days of transaction or face a withholding tax if it is disposing of shares in a Canadian corporation. (a) 1-5 days; and (b) 1-3 days. Is there Is any capital duty on the issue of new shares? No What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Tax-free elective “roll-over” relief may be available, if the shares are contributed in exchange for shares in another Canadian corporation. Relief may also be available under double tax treaties. Contributions are treated as dispositions. If there is no applicable relief, then the difference between cost and fair market value of the shares will be included in computing the gain. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Tax-free elective “roll-over” relief may be available, if the consideration consists of the shares of another Canadian corporation. Relief may also be available under double tax treaties. the shares If were acquired before 31 January 1984, the gain is not subject to income tax. If not, the gain is subject to a 35% Capital Gains Tax. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? when the(a) contribution is not unanimously approved by the shareholders of the transferee, an expert must perform the valuation. no specific(b) requirements. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Shares may be sold in exchange for shares in another Canadian corporation at net book value. the No, but tax authorities may challenge the sale if it is not at fair market value. Upon contribution to local company, must contributed shares be valued / appraised? No, but the tax authorities may challenge the contribution if it is not at fair market value, unless the contribution is made in the context of a group reorganization. Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? tax (gift Yes may apply at a rate of up to 25%). Jurisdiction Chile
Baker & McKenzie 91 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? In the context of a tax-free reorganization, “roll-over” relief may be available. Relief may also be available under double tax treaties. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? The rate may be reduced to 17% provided the transfer is not “habitual,” the shares were held for at least the one year, transfer is made to an “unrelated and the party,” shares are shares issued by a Chilean corporation. Relief may also be available under double tax treaties. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Upon contribution to local company, must contributed shares be valued / appraised? An appraisal is required if the shareholders of the transferee do not unanimously approve the value of the contribution. Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
92 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 1 day for a corporation, 3 days for a limited liability company (not including time for appraisal); and (b) 1 day for a corporation, 3 days for a limited liability company (not including time for appraisal). Is there Is any capital duty on the issue of new shares? Notary fees and VAT (just over 0.3%) on the increased nominal value of the shares plus registration tax of 0.7% for registration. What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Contributions are treated as dispositions that are subject to capital gains tax – 33% . No tax reliefis available. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Capital gains tax - 33% %. No tax reliefis available. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? Preferably , by a third party independent appraiser, the auditor/ tax advisor for both transactions. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Yes No, the sale must be at fair market value. Upon contribution to local company, must contributed shares be valued / appraised? Yes Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? in some Yes, circumstances Are shares transferable by gift? (a Yes gift may constitute deemed income for the transferee). Jurisdiction Colombia
Baker & McKenzie 93 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 1 -3 days; and (b) 1 -3 days. Is there Is any capital duty on the issue of new shares? No What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Mexican shareholders are subject to income tax at 28% on the net gain. Foreign shareholders are subject to income tax at 25% (40% if located in a preferential tax regime) on gross amount or may elect to be taxed at 28% on net gain. Further relief may be available under a double tax treaty. Intra-group restructures qualify for tax deferral. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Mexican shareholders are subject to income tax at 28% on net gain. Foreign shareholders are subject to income tax at 25% (40% if located in a preferential tax regime) on gross amount or may elect to be taxed at 28% on net gain. Further relief may be available under a double tax treaty. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? No specific requirements. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No, although a valuation is recommended to ensure that the shares are sold at fair market value. The shares must be sold at fair market value. Upon contribution to local company, must contributed shares be valued / appraised? No, although a valuation is recommended to ensure that the shares are contributed at fair market value. Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes Jurisdiction Mexico
94 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Both types of transaction can generally be on effective the date of execution of the relevant agreement and delivery of stock certificates or stock powers, so the only lead time required is a few days to prepare the legal documents and obtain signatures. Is there Is any capital duty on the issue of new shares? No What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? toContributions a wholly-owned subsidiary are generally tax exempt. In the case of stock contributions to a non-US transferee, the transferor must follow certain formal procedures to preserve nonrecognition treatment. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Reduced long term capital gains tax rates may apply to the gain on sale of stock by non-corporate taxpayers. For corporate taxpayers, the regular rate applies. Sales between members of a U.S. consolidated tax group notdo generally attract taxation at the time of sale; taxation of the gain, if any, is deferred. relief Tax may also be available in some circumstances Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? No specific requirements. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No specific requirements. Upon contribution to local company, must contributed shares be valued / appraised? No, this is up to the business judgment of the company’s directors. Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes (although technically the transaction will not be structured as a “gift” but should be structured as a contribution or distribution of shares). Jurisdiction United States
Baker & McKenzie 95 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 1-2 weeks; and (b) 1-3 days. Is there Is any capital duty on the issue of new shares? The increase of the capital stock and issuance of new shares is subject to a 1% stamp tax. What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Income tax will attach at the 34% corporate rate on the difference between the tax cost basis of the contributed shares and the fair market value of the issued shares. No withholding tax applies. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? where the sale of the shares can be stepped together with other steps and the overall transaction is recharacterized. Any gain on sale is subject to income tax at the corporate rate, which is 34%. Payment of the purchase price is subject to back-up withholding The of 5%. seller is entitled to credit the amount withheld against the final income tax liability Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? No specific requirements. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No. The shares can be sold at net book value. The difference, however, between the net book value and fair maker value may be considered to be a gift for tax purposes. Transfer pricing regulations may apply. Upon contribution to local company, must contributed shares be valued / appraised? No Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes, however, gift tax may apply tax and gift rates range from 10% to 55%. Jurisdiction Venezuela
96 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? The shareholder is required, to however, report the gain in the year- end income tax return and pay the applicable tax. Relief may be available under double taxation treaties. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? determined in the year-end return. shares Sale of listed in a Venezuelan stock exchange is subject to a flat 1% income tax rate on the sales price. Relief may be available under double taxation treaties. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Upon contribution to local company, must contributed shares be valued / appraised? Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
Baker & McKenzie 97 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 1-3 days; and (b) 1-3 days. Is there Is any capital duty on the issue of new shares? No What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? The tax of 30% is chargeable on any capital gain which is broadly determined based on the market value of the shares less the transferor’s capital gains tax cost base. Relief is available in a number of circumstances, including intra- group transfers between members of an Australian tax consolidated group (requires 100% ownership). What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? The applicable tax rate of is 30% on any capital gain less the transferor’s capital gains base. tax cost There is no taxable gain on an intra- group transfer between the members of an Australian tax consolidated group (requires 100% owner- Shares ship)). held by a non- resident will only generally be subject to Australian the if CGT Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? If a valuation is required, usually an internal valuation will suffice, although an independent valuation will be necessary in some circumstances. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No, although directors must generally sell shares for consideration of no less than fair market value. may be It possible to sell shares at net book value, being an amount less than full market value. valuation A may be required for tax or stamp duty purposes. Upon contribution to local company, must contributed shares be valued / appraised? No, although directors must generally contribute shares for consideration of no less than fair market value. may be It possible to contribute shares for consideration equal to net book value, being an amount less than full market value. valuation A may be required for tax or stamp duty purposes. Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes Jurisdiction PACIFIC ASIA Australia
98 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? company’s assets directly or indirectly predominantly consist of Australian land assets. If the shares held by a non-resident are subject Australianto a CGT CGT, rollover may be available for certain transfers within a 100% group.owned In some States, stamp duty of 0.6% is levied on the higher of the market value or consideration paid for shares. Group relief is available in some circumstances. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Upon contribution to local company, must contributed shares be valued / appraised? Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
Baker & McKenzie 99 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Government approval and subsequent registrations are required where the target enterprise is a FIE. is Timing typically: (a) two months; and (b) two months. Where the target enterprise is not a FIE, the process takes one week. Is there Is any capital duty on the issue of new shares? Stamp tax of 0.05% any increase of the registered capital of For a FIE. registered capital up to RMB 10 million, a registration fee of 0.08% For is due. an amount between RMB 10 million to RMB 100 million, a fee of 0.04% is payable. What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? In general, the PRC tax implications of a share swap are similar to the sale of an equity interest. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Capital gain from the sale of shares by a foreign shareholder is subject to 10% withholding enterprise income tax. Capital gain from the sale of shares by a PRC shareholder should be added to its taxable income and be subject to enterprise income tax at the shareholder’s tax rate, normally 25% for enterprises. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? duly A qualified PRC appraiser , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No valuation is required except when the buyer is and a FIE the target enterprise is not a FIE. sale should A be made at fair market value, unless specifically allowed under law to be conducted at book value. It is expected that such book sale at value may be allowed only when the transferee is a PRC entity. Upon contribution to local company, must contributed shares be valued / appraised? A Yes. non-cash contribution taking the form of shares or equity must be appraised, if such are not publicly traded or do not consist of transfers against book value or investment costs (if permitted under PRC law). Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Where the company receiving the contribution is a foreign invested enterprise (“FIE”), the required governmental approval is not likely to be granted. Where the company receiving the contribution is a foreign invested holding company that has already received US$30 million of capital in cash, Are shares transferable by gift? Yes Jurisdiction China
100 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 1-3 days; and (b) 1-3 days. Is there Is any capital duty on the issue of new shares? No registration fee is due for the amount exceeding RMB 100 million. The rate of capital duty is 0.1% on the amount of increase in share capital, and 0.1% on What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Stamp duty is payable at the 0.2% rate of on the higher of the value of the issued shares or the contributed What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? tax-free A treatment of a transfer at investment costs or book value may be permitted where the transferee is a PRC entity. Certain treaties provide for lower withholding tax rate on capital gains. Stamp tax of 0.05% is levied on the transfer value. Stamp duty is payable at the rate of 0.2% on the higher of the value of the consideration paid or the Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? No specific requirements. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No valuation is required. Generally, directors must sell the shares at no less than fair market value Upon contribution to local company, must contributed shares be valued / appraised? Some valuation is required. This is because the par value of the shares issued in Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? contributions will be permitted for capital increases. minimum A of 30% a company’s registered capital must be contributed in cash. Yes Are shares transferable by gift? Yes Jurisdiction Hong Kong
Baker & McKenzie 101 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? any share premium arising from the issue of the new shares, capped in each case at HK$30,000. What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? shares. If the transferor owns at least the 90% of issued share capital of the transferee (or vice versa), or if the parent company owns at least the 90% of issued share capital of both the transferor and the transferee. The transferee must not fall outside the required 90% ownership within 2 years of the contribution. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? value of the shares being sold. An exemption may apply if the transferor owns 90% of the issued share capital of the transferee (or vice versa), or if a parent company owns 90% of the issued share capital of both the transferor and the transferee. The transferee must not fall outside the required 90% ownership within 2 years of the sale. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? and acquire the shares at no more than fair market value in order to avoid a void transaction and to satisfy fiduciary duties. In some circumstances, it may be possible to sell at net book value, being an amount less than full market value. Upon contribution to local company, must contributed shares be valued / appraised? exchange (if any) must not exceed the value of the contributed shares. Also, if the par value of the shares issued in exchange is less than the value of the contributed shares, the directors must book the balance in the share premium account of the issuing company. Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
102 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) One month if valuation is required. Otherwise 1 day; and (b) 1-3 days. Is there Is any capital duty on the issue of new shares? The amount of the increase in share capital by issuing new shares is subject to registration and license share If tax. certificates are issued, stamp duty is payable as the well. If capital of a corporation is increased by issuing new shares, this will the affect amount of per capita levy due. What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? contribution A of shares, in principle, is a taxable event. Capital gains are subject to Japanese corporation tax, inhabitants tax and enterprise tax at 42% (effective tax rate). However, taxes can be deferred if certain conditions are met. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Capital gains are subject to Japanese corporation tax, inhabitants tax and enterprise tax at 42% tax(effective sale ofA rate). shares must be at the shares’ fair market if thevalue; shares are sold at a price lower than fair market value, the transferor is required to recognize the difference between the fair market value and the sales price as a non-deductible donation (only a certain portion can be deductible for ), kabushiki Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? (a) An inspector appointed by the court (Joint stock corporation ( kaisha) only a an attorney, certified public accountant, or certified tax accountant; (b) No specific requirements. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No valuation required. Directors must sell the shares at a reasonable price taking into consideration the fair market value in order to satisfy fiduciary duties. Depending on the circum- stances, it may be possible to sell at net book value, being an amount less than market value. Upon contribution to local company, must contributed shares be valued / appraised? – unless Yes the shares have a market price and the price set by resolution of the Board does not exceed the market price. Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? – as Yes long as the directors of the donor company fulfill their fiduciary duties. If the recipient is a shareholder of the donor company, the transaction may be prohibited. Jurisdiction Japan
Baker & McKenzie 103 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Japanese tax purposes) and the transferee is required to recognize the difference between the fair market value and the sales price as a taxable gift gain. On the other hand, if the shares are sold at a price higher than fair market value, the transferor is required to recognize the difference between the fair market value and the sales price as a taxable gift gain (in addition to the ordinary capital gain) and the transferee Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Upon contribution to local company, must contributed shares be valued / appraised? Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
104 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 14 days; and (b) 14 days. Is there Is any capital duty on the issue of new shares? No What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Stamp duty is applicable to the instrument of transfer at the rate of 0.3% of the par value of the shares, consideration for the or transfer, the market value (whichever is higher). What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? is required to recognize the difference between the fair market value and the sales price as a non-deductible donation (only a certain portion can be deductible for Japanese tax purposes). The share transfer is not subject to income tax (unless the company is in the business of trading in shares). However, stamp duty at the rate of 0.3% of the consideration or the market value Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? The Malaysian Stamp Office imposes stamp duty on the instrument of transfer. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No. The shares can be sold at any consideration agreed upon by the parties, and can therefore be net sold at book value rather than at full market value. The Malaysian Stamp Office would carry out a Upon contribution to local company, must contributed shares be valued / appraised? care No, but must be taken to ensure that the nominal value of the shares issued by the recipient Malaysian company in exchange (if any) does not exceed the value of the contributed shares. Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes. it However, is advisable for a nominal consideration to be inserted. This is because the contract could be void if there is no exchange of consideration. Jurisdiction Malaysia
Baker & McKenzie 105 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 1-3 days (4 to 8 weeks if approval of SEC is required); and (b) 1 month (6 months if a BIR ruling is required for tax relief). Is there Is any capital duty on the issue of new shares? Stamp duty of 0.5% the total par value of the shares is imposed on the original issue. What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Certain related company transfers may qualify for a stamp duty exemption. Capital gains tax at the rate of 5% for net capital gains not exceeding PhP100,000 (about US$1,900), and 10% for net capital gains in excess of PhP100,000 is imposed. Stamp duty of 0.375% is chargeable on the par What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? (whichever is higher) is applicable. Inter-company transfers may qualify for a stamp duty exemption. Capital gains tax at the rate of 5% for net capital gains not exceeding PhP100,000 (about US$1,900), and 10% for net capital gains in excess of PhP100,000 is imposed. Capital gain is computed on the basis of the fair market value Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? No specific requirements, although if shares are issued in exchange, the value of the contribution should be determined by the board of directors, subject to approval by the SEC. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? valuation of the shares for stamp duty adjudication purposes. Such valuation would not the affect consideration agreed upon by the parties. No. The shares can be sold at net book value. Upon contribution to local company, must contributed shares be valued / appraised? No, unless shares are issued in exchange in which case the value of the shares should be determined by the board of directors, subject to approval by the SEC. Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes Jurisdiction Philippines
106 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 1-3 days; and (b) 1-3 days. Is there Is any capital duty on the issue of new shares? No What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? value of the contributed shares. the If transferor gains control over the issuing corporation, the capital gains tax will be deferred until the subsequent the sale of contributed or issued shares. the shares If are held on revenue account, the gain from the sale may be subject to income tax. the shares If are held on capital What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? or book value of the shares, whichever is less higher, the acquisition cost. Stamp duty of 0.375% is chargeable on the par value of the transferred shares. relief may Tax be available under a double tax treaty. the shares If are held on revenue account, the gain from the sale may be subject to income tax. the shares If are held on capital Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? No specific requirements. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? is No. It possible to sell shares between related companies at net book value. Upon contribution to local company, must contributed shares be valued / appraised? No Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes Jurisdiction Singapore
Baker & McKenzie 107 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 2 - 3 months; and (b) 7 days. Due to notarization/ legalization Is there Is any capital duty on the issue of new shares? No Registration fee is 0.025% of the amount What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? account, the proceeds from sale are not taxable. The transfer of shares is subject to stamp duty at 0.2% on the higher of net asset value of the shares or consideration. Relief may be available but clawbacks of relief may occur where the shares are within spun-off a certain period. No tax on contribution of shares. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? account, the proceeds on sale are not taxable. The transfer of shares is subject to stamp duty at 0.2% on the higher of net asset value of the shares or consideration. Relief may be available but clawbacks of relief may occur where the shares are within spun-off a certain period. Securities transaction tax of 0.3% on the sale price. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? An independent opinion can be issued by an attorney, accountant or , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No Upon contribution to local company, must contributed shares be valued / appraised? In general, no. In some circum- stances, an independent opinion on Is it Is possible to sell shares (in return for cash/ loan note)? is It possible to sell shares for cash for but not a loan note if the Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? (gift Yes tax may apply). Jurisdiction Taiwan
108 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? requirements, execution of documents may take up to 1 month. (a) 1-3 days; and (b) 1-3 days; though significant lead time may be required to satisfy foreign ownership requirements. Is there Is any capital duty on the issue of new shares? by which the capital is increased. No What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? The gains from the sale of shares are considered income of the seller that is subject to income tax. No tax reliefis available. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Capital gains on the sale of shares are subject to alternative minimum tax. relief on Tax the securities transaction tax is available if the sale is part of an “M&A transaction.” The gains from sale are considered income of the seller that is subject to income tax. No tax relief is available. For corporate income tax purposes, the shares must be sold at fair market value. Where Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? underwriter unrelated to the parties. No specific requirements. ., , e.g 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? In case of local corporate shareholders, the shares must be sold at fair market value if it from thediffers book value (unless there is a justifiable ground accepted by the tax authorities, reorganization). Upon contribution to local company, must contributed shares be valued / appraised? value of the shares may be required. No. In the event of an audit of the the company, company may be required to justify the price. Is it Is possible to sell shares (in return for cash/ loan note)? transferee/ transferor is a foreign entity. Yes Are shares transferable by contribution in return for the issue of shares? for tax Yes, purposes the contribution would be treated as two trans- actions: the sale of shares that triggers Thai corporate income tax if there are gains and a subscription for shares. Are shares transferable by gift? but Yes, the market value of the shares may be considered income of the transferor for tax purposes. Jurisdiction Thailand
Baker & McKenzie 109 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? the sale is between Thaia buyer and a foreign seller and any capital gains are paid in Thailand, the gains may be subject to 15% withholding tax that may be exempt/ reduced under double tax treaties. Any share transfer instrument in,executed or brought to, Thailand is subject to 0.1% stamp duty of the paid-up value of shares or the nominal value of the instrument, whichever is higher. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Upon contribution to local company, must contributed shares be valued / appraised? Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
110 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 2 weeks; and (b) 2 weeks. Is there Is any capital duty on the issue of new shares? Capital duty of 1% on the issue of new shares. What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Contributions are either subject to capital transfer tax at 1% or to gift tax at progressive rates up to 60%. Capital transfer tax may not apply in some circumstances. tax is only Gift triggered if the contribution is for no consideration Capital transfer tax might not be applicable if the Austrian Reorganization Act can Tax be applied. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? a domestic If company sells shares in a domestic/ foreign company, the sale of domestic shares is subject to 25% corporate income tax. The sale of foreign shares is generally exempt. a foreign If company sells domestic shares it is subject to 25% corporate income tax unless Treaty relief is available. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? No specific requirements. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No In some circumstances, it may be possible to sell at net book value, being an amount less than full market value. Upon contribution to local company, must contributed shares be valued / appraised? No Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes In general, contribu- tions must be in exchange for shares. Are shares transferable by gift? Yes Jurisdiction EMEA Austria
Baker & McKenzie 111 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 2-4 weeks; and (b) 1-3 days. Is there Is any capital duty on the issue of new shares? No What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Capital gains on shares are generally exempt from corporate income tax. Capital losses on shares are generally not deductible for corporate income tax purposes. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Capital gains on shares are generally exempt from corporate income tax. Capital losses on shares are generally not deductible for corporate income tax purposes. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? No specific requirements (although the statutory auditor of the transferee should be involved in a case of contribution (see column 5 on valuation of shares)). For tax purposes, a third party valuation is preferable. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Directors must generally sell shares for consideration of no less than fair market value and acquire shares at no more than fair market value. For tax purposes, shares should be sold/ purchased at fair market value. Upon contribution to local company, must contributed shares be valued / appraised? shares are If contributed to a Belgian company, both the statutory auditor and the board of directors of such Belgian company must prepare The a report. statutory auditor’s report must confirm whether the value of the contributed shares is at least equal to the value of the shares issued in exchange. Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? No Jurisdiction Belgium
112 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 2 months; and (b) 2 months. 2 - 6(a) months; and timing(b) depends on whether shares are listed. it Usually, takes 4 days. Is there Is any capital duty on the issue of new shares? No No What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? The contribution of the shares does not give rise to capital gains. No tax on contributions. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Capital gains realized by the Czech entities upon the sale of the shares are subject to ordinary corporate income tax at the rate of 21%, unless the sale qualifies for participation exemption. There is no stamp duty on the transfer of shares. No tax imposed on capital gains. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? The valuation, if required (mandatory), must be performed by the court appointed valuer. The company’s auditor, subject to review by the Capital Market Authority. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? the shares If are transferred between related parties and the value of the shares exceeds 10% of registered capital of the purchaser or the Czech the seller, purchase price must be based on the valuation prepared by the court appointed valuer. in some Yes, circumstances. Upon contribution to local company, must contributed shares be valued / appraised? Yes Yes Is it Is possible to sell shares (in return for cash/ loan note)? Yes Yes Are shares transferable by contribution in return for the issue of shares? Yes, although a participation interest in a limited liability company cannot be contributed in some circum- stances. Yes Are shares transferable by gift? , Yes as long the directors of the donor company fulfil their fiduciary duties. If the recipient is a shareholder of the donor company or related party the transaction may be prohibited. Additionally, gift tax may apply. No Jurisdiction Czech Republic Egypt
Baker & McKenzie 113 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) Up to 2 months; and (b) 1-3 days. Is there Is any capital duty on the issue of new shares? flat rate A of 375 € or 500 € applies if the share capital exceeds 225,000€. What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? In some circumstances, share for exchanges benefit from a tax deferral. deferral Tax continues until disposal of the shares received in exchange. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? capital A gain derived from the sale of shares is subject to the normal corporate rate tax (33.3%, plus surcharge). However, shares held for more than 2 years that represent a “controlling interest” are subject to an exemption up the to 95%, remaining 5% being subject to the normal corporate tax rate (which might be neutralized within a tax consolidated group). This exemption Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? Valuation is only required upon contribution. An external valuation auditor must be appointed by the commercial Court. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No. The shares must be sold at full market value. Upon contribution to local company, must contributed shares be valued / appraised? Yes Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes, although the gift is not tax deductible for the transferor and is taxable income for the transferee tax (the gift rate can be as high 60%). Jurisdiction France
114 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? does not apply to a controlling interest that qualifies as real estate orientated interest. the If companies belong to a tax consolidated group, any capital gain resulting from the sale will be postponed until the departure of the companies from the group, or the the tax end of consolidated group. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Upon contribution to local company, must contributed shares be valued / appraised? Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
Baker & McKenzie 115 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 1-3 days (GmbH shares) and 1-3 weeks for recording the capital increase in the commercial register; and (b) 1-3 days (GmbH shares). Approx.(a) 2 months (including registration); and (b) 1-3 days. Is there Is any capital duty on the issue of new shares? No No ., where ., e.g What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Contribution is treated as a taxable sale unless tax exemption rules apply, ( more than the 50% of shares of a corporate entity are contributed). Stamp duty is payable when the capital increase is registered at the Hungarian Court of Registration. The amount of stamp duty depends on the type of What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? exemption Tax applies in case of corporate contributors or sellers to all but 5% of the gain, unless shares result from a tax neutral conversion or contribution of other taxable assets, spin- split or off, division. The difference between the book value and the sale value of the shares is included in the taxable business income of a Hungarian resident Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? (a) German for court CPA filing purposes in issuance of new shares; and (b) a valuation expert. An auditor or expert. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? arm’s No, but length price is required. Any sale at less than full market value will trigger constructive dividend profit realization and dividend withholding tax. No. However, if the transfer is between related parties, the transfer pricing rules should be taken into account. Upon contribution to local company, must contributed shares be valued / appraised? Appraisal only required for corporate law purposes if in return for the issue of shares. If in return for cash/ loan note, an appraisal is only recommended for financial accounting and tax purposes. in the Yes, case of companies limited by shares. Is it Is possible to sell shares (in return for cash/ loan note)? Yes Yes Are shares transferable by contribution in return for the issue of shares? Yes Yes Are shares transferable by gift? but gift Yes, tax applies. but if Yes, the transfer is between related parties, the transfer pricing rules should be taken into account. Jurisdiction Germany Hungary
116 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? legal entity, but should not exceed EUR 1000. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? company and taxed at the standard corporate income tax 16%. rate of Solidarity tax at a rate of 4% is also payable. As of 1 January 2007, the shares sale of acquired after 2006 is exempt from corporate income tax provided that certain conditions are met. Capital losses are not deductible. No tax relief is available for intra-group transfers. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Upon contribution to local company, must contributed shares be valued / appraised? Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
Baker & McKenzie 117 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 2-5 months (depending on the evaluation process by the appraiser); and (b) 2 weeks. Is there Is any capital duty on the issue of new shares? If the shares are issued in exchange of the contribution of other shares, the capital duty tax is fixed at EUR 168.00. What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Several regimes are available: Ordinary taxation – Capital gain is subject to tax at 327.5%. Special regime - applies to contributions of share participations representing at least 20.1% of the share capital of the subsidiary occurring between Italian resident corporations. In this case, the capital gain is calculated as the difference , an , i.e. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Under the participation exemption regime, only 5% of the capital gain is subject to tax at 27.5% ( tax effective 1.3%. rate of This relief is available when the shares were held as a financial asset on the statutory balance sheet of the seller for not less than 12 months; and the company whose shares are transferred either carries on business Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? (a) An appraisal must be performed by a chartered accountant who is listed in the register of auditors or by an auditing If company. the transferee is an Srl (limited liability company), the appraiser can be appointed by the transferor. the If transferee is an Spa (stock company), the appraiser is appointed by the Court. (b) No specific requirements. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No appraisal is required by the law. the Normally, transfer made between related parties should follow transfer pricing regulations. However, the sale at book value is possible in the context of an intra-group reorganization or when the seller has no minority shareholders, especially when possible capital gains are not subject to taxation in Italy. ) revisori Upon contribution to local company, must contributed shares be valued / appraised? the If Yes. transferee is a joint stock company (SpA), the appraiser must be appointed by If the Court. the transferee is a limited liability company (srl), the appraiser can be selected amongst chartered accountants listed in the register of auditors or auditing firms ( Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes Jurisdiction Italy
118 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? between (i) the book value of the newly issued shares the if higher, or, book values assigned to the contributed shares in the books of the acquiring company; and (ii) the tax basis of the contributed shares. Participation exemption regime - this regime may also apply to the contribution of shares. If the transferor and transferee reside in two EUdifferent countries then the transaction is tax free. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? or is listed on a stock exchange; and the company whose shares are transferred is not residing in a tax-haven jurisdiction or, alternatively, the transferor obtains a ruling from the tax authorities. The sale of shares eligible to the participation exemption regime cannot generate deductible losses. Capital losses are deductible in the same percentage. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Upon contribution to local company, must contributed shares be valued / appraised? Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
Baker & McKenzie 119 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 3-4 days; and (b) 3-4 days, provided that the relevant valuation audit / requirements have been met. Is there Is any capital duty on the issue of new shares? No What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Contributions made to the capital of a Dutch company are not subject to capital duty or similar charges.
all the What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? The standard Dutch corporate income tax rate is 25.5%. However, capital gains derived from shares sale of are usually exempt by virtue of the Dutch participation exemption. The participation exemption applies to 5% or more investments, unless investment has the nature of a Passive Investment Company which is not subject to an profit effective Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? The valuations must be performed by the management of the Dutch company. Subsequently, an independent Dutch auditor must issue a statement confirming that the value of the contribution acquisition / at least equals the value of the consideration paid by the Dutch company. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Dutch taxpayers must always observe the arm’s length standard and maintain documentation in support of lengththe arm’s nature of the transaction. sale between A a (previous or current) shareholder / incorporator and its Dutch subsidiary within 2 years after the subsidiary’s incorporation anrequires auditor’s statement confirming that the value of the shares is at least equal to the purchase Upon contribution to local company, must contributed shares be valued / appraised? The taxpayer must be able to show that the value for which the contribution was made is entered in the books and reflects an length arm’s agreement. contribution A in return for the issue of shares by a Dutch company requires a statement from an auditor confirming that the value of the contribution is equal at least to the nominal value of the Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes, although the gift may give rise to transfer pricing adjustments. Jurisdiction Netherlands
120 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 1-2 months (shares in a joint stock company), Is there Is any capital duty on the issue of new shares? No What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? The increase of the share capital of the Polish company What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? tax rate of at least 10%. Income earned on the shares sale of by a foreign company is Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? (a) upon contribution to a joint stock company, , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? price paid by the Dutch company. No valuation required. The sale should be at
Upon contribution to local company, must contributed shares be valued / appraised? shares to be issued. contribution A as a gift to a Dutch company within 2 years of its incorporation by its direct (previous or current) shareholder / incorporator requires an auditor’s statement confirming that the value of the contribution is at least equal to zero. valuation is A not required for a limited liability company. Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes Jurisdiction Poland
Baker & McKenzie 121 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? 2 weeks (shares in a limited liability company); and (b) 1-3 days for sale and 2 weeks for court. registration. Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? resulting from the contribution is subject to 0.5% tax on civil law transactions. The tax is payable by the Polish company. is Tax collected and paid by a notary public within 14 days from a date of execution of a notarial deed on contribution. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? exempt from Corporate Tax. Income earned on the shares sale of by a Polish company is subject to 19% Corporate Tax on the gain. shares Sale of in the Polish company and shares sale of to the Polish buyer subject to 1% tax on civil law transactions. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? an auditor is appointed by the registry court (b) no specific requirements , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? length arm’s and the price should not be lower than fair market value. Upon contribution to local company, must contributed shares be valued / appraised? For a joint-stock company, promoters must draw up a report describing the contribution. The contribution is also subject to appraisal by an auditor with a report stating whether the value of the contribution corresponds to the nominal value or the higher issue price of the shares issued in exchange for the contribution. Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
122 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 3 days; and (b) 3 days. Is there Is any capital duty on the issue of new shares? State duty of 1,000 rubles, and fees at 0.2% of the nominal value of the shares, capped at 100,000 rubles. What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Capital contributions in exchange for shares are not subject to Russian tax. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? shares Sale of is subject to profits tax at the rate of 24%. The tax base is determined as the difference between the selling price and the purchase price of the shares. If sale price of the shares is below the market value of the shares, then the tax base will be determined based on the market value (with special rules applying depending on whether the shares are publicly listed or not). Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? Where required, an independent appraiser. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? The market value of the shares must be assessed by an independent appraiser if the shares are used in payment for other shares (as an in-kind contribution). is possible It to sell shares at net book value. Upon contribution to local company, must contributed shares be valued / appraised? Yes Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? No, gifts between legal entities in excess of RUR500 are prohibited. Jurisdiction Russia
Baker & McKenzie 123 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) For registration of deed: 4 weeks. An independent valuation will add extra time (4 to 6 weeks); and (b) 1-3 days. Is there Is any capital duty on the issue of new shares? 1%, although this can be avoided if issue eligible for EU merger directive (subject to business purpose test). What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? relief Tax available if contribution takes form regulated by merger EU the directive, (subject to business purpose test). Otherwise there are three possible scenarios, for which please see explanations in the previous column. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Spanish resident corporation transfers its participation in a non Spanish resident corporation which belongs to the same group the standard rate is 30% (reinvestment tax credits can further reduce the effective rate to 18%). Furthermore Spanish Corporate Tax Income Act sets out a foreign tax credit system and a participation exemption system (the taxpayer may opt provided Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? (a) For an an SA, independent expert must be appointed by the Companies Register. For an SL, the valuation is at the discretion of the company directors. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No, but shares must be sold at no less than fair market value. Upon contribution to local company, must contributed shares be valued / appraised? if Yes, contributed to a corporation (SA). Not required if contributed to a limited liability company (SL company). Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes There are two possible scenarios: If there is, a Spanish tax group deferral regime will apply. b) if there is, no Spanish tax group the transaction may be re- characterized by the Spanish Tax Authorities as a “deemed dividend” Jurisdiction Spain
124 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? that certain requirements are met) in order to avoid double taxation. The seller and the buyer belong to the same Spanish tax group, the taxation of capital gains is deferred until the disappearance of the tax group. If a non- Spanish resident corporation transfers its participation in a Spanish resident corporation which belongs to the same group, it will be taxed at 18%. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Upon contribution to local company, must contributed shares be valued / appraised? Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
Baker & McKenzie 125 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? No taxation of capital gains derived from the sale of less than 25% equity interest in a Spanish company, provided the seller is (i) an EU resident which does not carry out a business activity in Spain through a Permanent Establishment or (ii) an EU Permanent Establishment Treaty provisions should also be considered. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Upon contribution to local company, must contributed shares be valued / appraised? Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
126 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 6-8 weeks (however, can be quicker if there is only one shareholder); and (b) 1-3 days. (a) 10-15 days; and (b) 1-3 days. Is there Is any capital duty on the issue of new shares? No 1% on the issue of share capital (above the first CHF 1 million). Not applicable in qualifying What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? Sweden does not impose stamp duty on contributions. For companies, gains on shares in unlisted Swedish companies are exempt from tax. The transferor is taxable unless the contribution qualifies as a reorganization for tax purposes and the shares received in What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? For companies, gains on shares in unlisted Swedish companies are exempt from tax. the shares If sold represent less than 20%, the capital gain is subject to ordinary federal and cantonal income taxes. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? (a) The board of directors and auditor. (b) No valuation required. (a) The directors or incorporators of the transferee (confirmed by an auditor). (b) No specific requirements. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No valuation required. As a general rule, shares in unlisted companies may be sold at net book value. No. Directors must sell at no less than fair market value in order to satisfy their fiduciary duties and the tax requirements. Upon contribution to local company, must contributed shares be valued / appraised? the If contribution is made in return for shares, the board of the issuing company must at the general shareholders meeting present a report on the valuation of contributed shares. The report must be reviewed by an auditor. – the Yes directors or incorporators of the Swiss transferee must issue a special report describing the assets contributed, Is it Is possible to sell shares (in return for cash/ loan note)? Yes Yes Are shares transferable by contribution in return for the issue of shares? Yes Yes Are shares transferable by gift? Yes Yes Jurisdiction Sweden Switzerland
Baker & McKenzie 127 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? reorganizations for tax purposes. What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? exchange are recorded at the same book value as the contributed shares. The contribution does not represent taxable income to the recipient company. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? If the shares sold represent at least 20% and have been held for a minimum period of one year, the federal and cantonal income taxes are reduced by the percentage corresponding to the ratio between (i) the net capital gain realized on the sale and (ii) the total net profit of the company (so-called participation reduction). If the company qualifies as a pure holding Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1
e.g., Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Under special circumstances ( reorganization), it is possible to transfer the shares at net book value. Upon contribution to local company, must contributed shares be valued / appraised? the value of such assets and the basis for valuation. An auditor shall confirm the accuracy and the completeness of the special report. No valuation report required for limited liability companies. Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
128 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? if its if at least i.e. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? company ( investments in other companies represent at least 2/3 of the company’s total assets or 2/3 of its total income comes from participation income), the capital gain on the sale of shares is fully exempted from cantonal income tax. The federal transfer stamp tax may apply on the sale if either the seller or the buyer qualifies as a Swiss securities Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Upon contribution to local company, must contributed shares be valued / appraised? Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
Baker & McKenzie 129 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 1-3 days; and (b) 1-3 days, unless prior approval of Anti- the monopoly Committee is required. Is there Is any capital duty on the issue of new shares? No What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? For the the transferor, contribution of shares in exchange for the issue of shares is treated as a sale/ disposition , e.g. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? dealer ( a legal entity holding securities having a book value exceeding CHF The10 million). transfer tax rate is 0.15% on Swiss shares and 0.3% on foreign shares. Relief may be granted with respect to transactions qualifying as reorganizations or intra-group transfers. The sale of shares will give rise to a gain or a loss for the seller, as applicable. gain is A calculated as the positive difference Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? Qualified valuation experts. , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No, unless the shares are shares of the company where the Government has a direct or indirect shareholding interest. Upon contribution to local company, must contributed shares be valued / appraised? No, unless the shares are contributed to the company in which the Government has or will have a direct or indirect Is it Is possible to sell shares (in return for cash/ loan note)? is It possible to sell shares for cash but not for a loan note. Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes Jurisdiction Ukraine
130 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? with tax treatment similar to the treatment of the seller. The transferee a tax will get basis in the contributed shares equal to the value, at which such shares will be contributed. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? between: (a) the higher of the sale price or arm’s length value of the shares; and (b) the tax basis of the shares. The gain is taxable to a domestic seller at 25% corporate tax and to a foreign seller at 15% withholding unless tax, a double tax treaty provides otherwise. loss is A creditable against the seller’s securities trading income. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? the If Ukrainian transfer pricing rules the apply, shares must be sold at full market value. Otherwise the shares may be sold at net book value. Upon contribution to local company, must contributed shares be valued / appraised? shareholding interest. Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
Baker & McKenzie 131 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? (a) 1-3 days; and (b) 1-3 days. Is there Is any capital duty on the issue of new shares? No What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? The initial contribution of the shares, whether in exchange for shares or not, will be treated as a no gain no loss event (provided the transferor and transferee satisfy the requirements for a group for UK tax purposes). When the transferee, together with the target company, What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? The purchaser may deduct the purchase price from its securities trading income. The initial sale of the shares will be treated as giving rise to neither a gain nor a loss for tax purposes, with the result that the transfer give will not rise to a liability to UK tax (provided the transferor and transferee are members of the same group for UK tax purposes). Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? No specific requirements , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? No valuation required. Directors must sell at no less than fair market value and acquire at no more than fair market value in order to satisfy fiduciary duties. A shareholder can ratify these actions if required. Depending on the circumstances, it may be possible to sell Upon contribution to local company, must contributed shares be valued / appraised? No - but care must be taken to ensure that the nominal value of the shares issued by the recipient English company in exchange (if any) is not more than the value of the contributed shares as this would be a breach of s100 of the Companies 1985. Act Is it Is possible to sell shares (in return for cash/ loan note)? Yes Are shares transferable by contribution in return for the issue of shares? Yes Are shares transferable by gift? Yes Jurisdiction United Kingdom
132 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? leaves the group, within 6 years, the transferee would suffer a degrouping charge of 30% of the capital gain based on the market value of the shares at the date of the contribution less the historic base cost of the shares in the hands of the transferor. If the contribution of the shares is made for no consideration, the transferor will not obtain an uplift in its base cost in the shares it holds in the What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? When the transferee, together with the target company, leaves the group, within 6 years, the transferee would suffer a degrouping charge of 30% of the capital gain based on the market value of the shares at the date of the original transfer less the historic base cost of the shares in the hands of the transferor. Stamp duty of 0.5%, with a minimum of £5, will be levied on the value of shares. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? at net book value, being an amount less than full market value. Upon contribution to local company, must contributed shares be valued / appraised? Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
Baker & McKenzie 133 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? transferee to reflect the value of the contributed shares. An uplift will be obtained, if the however, contribution is made in exchange for the issue of shares by the transferee to the transferor. If there is no consideration issued in exchange for contributionthe of the shares, the transfer will be exempt from stamp duty and this can be self certified by the transferor on the stock transfer What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Group relief may be available unless there are arrangements in place pursuant to which the transferor or transferee will cease to be associated. Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Upon contribution to local company, must contributed shares be valued / appraised? Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
134 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 8 – Moving Companies Into the New Structure What is the approximate timing for (a) a contribution of shares; and (b) a sale of shares? Is there Is any capital duty on the issue of new shares? What is the relevant tax on contribution and the prevailing this rate of tax? When is tax relief available? If form. consideration is issued in the form of shares, stamp duty will be levied at the same rate and with same conditions for group relief as on a sale. What is the relevant tax on sale and the prevailing this rate of tax? When is tax relief available? Who must perform the valuations or appraisals upon (a) contribution and/or (b) sale? , 1 Upon sale must shares be valued / appraised? Can shares be sold at net book value rather than full market value? Upon contribution to local company, must contributed shares be valued / appraised? Is it Is possible to sell shares (in return for cash/ loan note)? Are shares transferable by contribution in return for the issue of shares? Are shares transferable by gift? Jurisdiction
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Section 9 Identifying the Most Effective Form of Entity for the Asset or Business Transfer
Before making any asset or business transfer, the appropriate vessel for the business or assets must be identified, be it a company, branch or representative office. Before a decision as to the corporate vehicle is made, various considerations should be addressed, such as timing, capital requirements, local regulation, nominal shareholders and minimum share capital rules. If the asset or business transfer is constrained by timing issues it will be of utmost importance to decide what is the most appropriate entity into which the business can be transferred: •• newly incorporated company; •• dormant subsidiary; •• shelf company; or •• branch/representative office.
1. Incorporating a New Company When making a decision as to whether to transfer a business or assets into a new company, it is necessary to review all of the incorporation formalities which must be fulfilled and weigh these against the advantages and disadvantages of a ready-made company or branch. A thorough review should consider the following factors: •• practical set-up requirements; •• minimum share capital; •• debt or equity funding; •• type of company; •• time to incorporate; and •• number of shareholders.
1.1 Practical Set-up Requirements A review of the practical set-up requirements for a new company in the proposed jurisdiction of the asset or business transfer should cover:
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•• Number of founders required – e.g., a Swiss AG/SA requires three persons, whereas a Belgian SA/NV requires only two. •• Director and shareholder requirements – e.g., must the directors also be shareholders (as in a Philippine stock corporation where five directors must also hold at least one share each in the company)? Must the directors be domiciled in the country of incorporation (as in a Danish A/S where the Managing Director and at least half of the board of directors are required to be resident in Denmark or citizens of EEA member states)? How many directors must the company have? •• Registered office requirements – e.g., must it be in the country of incorporation? •• Capitalization requirements. •• Foreign ownership restrictions – e.g., whether there are restrictions, as in Thailand and the Philippines, on 100% foreign ownership of a local subsidiary. Issues such as licenses, value-added tax (VAT), and foreign investment review boards should also be considered. For example Australia, India and Thailand require prior approvals for foreign investment. Such issues can weigh heavily in decisions whether or not to incorporate a new company.
1.2 Share Capital Requirements The establishment of a new company will usually require the injection of a minimum share capital amount by the proposed new shareholder. Although in the UK or U.S. this can be a nominal amount, in a number of jurisdictions this minimum is actually set at quite a high level (e.g., in Saudi Arabia it is roughly equivalent to US$500,000; a German GmbH requires €25,000). Additionally, in some jurisdictions the share capital must be fully paid up, e.g., in Austria, Denmark and Norway. Similarly, many jurisdictions also require the shareholder of a new company to transfer the new company’s capital into a specifically designated bank account. This involves the shareholder providing a number of guarantees and opening a new bank account for the funds. For example, an Austrian GmbH and Swiss AG require up to 25% and 20%, respectively, of the nominal share capital to be paid in to a bank account before registration can be made; in Russia and in certain Latin American countries, designated bank accounts must be created. All of these issues can affect timing and influence the choice of vehicle to be used and should be addressed well in advance of any asset or business sale.
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1.3 Debt / Equity Funding Once set up, a new company will require funding for it to be able to purchase the business or assets. This can be achieved either by debt funding, equity contribution or a combination of the two. The decision as to debt or equity funding will be influenced largely by the parent’s financial situation at that time. However, the jurisdiction’s thin capitalization rules must also be borne in mind. (Thin capitalization is the situation where a company’s debt to equity ratio exceeds the applicable local ratio.) Jurisdictions can impose further requirements on companies or their members as a result of low capitalization, for example: •• In Belgium, the founding shareholders are liable for the debts of a Belgian company, should it go into bankruptcy within 3 years of incorporation due to inadequate initial capitalization. •• In Denmark, if an ApS loses more than 40% of its net capital it must either be re-capitalized to the prescribed level or dissolved. •• In Italy, if losses (current and carried forward) at any time exceed one third of the capital, the directors must convene a shareholders meeting for remedial action. Failure to do so would result in the dissolution and liquidation of the company. Again, these local requirements should be reviewed carefully prior to any asset or business sale, as they may influence the final decisions as to the type of vehicle to be used.
1.4 Type of Company The type of company to be incorporated should also be carefully reviewed, because in most jurisdictions the type of company will affect the liability of the shareholders, the minimum number of required shareholders and a whole raft of individual requirements. For example in Italy, a sole shareholder in an SrL will have the same limited liability as shareholders in an SpA unless the sole shareholder is a company, in which case the company will have unlimited liability for the obligations undertaken by the SrL. There may also be practical consequences, such as tax liability, arising from the choice of type of company which will arise in the future. For example in Austria a GmbH has the disadvantage that transfers of its shares are burdened with a transfer tax at the rate of 2.5% whereas transfers of shares in an AG only attract a transfer tax of 0.15%. Similarly, in Argentina, the transfer of shares of an SA is exempt from capital gains tax, whereas the transfer of shares of a S.R.L. is not. Such considerations will be especially important when the time comes to on-sell to a third party.
1.5 Number of Shareholders In a number of jurisdictions a company will be required to have more than one shareholder, usually with a nominal shareholder holding a minority stake. This can cause problems
138 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 9 – Identifying the Most Effective Form of New Entity especially where the nominal shareholder must be an individual or resident of the jurisdiction. For example in Russia, where the shareholder of a new company is a foreign company which in turn is owned by a foreign company the new company will requires a resident shareholder. This can be avoided only by having a non-foreign company as the sole shareholder or having a foreign company which has two shareholders as the sole shareholder. In Argentina, a minimum of two shareholders is required and the minority or second shareholder should not be a mere shell or holding company, but should have significant assets located outside of Argentina, otherwise it will be very difficult or even impossible to register such shareholder with the Public Registry of Commerce as required by law. Requirements such as these may have considerable impact on any intended disposition to a third party and should be considered at the outset as part of the planning process.
2. Use of Dormant Subsidiaries In light of certain of these requirements, the use of a dormant subsidiary may be an easier vehicle for the asset or business transfer as it clearly avoids the inconvenience of incorporating a new company. However, dormant subsidiaries can have their own disadvantages to be considered, in particular their trading history and potential exposure to past liabilities. In a number of jurisdictions a dormant company will still be required to make certain filings, annual returns and notifications despite its dormant status. Failure to do so may result in fines and penalties. Additionally, the existence of creditors will also be of extreme importance because once the company starts trading again, the rights of the creditors will be revived. It is therefore critical to undertake an in-depth review of the dormant company’s past history in order to avoid passing assets or a business to a “dirty” vehicle that may prove unacceptable to a third party purchaser. Occasionally, for commercial reasons, the use of a dormant company is entirely undesirable. The name may have unwanted connotations or the company may have bad “goodwill” towards it. In these cases it may be preferable to avoid using the dormant company and opt for its dissolution as an outward show of making a “clean break.”
3. Shelf Companies An alternative and “cleaner” vehicle to use for a business transfer or asset sale may be a shelf company. A shelf company is a ready made company, incorporated other than on specific instructions from a client, which has never undertaken trading or business activities and is retained for the purpose of being readily available to a client in need of a corporate vehicle. Such companies are usually purchased from a company formation agent. The advantages of a shelf company lie in its “clean” history and ability to begin trading immediately (subject to the need for any local trade licenses). However, the administrative
Baker & McKenzie 139 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 9 – Identifying the Most Effective Form of New Entity headache of incorporating a new company is in effect only delayed as the shelf company will still require a change of name, change of corporate address and change of corporate officers, imposing additional cost and filing requirements. This is something that will still have to be addressed prior to any on-sale to a third party. In Malaysia, the original shelf company name must continue to appear on official corporate documentation such as invoices for a period of one year following the acquisition of the shelf company, which may also be an administrative nuisance. Additionally, please note that in some jurisdictions, such as Austria, the concept of a shelf company does not exist and this option is not available.
4. Branches As an alternative, it may be more time efficient to utilize a branch as the appropriate corporate vehicle. When considering whether to use a branch rather than a new company or existing company, the following factors should be reviewed: •• timing; •• registration / residency requirements; •• account publication / parent privacy; •• liability; •• foreign ownership restrictions on subsidiaries (which may necessitate using a branch); •• tax issues; and •• distribution of profits. When planning a pre-acquisition restructuring, the company that forms the branch should be one of the entities planned to be transferred to the new structure.
4.1 Timing As with establishing a new company, the time it takes to establish a branch fluctuates between jurisdictions. However, it is frequently the case that branches take less time to set up. For example, in the UK a branch of a company may be established immediately with the requirement that certain particulars of the branch and its foreign “parent” be delivered to Companies House within a month, and in other countries, such as Switzerland, only branches of a certain size and autonomy need be registered at all. However, one should not assume that establishing a branch is always a speedy alternative to the incorporation of a new company. In Spain, for instance, a branch will offer no advantages, as the cost and time frame for establishing it are similar to those involved with incorporating a new company, and in Germany the legal costs involved with setting up a branch are greater than for incorporating a new company.
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4.2 Registration / Residency Requirements Consideration should also be given to the registration and residency requirements in setting up a new branch. In Denmark the branch cannot start its business before the registration form and all relevant documents have been filed with the Commerce and Companies Agency and the tax authorities. There may also be local residency requirements for directors/representatives or, at the very least, requirements for a locally resident representative to accept service on behalf of the parent company. In Denmark the branch manager must either be living in Denmark or a citizen of the EU/EEA. Again, all issues should be reviewed thoroughly before any decision as to corporate vehicle is made.
4.3 Accounts Publication / Parent Privacy Another point to note with regard to branch offices is that the parent may be required to publish its accounts in the country of the newly formed branch. For example, in the UK, if the overseas parent company’s law requires publication of accounts a copy of the consolidated accounts must be delivered to the Registrar of Companies. If the law of the parent’s country does not require publication of accounts, then the company must deliver accounts which relate to the parent company and the branch. Should privacy of accounts be an issue for the parent company this is a requirement to be borne in mind and may mean a different corporate vehicle will be preferable.
4.4 Liability The fact that a branch is not usually deemed a separate legal entity may also be a disadvantage as the company that formed the branch will be liable for all actions, debts and obligations relating to that branch. In any planning stage, the liability for each of the proposed entities must be reviewed. A subsidiary (new company) is usually deemed a separate legal entity from its parent, meaning any judgment against the subsidiary will be effective only against the assets of the subsidiary. A branch, however, is not considered a separate entity from that of its parent, and should a judgment be made against the branch, the parent would be held liable. It is also worth noting that should the intention be to transfer the branch to a third party, this will only be possible upon the transfer of the branch’s parent company. This is also of utmost importance as part of planning for the essential retention or on-sale of the business or assets.
4.5 Distribution of Profits Another consideration flowing from the fact that a branch is not a separate legal entity is that branches are free to distribute profits to their parents unhindered. Subsidiaries (new
Baker & McKenzie 141 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 9 – Identifying the Most Effective Form of New Entity companies), on the other hand, are usually constrained by local law from being able to freely distribute profits and must have distributable profits or meet other financial tests.
4.6 Tax Issues Tax consequences will also vary depending upon the entity chosen. In the UK, for example, the establishment of an operation as a branch is taken by the Inland Revenue as evidence that the overseas parent is carrying on business in the UK. However, in other jurisdictions the branch will be taxed under the rules as if it were a subsidiary under that jurisdiction’s law. In addition, whereas a new company may be subject to corporation taxation on its worldwide income, a branch or representative office may only be taxed on trading activities in the country of the branch. It may be easier to control the level of taxable profits through the use of a subsidiary rather than a branch as arrangements such as management fees, technical service fees and pricing policies can be used. A branch may also be excluded from claiming small company reduced tax rates and may not be allowed to deduct interest on loans from its parent. Finally, there may be more favorable tax treatment for distributions made from a branch as compared to a Subsidiary. Dividends paid from a subsidiary may be subject to dividend withholding taxes, whereas branch profit remittances may not be taxed, or may be taxed at a lower rate, though this is far from the general rule which seems to be to tax branches and subsidiaries in much the same way. On the other hand, a branch may be considered a non-resident for tax purposes (as is the case in Malaysia) and certain fees and payments to the branch in Malaysia may therefore be subject to withholding tax. For the same reason, a branch is not entitled to the benefits of Malaysia’s Double Tax Treaties with third countries.
4.7 The Branch Registration Process Branch registration procedures vary from jurisdiction to jurisdiction. Typically, in order to register a branch, the board of directors or shareholders of the parent company have to resolve to register the branch and file a branch registration application, together with translations of the organizational documentation of the parent company (e.g., certificate of incorporation or commercial registry extract, certified translations of the memorandum and articles of association, by-laws, etc.) and other supporting documentation (e.g., annual report, credit standing letter, etc.). In many jurisdictions, the parent company is required to designate a local resident as the branch representative who has authority to accept service of process on behalf of the company or is even granted full powers to represent the company. In some jurisdictions, it may only take a few days for a branch to be registered and permitted to conduct business (e.g., Denmark). In other jurisdictions, this process may take several months (e.g., China).
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In many common law jurisdictions (e.g., England and Wales, South Africa), a foreign company is not required to register a branch before starting to conduct business in such jurisdiction. On the contrary, in such jurisdictions, the foreign company must conduct business before being able to register a branch. Similarly, in some jurisdictions (e.g., China), a foreign company must have entered into a lease prior to being able to register a branch. Once a branch has been registered, the foreign company will need to register with local tax authorities (e.g., obtain a tax identification number, VAT number, etc.) in order to conduct business. In jurisdictions where a branch may be registered only once a foreign company “conducts business within such jurisdiction,” it may be necessary to transfer a few initial assets in order to register the branch and register with tax authorities so as to ensure that the proposed branch is ready to efficiently conduct business as of the proposed separation or closing date.
4.8 The Representative Office Registration Process In many jurisdictions, a foreign company may not engage in any business activities without registering a representative office at a minimum. The registration process for representative offices is often quite similar to that for branches (i.e., corporate authorization, application with one or more authorities, appointment of representative office representative, etc.). In certain jurisdictions, the registration of a representative office requires additional steps. For example, in China, the foreign company will need to register with the Foreign Enterprise Service Corporation (“FESCO”), a Chinese state agency, as it may only employ individuals through FESCO and not in its own name. This fact should be kept in mind when “transferring” a representative office in China (see below).
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Section 10 Restructuring issues raised by branches and representative offices
When planning and implementing the separation of a business involving companies with foreign branches or representative offices, peculiar issues arise that often turn out to be “traps for the unwary.” In order to better anticipate such issues, it is important to understand that a branch is merely an extension of a foreign company and a representative office is merely a presence of a company in a jurisdiction different from its home jurisdiction. Neither branches nor representative offices have their own legal personality (except in a very limited sense in a few jurisdictions).
1. Transferability Because branches and representative offices are extensions and part of the parent company and do not have their own legal personality they are not per se transferable. In other words, the parent company is unable to transfer its branches or representative offices to another company. In order to achieve the equivalent of a transfer, the following actions are typically necessary: •• the receiving company registers its own branch or representative office (or incorporates a subsidiary) in the relevant jurisdiction; •• the transferring company transfers the relevant assets, liabilities and employees of its branch to the newly registered (or existing) branch or representative office (or subsidiary) of the receiving company; and •• the transferring company deregisters its branch or representative office, unless the transferring company retains a business and needs the relevant branch or representative office to conduct such retained business. When planning the separation of a business, it is essential to take into account the time it takes for the receiving company to register its own branch or representative office, if applicable, or, alternatively, to incorporate a subsidiary. In most jurisdictions, the activities of branches or representative offices are specifically limited to those activities listed in the registration application. Accordingly, it is crucial to identify the proposed activities of the new branch or representative office and include them in the registration application. If the parent company is planning to retain activities in an existing branch or representative office, it is equally crucial to review whether the existing branch or representative office approvals will need to be amended to reflect a change in activity following the separation.
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The transfer of the target business assets, liabilities and employees is typically less time consuming and more straight-forward (i.e., via the execution of a simple business transfer agreement). However, some jurisdictions require additional steps to be taken. For example, in China, the receiving company will need to work with FESCO to assign the employees working in the target business for work at the receiving company.
2. Deregistration Often overlooked is the time it takes to deregister a branch or representative office that is no longer needed following the business separation. The deregistration process tends to be quite time consuming and typically trails behind as a “post-closing” item of the separation process. In most jurisdictions, the procedures for deregistering a branch or representative office are very similar to those of registering a branch or representative office. In other words, the parent company’s board of directors or equivalent body has to approve the deregistration and applications for deregistration have to be filed and approved by various governmental authorities. In addition, in many jurisdictions, the parent company will need to appoint an agent and/or a liquidator for the deregistration process (e.g., in the Philippines and Taiwan). Finally, in most jurisdictions, a tax clearance certificate is required confirming that the parent company has filed all tax returns and paid all taxes due in relation to the branch or representative office, which can take some time and often will be issued only upon a tax audit.
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Section 11 Employment considerations
1. Background Industrial relations can play an important role in formulating the plans for a pre-transaction restructuring. This is particularly the case in jurisdictions with extensive labor legislation or with a strong culture of employee involvement through works councils or trade union representation. Many European Union Member States fall into this category. The need to spend time informing and consulting with employees or their representatives should be factored into any restructuring timetable. Common pre-transaction measures with an employment impact include the spinning out of one or more businesses from one group company to a new or existing subsidiary, either to transfer those businesses to a purchaser or a joint venture vehicle, or to allow the businesses that remain to be transferred. In connection with this there may be redundancies, relocations and changes to terms and conditions of employment. Set forth below is a discussion of some of the main issues to be aware of when effecting a restructuring in the European Union, North America and the Asia Pacific region.
2. The European Union After a further wave of expansion on 1 January 2007, the European Union (“EU”) now has some twenty-seven Member States. These are Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom. Three further states - Iceland, Liechtenstein and Norway - are associated with the EU states in the European Economic Area (“EEA”) and are subject to the EU Directives discussed below. Switzerland is not an EU or EEA member but has similar legislation.
2.1 The Acquired Rights Directive From a labor point of view, the EU’s Acquired Rights Directive (“ARD”) or, to be more precise, legislation implementing the ARD in each of the 27 Member States, is invariably the first point of reference when planning any pre-transaction restructuring project. To determine whether the ARD will apply, managers must first consider whether the project involves a “transfer of an undertaking.” If it does, various rights are triggered for the employees who are employed in the undertaking, notably the right to be informed and consulted about the transfer, to transfer automatically to the acquiring entity, and to protection from dismissal and changes to terms and conditions of employment.
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It is important to stress that the ARD will apply even where the transfer takes place entirely intra-group, as will often be the case in the context of a pre-transaction restructuring. The only requirement is that there is a legal transfer (or merger) of an undertaking, business or part of an undertaking or business from one employer to another. The fact that both employers are within the same group does not affect the legal position, although of course it may have significant practical implications. It is also important to note that the ARD does not apply to share transfers. Where a restructuring simply involves the transfer of shares of a company from the existing corporate structure to the new corporate structure, the ARD’s provisions on informing and consulting employees will not apply. Note, however, that in some jurisdictions the change of ownership of a company may nevertheless trigger a right on the part of a works council, trade union or other employee representative body to be informed and/or consulted if there are implications for the employees. Works council information and consultation rights are most expansive in countries such as the Netherlands, France and Germany. Note also that a restructuring may involve a series of transfers and it is important to be alert to the fact that, although one or more of these transfers may not trigger the ARD (for example, the transfer of shares of a company), other transfers (such as the onward transfer of the assets of the company) may do so.
2.2 Meaning of “Undertaking” “Undertaking” is not defined in the ARD. As a consequence, the meaning of “undertaking” has evolved through developments in case law, particularly that of the European Court of Justice (“ECJ”). The primary consideration is whether there is a recognizable, stable and continuing economic entity. All relevant factors must be examined in each case and the weight to be accorded to each factor will vary depending on the circumstances. Broadly speaking, if no assets are transferred, particularly in an asset-intensive business, it is unlikely that there will be a transfer of an undertaking. However, this is not always the case and advice should always be sought. In the context of a pre-transaction restructuring, ascertaining what does and does not amount to an undertaking often proves particularly problematic, especially in the case of labor-intensive service industries. Within the same legal entity, or division of a legal entity, a variety of different business units may exist, one or more of which is to be separated out in readiness for the transaction. The business units may share assets and premises. Employees may work for more than one unit and it may not always be clear to which unit they are predominantly assigned. In such circumstances, determining whether the restructuring amounts to a transfer of an undertaking for the purposes of the ARD can come down to a fine judgment call. Much may depend on the objectives of the company concerned and the desire to structure the transaction in such a way as to make it more or less likely that the ARD will apply. This can be achieved through decisions on the transfer and use of shared assets, shared contracts, shared premises and so on. The advantage of an intra-group
Baker & McKenzie 147 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 11 – Employment Considerations restructuring in advance of a transaction, as opposed to the transaction itself, is that the absence of an independent counter-party makes it relatively easy to take a tailored approach to the structuring of the transfer to achieve desired goals. There is an unresolved debate as to whether the ARD applies to “cross-border” transfers of undertakings. A cross-border transfer is a transfer where the transferor and transferee are located in different EU Member States, or where the transferor is located inside the EU but the transferee outside, or vice versa. The ARD itself states that it applies wherever “the undertaking … to be transferred is situated within the territorial scope of the Treaty,” i.e., anywhere in the EU. Lawyers in different jurisdictions, and indeed within the same jurisdiction, hold conflicting views on this issue and in the absence of case law to resolve the question one way or the other, there is no one right answer. In most situations a restructuring will not involve a cross-border element, but should it do so, it is important to take advice from local counsel as to whether the ARD is likely to apply.
2.3 Consequences of Classification The principal consequence of a transfer being classified as a transfer of an undertaking for purposes of the ARD is that all rights and obligations arising from contracts of employment of employees employed in the undertaking as of the date of the transaction transfer automatically to the transferee. Employees’ rights to old age, disability or survivors’ benefits under supplementary company or intercompany pension schemes are, in general, excluded from transferring automatically, although certain rights under such schemes (for example, early retirement and redundancy benefits) do transfer. Some jurisdictions allow employees to object to the automatic transfer of their contract of employment, although the consequences of such an objection vary. For example, in Germany, employees who object to the transfer simply carry on being employed by the former employer, whereas in the UK, the effect of an objection is to terminate the employment relationship by operation of law, without entitlement to compensation. Other important consequences flow from the automatic transfer of employment contracts under the ARD. First, employees are protected from being dismissed by either the transferor or the transferee for a reason connected to the transfer itself. However, this does not prevent dismissals that are for “economic, technical or organizational reasons entailing changes in the workforce,” (an “ETO”). Employers often use the “ETO reason” route as a means of justifying dismissals where, for example, the transfer necessitates an internal reorganization that results in one or more jobs being identified as surplus to requirements. Care should be taken when implementing any such dismissals and legal advice should normally be sought. Even where an ETO exists, there will typically be procedural requirements that must be followed. Secondly, the ARD places strict restrictions on the ability of an employer to change terms and conditions following a transfer. The extent of these restrictions varies between
148 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 11 – Employment Considerations jurisdictions. Where an intra-group restructuring is taking place that is likely at some stage to involve a transfer of an undertaking, and where there is also a requirement to change employees’ terms, it may be prudent to ensure that the changes are effected as far as possible in advance of the transfer of undertaking being completed to reduce the risk of problems arising.
2.4 Informing and Consulting Article 7 of the ARD imposes obligations on both the transferor and the transferee to inform representatives of their respective employees who are affected by the transfer and to consult over measures. The identity of these representatives will depend on whether there are any pre-existing information and consultation structures in place in the transferor and transferee organizations. This, in turn, is likely to depend on the industrial relations environment in the country concerned. For example, in countries such as France, the Netherlands and Germany, it is common (and in some instances obligatory) for companies to have works councils comprised of employees elected or appointed to the position by their co-workers. These works councils have the right to be informed and consulted about a broad range of matters connected with the business. In some cases, works councils will have rights of co-determination, or alternatively, they may be entitled to issue an opinion on the transfer and can hold up the process by delaying their opinion. In other countries, particularly Mediterranean countries such as Italy and Spain and Scandinavian countries such as Sweden, trade union representation of employees is more common. The greater the impact of the transfer upon the workforce, the more likely it is that the unions will intervene and seek to play an active role in the process. In the UK, Ireland and many of the new Member States from central and eastern Europe, employee representative bodies are less common. Note, however, that this may start to change as all EU countries have either implemented or are to implement the EU’s Information and Consultation Directive, which creates a statutory mechanism for allowing employees in undertakings employing more than 50 employees, or establishments employing more than 20 employees (the choice is left up to Member States), to request that information and consultation procedures be set up. For the time being, however, many employers in these jurisdictions will not have employee representatives whom they can immediately engage in an information and consultation process. Their obligations will then depend on the terms of the local implementing legislation of the ARD. Often, as in the UK and Ireland, the parties will be required to offer employees the chance to elect representatives to be informed and consulted about the transfer, following rules laid down for the election process. Employee representatives must be informed about the date or proposed date of the transfer, the reasons for the transfer, the legal, social and economic implications for employees and any “measures” envisioned in relation to the employees. Where measures are envisioned – such as redundancies, relocations or changes to reporting lines, or a subsequent sale outside the group – consultation must take place with the representatives in good time with a view
Baker & McKenzie 149 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 11 – Employment Considerations to reaching agreement. Local implementing legislation may provide for a more extensive, stricter consultation obligation. In practice, there is almost always a degree of consultation, even if the number of envisioned measures is very limited. The consequences of a failure to inform and consult are not laid down in the ARD and therefore vary from jurisdiction to jurisdiction. In a limited number of countries, the transfer itself can be invalidated. Some countries, notably France, impose criminal liability on the managers of the companies concerned for failure to inform and consult, backed up by a (rarely used) sanction of imprisonment. In others, such as the UK and Ireland, the employees (or their representatives) can seek a monetary award for each affected employee that is linked to their remuneration, or loss suffered, and subject to an upper cap. In still others, such as the Czech Republic, enforcement is by way of fines imposed by regulatory bodies.
2.5 Transfers Outside the Acquired Rights Directive Where a restructuring takes the form of a transfer of shares, such that the owner of the employing entity changes but not the identity of the employing entity itself, the ARD will not be triggered but there may nevertheless be employment considerations. In some jurisdictions, either individual employment contracts or (more likely) collective agreements with trade unions or works council agreements may include “change of ownership” provisions. The nature of these provisions will vary but typically some form of consultation obligation will be triggered. Consultation may be a good idea from an industrial relations standpoint in any event, particularly if the transfer is one of a series of transfers that will include a transfer of an undertaking and will involve employment measures of some sort. Employees or their representatives may be more inclined to co-operate with both the pre- transaction restructuring and the transaction itself if the employer concerned has been open about its intentions from the outset. Of course, commercial considerations may dictate an alternative approach.
2.6 Downsizing and the Collective Redundancies Directive During restructuring, the company may determine that the positions of one or more employees are surplus to requirements, for example because a business is being stripped down in readiness for being taken over, merged or moved into a joint venture vehicle, or because a reorganization of business units has identified the need to eliminate an excess of capacity. Where a redundancy exercise is proposed, the employer will first of all need to assess whether it is of such a scale as to amount to a collective redundancy for the purposes of the EU’s Collective Redundancies Directive and local implementing legislation, in which case various consultation obligations will be triggered.
2.7 The Threshold The Collective Redundancies Directive gives Member States a choice as to how to define a collective redundancy under local law. It can be defined either by reference to a period of
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30 days, or to a period of 90 days. If 30 days is chosen, a collective redundancy consists of at least 10 redundancy dismissals in establishments employing more than 20 but less than 100 workers, at least 10% of workers dismissed by reason of redundancy in establishments employing at least 100 but less than 300 workers, and at least 30 redundancy dismissals in establishments employing 300 workers or more, within a 30 day period. If 90 days is chosen, a collective redundancy consists of at least 20 redundancy dismissals over a period of 90 days, whatever the number of workers employed. Member States are also free to define a collective redundancy in a more restrictive fashion for employers, and indeed a number have done so, particularly in countries with a strong tradition of trade union representation. For example, in Italy a “collective redundancy” can, depending on the circumstances, involve the dismissal of as few as two employees.
2.8 Consultation – Collective Where an employer is contemplating a collective redundancy, it must begin consultations with the workers’ representatives in good time with a view to reaching agreement. To determine the identity of the representatives, the same considerations apply as when consulting under the ARD (see above), although note that the Collective Redundancies Directive extends to all workers and not simply employees as is the case with the ARD. Consultation must cover ways and means of avoiding collective redundancies or reducing the number of workers affected and of mitigating the consequences for the affected workers, for example through retraining, plus any other matters that may be specified by national legislation or applicable collective agreements. The workers’ representatives must be provided with certain specified categories of information relating to the collective redundancies to assist them to carry out their consultation function. This includes information as to the number and categories of workers to be made redundant, the proposed selection criteria, and details of any redundancy payments. There is also a requirement to notify a competent public authority, for example a Social Security bureau, not less than 30 days before the first of the dismissals takes effect. Local law often lays down particular timeframes for the consultation process which may further delay the implementation of the dismissals. In some jurisdictions a failure to carry out consultation can render any redundancies null and void. In other jurisdictions, the likely consequence is a fine and/or claims for damages by employees. Note that, in some Member States, proposed relocations may amount to redundancies where the new site of business is far enough away from the existing site to trigger a redundancy under local law. Even where an employer has a contractual right to relocate, local law may place limitations on that right. At a minimum, prior consultation may be required, perhaps with a works council or trade union.
2.9 Consultation – Individual In addition to collective consultation obligations, the majority of Member States impose requirements to consult individually with employees in a redundancy situation, even where
Baker & McKenzie 151 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 11 – Employment Considerations only one redundancy is proposed. The requirements vary significantly from jurisdiction to jurisdiction, so legal advice should always be sought. The consequences of non-compliance also vary, but typically employees will have a claim for unfair or wrongful dismissal, entitling them to compensation.
2.10 Redundancy Selection Criteria The laws of many Member States oblige employers to select employees for redundancy using criteria which can be objectively justified. Failure to do so may lead to claims for unfair or wrongful dismissal or even discrimination on one of a number of proscribed grounds. What will be regarded as fair criteria differs from Member State to Member State. The “last in, first out” principle is strictly applied in some jurisdictions, some require consideration of “social criteria” such as family status, while others give employers more scope for selection using, for example, performance and attendance criteria. In some countries, a collective or other workforce agreement may pre-determine the grounds to be used.
2.11 Severance Payments Most Member States require a minimum period of notice to be given to employees on termination, which is often paid in lieu. Employees will also have an entitlement to accrued holiday up to the termination date and possibly other contractual benefits as well. In addition, many Member States require employers to pay enhanced severance compensation, particularly in redundancy situations. This is often linked to the employees’ age, length of service and salary. Employees may also have a contractual right to enhanced compensation, either under individual contracts of employment or collective agreements, or through custom and practice.
2.12 Changes to Terms and Conditions The extent to which any employer can unilaterally implement changes to terms and conditions of employment is severely circumscribed in EU countries. In most cases, at a minimum the consent of the employees is required. Failure to obtain such consent may result in claims for breach of contract or even, if the change is sufficiently serious, for constructive dismissal on the basis that the employer has committed a repudiatory breach of contract entitling the employee to treat himself as discharged and claim the protection of local employment legislation. Where unions or works councils are involved, they may have a right to be consulted or even a right of veto on the proposed change. On occasion, the easiest way of effecting the desired change may be to implement a technical collective redundancy, triggering the information and consultation obligations described above. As discussed above, changes to terms and conditions are even more difficult where the ARD applies to a transfer. In some jurisdictions, changes to terms simply cannot be made if the change is connected to the transfer of undertaking, even if the employees
152 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 11 – Employment Considerations consent (although in practice, if the changes are favorable to the employees, there may not be any objection). In others, a specific protected period must be observed before any changes can be implemented. The restructuring action plan should take account of these considerations.
3. Asia Pacific
3.1 Transfer of Employees Unlike the European Union, there is no concept of “transfer” of employment in most Asia Pacific countries, even where the old and new employers are within the same group or where the employees are meant to be transferred as a part of a larger transaction such as the sale of a particular business. There are certain limited exceptions to this general rule under Chinese and Japanese law, but such exceptions will not apply in every case. As an employer cannot force an employee to change employers, “transfer” is achieved through termination and rehire. In some jurisdictions such as Hong Kong, statutory procedures exist to help employers avoid making certain termination payments to employees who agree to transfer to the new owner. As there are strict restrictions on termination in some jurisdictions (such as China, Korea, Japan and Indonesia), many employers adopt a “resign and rehire” approach. This avoids having to justify the dismissals or risk later disputes. Some employers will adopt a resign and rehire approach throughout the region to be consistent and for easy administration.
3.2 Notice It is possible to dismiss by giving notice or making payment in lieu of notice in almost every jurisdiction in Asia except for the Philippines (where payment in lieu of notice is not allowed) and Indonesia (where strict procedures preclude termination by notice or payment in lieu of notice in most cases). In other jurisdictions, such as China, Korea and Japan, termination by notice is permissible, but subject to the general requirement that the dismissal be justifiable in accordance with applicable laws and procedures. Given the difficulty in justifying a dismissal (even in the context of a reorganization) in these jurisdictions, however, some employers will seek a resignation but make payment in lieu of notice as if they had dismissed the employee. In jurisdictions where termination on notice is allowed, the minimum notice period is usually one month, but can vary from one day to eight weeks. In some jurisdictions, such as Australia, India, Malaysia and Singapore, protective legislation applies only to specified categories of staff and the rights of senior employees are governed by the relevant contract of employment. In Vietnam, senior staff are entitled to “reasonable” notice which can depend on age, rank, industry practice and years of service. It is common in some jurisdictions such as Hong Kong to seek consent to short notice where the transaction is intra-group.
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3.3 Consultation There are no works councils or similar bodies in most Asia Pacific jurisdictions. There are consultation requirements in China and Vietnam, but otherwise, unless there is a collective bargaining agreement in place that requires consultation, this is generally not a requirement. Certain jurisdictions do, however, require local labor authorities to be notified if more than a certain number of employees will be made redundant. The level of unionization varies across Asia. Unions are much stronger in Indonesia and Korea than they are in Hong Kong or Singapore, for example. In all countries, if a collective bargaining agreement is in place and that agreement requires union consultation before termination, the requirement will be upheld.
3.4 Redundancies Employees across the Asia Pacific region have widely divergent rights when they are made redundant. Given the disparity in legal systems and employee rights across the region, reducing one’s workforce can be a significant task that should not be approached lightly. For example, unlike the United States, where the termination process is straightforward and “employment at will” allows employers to downsize without incurring significant costs, labor laws and market practice in many Asia Pacific countries require employers to make significant payments and/or comply with strict procedural requirements when carrying out terminations. In countries such as Korea and Japan, layoffs can be extremely problematic and employers may be required to prove “just cause” for the termination or make large payouts. In China, downsizing must meet statutory requirements to be justifiable. Restructuring in other countries such as Hong Kong and Singapore is relatively straightforward in comparison. In India, an employee’s rights will depend on his or her classification as either a “workman” or manager. In almost every Asia Pacific jurisdiction, employees will be entitled to the following: notice or payment in lieu of notice, accrued but unpaid wages and annual leave and expenses incurred on behalf of the employer. Some jurisdictions also require a pro-rata payment of any contractual bonus. Entitlement to and the amount of any severance payment will vary depending on the jurisdiction, employee’s length of service, terms of employment, and, in China, the type of legal entity of the employer (i.e., a “foreign investment enterprise” or representative office). Employers in many countries prefer to adopt the “voluntary redundancy” approach, meaning the employer solicits resignations from employees. This method of downsizing is particularly recommended in those jurisdictions where it is otherwise very difficult to terminate employees, including China, Indonesia, Japan and Korea, or where termination procedures are particularly cumbersome, such as India. Employers who are conducting a multi-jurisdictional exercise may therefore wish to adopt this approach throughout the region, with the exception of Australia.
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3.5 Harmonization of Terms and Conditions As in the EU and elsewhere, a new owner will generally wish to rationalize the terms and conditions of the “old” and the “new” employees as soon as possible. There is no legislation in the Asia Pacific region which protects employees’ terms and conditions automatically as there is in the EU, but where there are statutory processes to assist employers to avoid termination payments, the new terms and conditions must be similar to the employees’ existing terms. When the new employer harmonizes the terms and conditions of the new joiners and existing staff, the real issue is variation of the contract for some of the employees. In each jurisdiction in Asia Pacific, significant changes will require the employee’s consent. If the employee does not consent and the employer implements a salary cut or terminates a significant benefit, the employee can claim damages for breach of contract. Employees will, at a minimum, be entitled to the difference between their old salary and the new salary or between the value of the benefits. When an employer in some jurisdictions, such as Hong Kong, unilaterally varies the terms of an employee’s contract, this may allow the employee to claim that he or she has been constructively dismissed. In this case, the employer may be liable for other termination payments, such as long service payment or a termination payment for dismissal without a valid reason. The success of a claim for constructive dismissal will depend on the terms being changed and the manner in which the change is implemented.
4. United States Although the United States has worker protection laws at the federal, state and local levels, employees generally have fairly limited employment rights when compared to most other developed nations, especially when compared to the EU. The concept of “at-will” employment is generally followed in the United States and allows employers to terminate employees for any reason or no reason at all, with or without prior notice. Thus, a company may have considerable flexibility in considering whether to reorganize its workforce prior to a disposition and/or whether to alter terms and conditions of its employees to make the workforce more attractive for acquisition. The majority of U.S. employees are employed “at will” and, consequently, changes to the identity of their legal employer or a variation to their terms and conditions (in order to make them more attractive to an acquiring company), can normally be achieved easily through a termination and rehire of those employees. The same is true of a downsizing that might be required to showcase a “lean and mean” workforce. Thus, some of the major issues to be considered pre-acquisition in the United States consist of ensuring that proper due diligence is conducted so that the costs and potential liabilities associated with reorganizing the workforce prior to disposition are considered and factored into the costs associated with the transaction. Some of the potential liabilities include: WARN or other notice obligations, severance or other contractual rights and successor employer liability for discrimination and other employment-related claims.
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4.1 WARN and other Notice Requirements The federal Worker Adjustment and Retraining Notification (WARN) Act gives employees a degree of protection (outside of discrimination legislation) against the loss of employment without prior notice. The WARN Act applies if an employer who employs 100 or more people intends to dismiss at least 50 employees consisting of at least 1/3 of its U.S. workforce, or 500 or more employees, which may include employees working oversees. In those circumstances, the employer is obliged to give the affected employees at least 60 days advanced written notice of the dismissals and to provide written notice to certain state, local and union (if applicable) officials. The WARN Act can apply outside of a “normal” downsizing or reduction-in-force situation and the liabilities for failure to comply with the statutory notice requirements include payments to the affected employees, as well as potential fines to the state and/or local governments. Courts have applied certain exceptions to the WARN Act notice requirements in situations involving a corporate restructuring where employees did not suffer any actual employment loss. However, when considering pre-acquisition restructuring scenarios, the company must analyze its potential WARN Act liability and be prepared to comply with the notice requirements if applicable or understand the extent of its potential liability if it fails to comply. Many states and a few municipalities also have their own “mini-WARN” laws that may require a longer period of advance notice to affected employees or that may apply with smaller thresholds. Thus, state and local laws applicable to the jurisdiction in which any workforce restructuring is to take place must be consulted prior to implementing the restructuring. Other notification requirements which may arise under state or federal law in the event of actual terminations include the obligation to notify employees of their rights to obtain unemployment insurance and to purchase health insurance under federal law.
4.2 Contractual Rights Although the majority of U.S. employees are employed at will, other employees will have certain contractual rights to advance notice and/or severance or other contractual payments in the event of a change in control. Those contractual rights need to be considered in the context of the proposed pre-transaction restructuring. Some employees (particularly executives and senior managers) are likely to have contracts of employment that give them the right to a specified period of notice or a severance payment in the event of a change in control, restructuring or termination. Contractual rights can also arise from staff handbooks (for example, notice provisions) or from other communications from the employer to employees. If an employee it to be dismissed, the employer must also ensure that it complies fully with its obligations under the benefits plans to which the employee belongs, particularly with respect to retirement plans. Thus, a due diligence review should be conducted prior to implementing any proposed corporate restructuring to accurately assess these obligations.
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If the employer has a collective agreement with any trade union relating to the affected employees, it is likely that some aspects of the collective agreement will impact a proposed restructuring. Collective agreements will commonly include provisions dealing with payments due in the event of a change in control, termination selection criteria, notice requirements and severance payments. In addition, the employer should ensure that its actions in dealing with employees throughout the intended restructuring process are consistent with the requirements of the National Labor Relations Act if its workforce is unionized.
4.3 Discrimination and Other Employment-Related Claims When implementing any proposed restructuring, employers must be conscious of the potentially discriminatory impact of any proposed workforce reorganization, which may be inadvertent. For instance, age discrimination may be a particular problem where an employer uses salary cost as a basis of making lay-off or other restructuring selections. Commonly, it will be the most senior, and thus usually the oldest, employees who are the most highly paid, and using such criteria may lead to claims of age-based discrimination. Similarly, decisions to eliminate part-time or at-home working arrangements in a cost- savings restructuring may have a greater impact on female employees, which may give rise to claims of gender, pregnancy or marital status discrimination. Prior to undertaking any workforce restructuring that involves lay-offs or position eliminations, the company should take time to prepare and use a fair and objective procedure for the selection process and to ensure that the process is appropriately documented. Doing so will provide some protection to the company in the event that any allegations are raised of illegal discrimination in the selection process. In preparing for any disposition, the company should also track any pending employment- related claims (whether at the demand or complaint stage or pending before an administrative agency or court) so that it has an accurate assessment of its potential liabilities in this regard for purposes of structuring indemnification clauses where available. Although single-plaintiff employment-related claims frequently have a lower risk value associated with them than other typical commercial litigation claims, with the increasing popularity of class-action litigation against employers for wage and hour and class-based discrimination claims, the company should be aware of any large potential liabilities associated with the intended restructuring.
5. Canada
5.1 Jurisdiction In Canada, employers are governed by either federal or provincial law depending upon the nature of the business. With the exception of the Province of Quebec, all jurisdictions within Canada are common law jurisdictions. Therefore, while certain statutory provisions may differ, the general employment law principles will be similar.
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5.2 Transferring a Division into a Separate Corporate Entity Employers implementing a corporate restructuring in anticipation of the disposition of a business division ought to be careful that the restructuring process itself does not trigger employment-related liabilities. In Canada, employment-related liabilities will arise where there is a transfer by way of an asset purchase but will not arise where a transfer is by way of shares. This distinction is based on the notion that employment contracts cannot be automatically transferred from one employer to another without the consent of the affected employees. In an asset transfer transaction, where the affected employees consent to the transfer of their employment, a legal consequence of the transaction is a change in the employer of the employees. Absent such consent, the affected employees are technically terminated from employment and entitled to notice of termination (or payment in lieu of notice) from the transferor. In share transfer transactions, there is a change in the legal owner of the shares but there is no change in the legal employer of the transferred employees. In such a situation, there is no termination of employment and related liabilities do not arise. It is therefore critical that the company give appropriate consideration to the nature of any proposed restructuring or transfer of a business division. In the unionized context, the terms of any collective agreement will bind an acquiring company on the transfer of a business division or part thereof. The union will also retain its bargaining rights following the transfer.
5.3 Transferring Employment-Related Liabilities It is important to remember that employment-related liabilities lie at all times with the legal employer of the employees. As such, they cannot be transferred. In a restructuring process, a parent company and newly formed subsidiary, for example, could choose to allocate or share responsibility for this liability; however, such an agreement is only binding as between those two parties. An employee who is terminated as a result of the transfer of a business division, or a subsequent disposition of a division to a third party, is entitled to recover from his legal employer irrespective of any agreement allocating such liability.
5.4 Constructive Dismissal Where a corporate restructuring results in a fundamental change to an employee’s terms and conditions of employment, such as physical relocation, that employee may resign and claim constructive dismissal. Whether or not a change is considered to be fundamental depends on the circumstances particular to each situation. For example, it is highly likely that a relocation of the employee to another city would be considered fundamental. Conversely, a relocation to another floor in the same office building would not. Lying somewhere in the grey is a relocation to a branch office half hour away.
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Where an employer intends to unilaterally implement a fundamental change to an employee’s employment, the employer can reduce its liability by giving the employee notice of such change. Typically, the amount of notice that should be given is that amount to which the employee would have been entitled if he or she were terminated at that time. In Canada, notice of termination entitlements increases in proportion to a number of factors, including the employee’s length of service, age, position and salary. An employee can still elect to resign after having been given notice of an impending change and sue his or her employer for anticipatory breach of contract. However, by terminating the employment contract prior to the fundamental change taking effect, the employee will have failed to mitigate his damages (by failing to remain employed until that time). Therefore, the employee’s entitlement would be proportionally reduced. If notice of the change had been given and the employee resigned after the change had taken effect, the period of notice provided would be deducted from the notice otherwise due upon termination.
5.5 Notice and Consultation There is no statutory obligation to notify or consult with employees or their unions, if any, about the transfer of a division or business or corporate restructuring. Note, however, that where a transfer results in a collective redundancy, most employers will be required to provide notice to the appropriate governmental authority. The threshold for what amounts to a collective redundancy and the particulars of any governmental notice varies by jurisdiction within Canada.
5.6 Contractual Considerations In any restructuring process, the employer must pay due regard to the terms of any employment contract in place, including any collective agreement. Such contracts may limit the ability of the employer to implement a restructuring process, transfer an employee or otherwise alter the terms and conditions of employment.
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Section 12 Stock options and other equity compensation issues
1. Introduction The company will need to consider how to treat employees of the target business who hold outstanding stock options and other equity compensation awards or who may be granted new awards. In a spin-off transaction, the employee stock options over company shares will need to be cashed out or adjusted in value to take into account the changes to the company. For employees with outstanding options who will be employed by the spun-off entity or a related subsidiary, the options must be both adjusted and converted into options over the new company’s shares. These adjustments and conversions may result in tax events in some jurisdictions and may mean the loss of favorable tax status in others. In addition to U.S. securities law implications, the adjustment and conversion of options and the granting of new options may raise significant securities law issues, particularly in EU jurisdictions which have recently implemented the EU prospectus directive 2003/71/EC. The company and/or the spun-off entity may be required to make securities law filings or other disclosure prior to the spin-off transaction. In addition, labor entitlement issues that should be considered in relation to equity compensation awards should the adjustment and/ or conversion of the awards be considered to result in a lesser benefit to employees (see Section 11, above). In a spin-off transaction, a company must decide whether to preserve or cash out any outstanding employee stock options and other equity compensation awards. In deciding these issues, the company needs to consider issues of contract and of operation of law. As a matter of contract, if the company intends that the awards will remain outstanding after the transaction is complete, the awards must be adjusted to reflect the change(s) taking place in the restructuring. As a general rule, the goal is to preserve the value of the awards post restructuring. Further, a company must review the contracts underlying the equity awards – the equity compensation plan and agreements – to determine whether change of control or other provisions have been triggered by the spin-off transaction. If these provisions exist and are triggered, the company is likely to be limited in the steps it may take to preserve the value of or cash out any outstanding equity compensation awards. Finally, the company will have to consider tax, securities law and other legal implications of the transaction on the equity compensation award. These issues are raised by operation of law and are particularly difficult if the company has offered options to employees in many different countries. The following discussion addresses mainly stock options, but similar themes apply for stock appreciation rights, restricted stock, restricted stock unit and other types of equity compensation arrangements.
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2. Primary Approaches to Outstanding Options There are two primary approaches for handling spin-offs within the stock option arena: the “concentrated adjustment and conversion” method and the “basket method.”
2.1 Concentrated Adjustment and Conversion Method There are two types of employees to be dealt with: employees who remain employed by the existing company and employees who become employed by the new entity being spun-off. The issues that arise in relation to equity compensation awards are different for each group. Under the concentrated adjustment and conversion method, employees who will remain employed by the existing company will have their options over the existing company shares adjusted to compensate for the loss in option value resulting from the spin-off of the new company. Generally, this adjustment means that the exercise price per option share will decrease and the number of option shares will increase (the “Adjustment”); however, the aggregate exercise price will remain the same. The Adjustment is intended to preserve the intrinsic value of the option grant so that the option has the same value before and after the spin-off. Other than the Adjustment, the terms and conditions of the original options will remain unchanged. On the other hand, option holders who will become employees of the spin-off company will have their existing options converted into options over shares of the spin-off company as of the date of the spin-off (the “Conversion”). The Conversion is intended to serve as a substitution of the existing company options for options over spin-off company shares (which will be traded in the market based on the value of the spin-off company as a separate business). The exercise price of the option and the number of option shares would be proportionally adjusted to preserve the option holder’s intrinsic value immediately before and after the spin-off. Other than the Conversion, the terms and conditions of the original options will remain unchanged. The spin-off company would assume the existing company’s obligations under the stock option plan and the options granted thereunder to the employees who are being transferred.
2.2 Basket Approach The second way of structuring a spin-off with respect to options is referred to as the “basket approach.” With the basket approach, optionees will be treated in essentially the same way as the existing company’s shareholders. Thus, options will be adjusted and converted to become separate options over the existing company and the spin-off company shares. The existing company options will be for the same number of shares as the old existing company options, but the exercise price will be reduced to reflect the post-spin-off reduction in value of the existing company shares. The new options will be for the relative number of shares reflected in the spin-off and the exercise price will be established to reflect the relative values of the existing and new company. The Adjustment and Conversion of old and new options are intended to preserve the intrinsic value of the
Baker & McKenzie 161 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 12 – Stock Options and other Equity Compensation Issues current options, so that the total options granted to an employee have the same value before and after the spin-off and the optionee’s position is parallel to that of existing company shareholders as a result of the spin-off. Other than the Adjustment and Conversion, the terms and conditions of the original options will remain unchanged.
2.3 Summary Of these two methods, the basket approach is in theory more favorable to the employee because he or she receives options in both entities. In essence, the basket method reduces the employee’s risk by diversifying his or her holdings such that, if one entity’s stock soars while the other’s languishes, the employee will reap the benefits of holding options over both companies’ shares. However, the basket approach is more difficult to administer than the concentrated adjustment and conversion method. In addition, the basket approach has the result that both the existing and spin-off companies are left with options held by individuals who are not their employees. Having non-employee optionees may be problematic under the terms of the company’s equity compensation plan or due to tax, securities or accounting issues, as discussed below. For these reasons, the concentrated adjustment and conversion method is more commonly used, particularly if the company has optionees in multiple countries. For purposes of this Handbook, we will therefore focus only on the international issues raised with respect to the concentrated adjustment and conversion method.
3. Authority under the Plan An important first step in planning for a spin-off is to review the relevant employee equity compensation plan (“Plan”) to identify the provisions that would govern the Adjustment and Conversion of the options in the event of a corporate transaction such as a spin-off. Generally, a Plan or a stock option agreement will contain a change in control provision. However, change in control provisions do not always clearly address how options will be adjusted and converted in the event of a spin-off or other corporate transaction. Further, a change in control provision may not include a spin-off transaction as a triggering event. If the Plan and option agreement do not dictate the terms of the Adjustment and Conversion of the options, the terms of the Adjustment and Conversion are generally spelled out in the spin-off transaction documentation itself. Alternatively, if the provisions of the Plan do not adequately address such restructuring or prevent the Adjustment and Conversion of options, an amendment may be considered prior to the restructuring. However, NYSE and NASDAQ shareholder approval rules (which require shareholder approval for material modifications to equity compensation plans) may limit the feasibility of amending the Plan. The question of whether the Adjustment and/or Conversion are authorized under the Plan and/or option agreement is important for several reasons. Most pertinent to this discussion
162 Baker & McKenzie Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 12 – Stock Options and other Equity Compensation Issues is whether the consent of the optionees is necessary to effect the Adjustment and Conversion. If the Plan and/or the option agreement state that existing company may not adversely alter the terms of an outstanding option without the prior written consent of the optionees and the Adjustment and Conversion is not authorized under the Plan, and thus not a term of the original grants affected by the spin-off, the optionees’ consent may be necessary. As explained more fully below, there will be situations where an optionee will lose favorable tax treatment or suffer other negative tax or legal consequences as a result of the Adjustment and Conversion of the option. In these situations, the optionees’ consent is likely to be required. On the other hand, absent some negative tax or other legal effect, it is possible to argue that consent is not required because the Adjustment and Conversion does not adversely impact the rights of the optionee. This is an issue that should be resolved prior to proceeding with the transaction.
4. Adjustment and Conversion of Options Granted Outside the U.S. There are many potential tax, securities and other legal issues that arise for outstanding stock options within the context of a spin-off where optionees are located outside the United States. In this regard, it is important to recognize that separate issues arise for both the Adjustment and the Conversion. Therefore, tax or other issues could arise both in the countries where only the Adjustment will occur as a consequence of the spin-off (i.e., where no employees will transfer to the spin-off company and the basket approach is not taken) and where both the Adjustment and Conversion will occur (i.e., where employees will transfer to the spin-off company).
4.1 Tax Issues •• Triggering Tax Event The Conversion of stock options pursuant to a spin-off may be a taxable event in some countries. Under local tax laws, the Conversion may be considered a disposal of one stock option followed by the regrant of a separate stock option. The disposal of the option is what triggers the taxable event in such countries. In those few countries where taxation of stock options is normally at the time of grant, the “grant” of the converted option may result in a new taxable event. The converted option is taxed even though the employee was already taxed at the time of the original option grant. In other countries, the Conversion may be considered a deemed exercise of the original option. For options that are subject to taxation upon exercise, a tax charge will result, absent a tax ruling to the contrary. Tax issues also arise in relation to the valuation of the options and the calculation of the exchange ratios for the Adjustment and Conversion. Generally, the Adjustment and Conversion rate is calculated to maintain the intrinsic value of the stock option before and after the transaction. In the U.S., companies must follow strict tax rules with regard to the conversion ratio to avoid the possibility that discounted options will trigger a deferred
Baker & McKenzie 163 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 12 – Stock Options and other Equity Compensation Issues compensation benefit, resulting in a severe tax penalty. Outside the U.S., however, local tax authorities may disagree with the U.S. method of calculating the value of the option or the exchange ratios, and the Adjustment and Conversion may be seen as resulting in a gain to the employees, with tax due upon that gain. The uncertainty of the tax consequences of the Adjustment and Conversion of stock options may be clarified by requesting a tax ruling from the local tax authorities. •• Loss of Tax-Favored Status If the existing options qualify for a tax-favored regime in a particular country, the spin-off transaction may cause the option to lose its tax-favored status. In some cases, it may be necessary to obtain approval from local tax authorities to confirm that the options remain eligible for tax-favored status. Again in analyzing these issues, it may be necessary to view the transaction in two steps, the Adjustment and the Conversion. For example, optionees in France with French-qualified options may find that the Adjustment may disqualify the options, thus triggering negative tax and social insurance treatment for the employee and employer if the transaction does not meet the definition of a permitted adjustment under French law. Furthermore, the Conversion to spin-off company shares is likely to be considered a new grant under French tax law. In such case, the option might still be French-qualified; however, it will be treated as a brand new option grant, and the four-year holding period (required for favorable tax and social insurance treatment under the French law) would have to start over from the spin-off/new grant date. This new grant also may require that the spin-off company adopt a sub-plan to its option plan that contains the required terms and conditions for the grant of French-qualified options prior to the spin. There may also be specific requirements under a tax-favored regime that are triggered by a company restructuring such as a spin-off. For example, one of the requirements of a U.K. “company share option plan” is that the plan sponsor must give prior notice to HM Revenue and Customs of changes in capitalization, such as a spin-off. This notification must be given, even if the outstanding options will be disqualified under the U.K. approved plan as a result of the Adjustment and Conversion. Failure to fulfill this notification requirement can result in HM Revenue and Customs withdrawing its approval of the U.K. approved plan. If HM Revenue and Customs withdraws its approval of the U.K. approved plan, all existing approved options will lose their approved status and will be taxed as unapproved options. In addition, once disqualified, no new approved grants may be made under the U.K. approved plan unless and until HM Revenue and Customs reinstates the plan’s approved status. Assuming that the existing company maintained a U.K. approved plan, then in addition to the existing company’s obligation to notify HM Revenue and Customs of the spin-off, it would need HM Revenue and Customs’ pre-approval of the Adjustment and Conversion of the options to preserve the approved status of the outstanding options. In all likelihood, this approval will not be forthcoming; in which case, the outstanding options would lose their approved status upon the Adjustment and Conversion.
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If HM Revenue and Customs declines to approve the Adjustment, the outstanding options will no longer qualify under the approved plan. Accordingly, at exercise both the employer and the employee will owe national insurance contributions on the spread (i.e., the difference between the exercise price and the fair market value of the shares at exercise). In addition, the employee will be subject to income tax on the spread at the time of exercise. Furthermore, the existing company must obtain the employees’ consent to the Adjustment and Conversion of the options, or else risk that the entire U.K. approved plan will lose its approved standing. HM Revenue and Customs may expect to be provided with copies of the consent letters sent to the approved options holders, as well as any other communications sent to these employees in relation to the spin-off.
4.2 Securities Law Issues To the extent the existing company has made securities filings or availed itself of self- executing securities law exemptions in granting options to its employees, it will need to review those filings and exemptions to confirm whether the Adjustment of the options results in any new filing obligations or changes in the availability of the exemptions. In many countries, it is recommended or required to notify the local securities authority regarding the transaction. Securities law issues may also arise in relation to the Conversion of the options over existing company shares to options over spin-off company shares. In the U.S., the existing company may need to file a new securities law registration for the offer of its securities to its employees. In other countries, the Conversion of existing company options for options in the spin-off company may be characterized as a cancellation of the existing options and a regrant of stock options in NewCo. Even though in most transactions the Conversion of options is automatic and employees do not have a choice as to whether their options are converted, the Conversion will be treated as a new offer of securities in some non-U.S. jurisdictions. If the Conversion of stock options is considered a new offer of securities, a governmental filing or notice may be required in order to make that offer of securities, often regardless of whether a filing was already made in relation to the original grant of options by the existing company. For example, under Australian securities laws, the Conversion of stock options pursuant to a restructuring will generally be considered a new offer of securities requiring a registration or an exemption from registration requirements. Similarly, in Canada the Conversion of options pursuant to a restructuring is likely to be considered a new offer of securities subject to provincial securities requirements. Existing securities approvals or self executing exemptions for options from the various provincial securities commissions should be examined to determine if the Conversion is covered under the existing relief. For countries that are part of the European Union, the EU prospectus directive 2003/71/EC must be considered. As of January 1, 2007, most EU countries implemented the directive into local law. The directive allows a company to file a prospectus in its home Member State and use the prospectus as a “passport” for future securities offerings in other EU
Baker & McKenzie 165 Baker & McKenzie’s Pre-Transaction Restructuring Handbook Section 12 – Stock Options and other Equity Compensation Issues jurisdictions. Before any spin-off transaction is implemented involving outstanding options held by, or new options granted to, employees in EU, the company must determine whether a prospectus will be required pursuant to the prospectus directive. Some EU countries take the view that non-transferable employee options are not securities subject to the directive, but that is not true for all countries. If a prospectus is required, it may take a matter of months to prepare and obtain approval of the prospectus. As a general rule, where a securities exemption, registration or approval was required under local law for the original grant of options, the spin-off company should consider carefully whether the Conversion of the options requires additional action. It is also important to consider whether the Conversion of the option may result in a change in either company’s status in such a way as to affect its securities compliance requirements. For example, different securities law issues arise for companies with more than 10% of their shareholders in Canada, or if the spin-off company is traded on a non-U.S. stock exchange, additional securities law issues may arise.
4.3 Other Legal Issues As noted above, employee consent may be required for the Adjustment and Conversion if it is not authorized by the Plan or option agreement. In any case, employee communications explaining the impact of the restructuring on the options should be prepared. Conversion of options to options in the spin-off company may lead to employee claims if the employee feels he or she ended up with something less than he or she had prior to the transaction. If the transaction results in an employee having fewer overall benefits than prior to the transaction and the benefits constitute vested rights, he or she may raise a claim for constructive discharge under local law. This reduction in benefits is less likely to be a problem where employee stock options make up a relatively small part of employee compensation, but there is some exposure. Although there is no way to eliminate these concerns entirely, good employee communication is crucial, particularly with regard to the fact that the intrinsic value of the employees’ options is maintained in the Conversion process.
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Section 13 Intellectual Property Considerations
1. Introduction Regardless of the role intellectual property (“IP”) plays in a particular business, IP frequently gives rise to the most challenging issues in a corporate spin-off or divestiture. Such challenges arise from the intangible and abstract nature of IP, the varied legal regimes that apply to different forms of IP, and the often-pervasive use of specific IP throughout an organization. Complications also arise due to the inherent nature of a divestiture or spin-off itself – a virtual “pulling apart” of a business. On the one hand, IP issues are not as contained as in a license or assignment of specific technology where the asset is specifically identified and usually well understood. On the other hand, there are not the same safeguards as in the sale of a business where, for example, ambiguities in identifying IP are often sufficiently addressed by sweeping catchall language. This Section provides an overview of the basic IP issues that are likely to arise in relation to the divestiture or spin-off of a business out of a larger company or group of companies as well as strategies for approaching such issues. In particular, this Section identifies (a) certain threshold IP distinctions that are particularly relevant to spin-offs, (b) certain general steps for identifying the IP that the spin-off company should have after separation, and (c) some of the issues and strategies to consider in assessing if and how such IP can be transferred or otherwise made available to the new company.
2. Threshold Distinctions As a threshold matter, there are two distinctions useful when addressing IP considerations in preparing a plan for a spin-off or divestiture.
2.1 Owned vs. Licensed IP The first distinction is between IP owned by the existing company and IP licensed to the existing company by third parties. Typically, the existing company can easily assign or license its owned IP. Rights to third party IP may be transferred by assigning the underlying license agreement or by granting a sublicense. Either method, however, may require consent from the third party licensor. Such consent may be conditioned on additional fees or on other terms and conditions. If consent is withheld, the new company may need to negotiate its own license for the third party IP or do without.
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2.2 Registered vs. Unregistered IP The second distinction is between IP that is registered with a government agency and IP that is not. In the United States, for example, patents and trademarks are registered with the United States Patent & Trademark Office (the “USPTO”) while copyrighted works are registered with the United States Copyright Office. Registration is not required with respect to trademarks and copyrights. Registered IP is easier to identify, and registration often establishes a legal presumption of ownership. Conversely, unregistered IP is more difficult to identify, and proof of ownership is most often dependent on contractual documentation.
3. Identifying Intellectual Property (Due Diligence) The first step in preparing for a spin-off from an IP perspective is to create an inventory of relevant IP and any pertinent use or transfer restrictions. A general needs assessment can then help identify the IP that should be made available to the spin-off company, if possible. An analysis of such IP, as well as the party’s business plans, priorities and position, can help determine how to structure the transfer for maximum effectiveness. For simplicity, this Section separately addresses IP inventory generation and IP relevance assessment. This may suggest that a complete inventory must be established before considering IP relevance. In practice, however, these inquiries are undertaken concurrently, so that the scope of assets subject to inventory is continually defined by an assessment of the relevance of particular existing company IP to the spin-off business.
3.1 Owned Technology Inventory (What IP does the Existing Company Have?) Separate inventory strategies are considered below for each of the principal forms of IP. It is important to note, however, that many assets may be subject to multiple forms of IP protection. Commercially distributed software might, for example, constitute key copyright assets. If the source code (human readable form) of such software is not generally distributed externally, such code may also constitute an important trade secret. The inventory should not only include the identity and description of the relevant IP but also an indication of how the IP was acquired – i.e., through internal development, a third party developer or an acquisition. •• Patents. Patents are the easiest IP to inventory, as patent attorneys typically maintain detailed files and patent lists. Moreover, a search for patents on the national registries is easily undertaken to verify ownership, inventors, assignments and certain recorded liens. In certain jurisdictions, however, patent applications are either not publicly available or only become publicly available after a certain period (usually 18 months) after their initial filing. A patent search should not be limited to records referencing the existing company if the existing company has: (a) a history of mergers, acquisitions or corporate reorganizations; (b) no standard employee invention assignment procedures (or low compliance with such
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procedures); or (c) regularly involved third parties in development activities. In such cases, it may be prudent to conduct searches with respect to the applicable employee inventors, third party developers, predecessor companies and other applicable third parties. •• Copyrights. An effective inventory of copyright assets should, at a minimum, contain a listing of all registered copyrights as well as any other key works of authorship constituting commercial products of the company (e.g., software for a software company, film for a movie studio, etc.) as well as supplemental material distributed with such products (e.g., manuals, guides, inserts and so forth). Key copyright assets may also include material used only internally or produced for limited distribution, including manuals and training material, as well as software and tools used in the production or manufacturing process. •• Trade Secrets. In certain cases, there may be specifically documented trade secrets in internal operations or procedures manuals, in recipes and formulas, and in invention disclosures and pending patent applications. In many cases, however, trade secrets consist of undocumented know-how. In such circumstances, there may be no substitute for interviewing engineers and other personnel to identify if any trade secrets exist and their relative value. This may be particularly important where the company has not otherwise pursued patent protection for its inventions and where it is important to understand the scope and significance of a company’s trade secrets for valuation purposes. •• Trademarks. As with patents and copyrights, it is relatively straightforward to inventory the existing company’s registered trademarks through the applicable national registry. Note that in the United States, trademarks are occasionally registered with individual state registries. As with copyrights, however, companies frequently decline to register a substantial portion of their trademark portfolio. A thorough trademark inventory, then, may require a more deliberate consideration of product names, marketing collateral and other promotional material. In addition, in identifying unregistered trademarks, it is important to bear in mind the broad scope of matter subject to trademark protection including, for example, certain trade names, service marks, logos, slogans, and trade dress (which, in turn, can encompass such matter as product shapes and packaging, uniforms and company colors).
3.2 Licensed Intellectual Property Inventory Inventory of licensed IP has historically focused on licenses for specific IP that is incorporated in or that constitutes a specific component of the spin-off company’s technology or products. While such traditional in-bound agreements are often critical, it is important to also consider: •• Settlement License Agreement •• Cross-License/Non-Assertion Agreements
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•• Commercial Off the Shelf License Agreements •• Development Agreements •• Development Tool License Agreements •• Joint Venture Agreements •• Founders Contribution Agreements •• Non-Disclosure Agreements These agreements should specifically be reviewed for limitations directly restricting either the transfer of the agreement to the spin-off company or the grant of a sublicense by the existing company to the new company. In addition to the license scope, license restrictions, non-compete arrangements and similar provisions in the agreements, these should be reviewed to determine whether the disclosure to or use of confidential information by the new company would constitute a breach of any such agreements.
3.3 Owned IP Encumbrances Although companies generally have broad rights to exploit and transfer their owned IP, such flexibility is often compromised as discussed below. These considerations impact the extent to which an IP asset can be made available to the spin-off company, the relative value of the IP asset to the parties, and the most effective manner in which the asset can be made available to the new company. •• Co-Ownership. Co-ownership of IP with third parties might arise, for example, if the IP is developed through a joint venture or under a collaboration agreement. Co-ownership limits the exclusivity that either co-owner has and can grant third parties with respect to such IP. In addition, under certain copyright regimes, unless the owners expressly agree otherwise, each owner of a copyrighted work is obligated to account for and share in the profits from the exploitation of such work with the other co-owners. Similarly, it may be impossible to enjoin an infringer of co-owned IP, unless all co-owners joined in the applicable action. •• Retained Rights. Retained rights in IP otherwise owned by the existing company can take a variety of forms. Some of the most common include: – Broad Reservations (Grant-back) – An assignor of IP rights may receive a grant-back to enable the assignor to continue its business or to exploit a particular field. – Rights in Incorporated Elements (Background Technology) – A developer, for example, may retain rights to pre-existing IP that is incorporated into a deliverable. Licenses for software development kits frequently retain rights in libraries, reference files or portions of the tool itself that is incorporated in the resulting software product.
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– Reversionary Rights – A technology assignment agreement may include various recapture rights for IP that proves commercially successful or, on the other hand, for IP deemed to be abandoned by its original owner (either expressly or by failure to commercialize). •• Ownership Uncertainty. – Prior Third Party Owners – Did the government registry fail to properly identify the existing company as the owner of the IP and instead list a prior owner? – Employee Assignments – Are there appropriate assignments from employees or contractors that have developed IP for the existing company? If not, it may be necessary to execute confirmatory assignments. Note, however, that such assignments may not be effective for previously created works unless further consideration is provided. – Third Party Claims – Is the IP the subject of any pending or threatened litigation? •• Outbound Licenses. Outbound agreements are critical as they identify the technology commercialized by the existing company prior to the spin-off. In addition, such agreements identify commitments with respect to the licensed IP including: – Rights Availability – Is the IP already exclusively licensed to a third party? – Future IP – Is the existing company committed to provide/license its future IP (improvements or new technology) to any third party? – Know-How Transfer and Support Commitments – Is the existing company obligated to teach third parties how to use its IP or to maintain and support the use of its IP by third parties (e.g., with respect to licensed software)? Has the existing company placed any of its sensitive IP into an escrow agreement (to be released, for example, if the existing company defaults under a support agreement)? •• Liens and Security Interests. Care should be taken to identify any liens or security interest applicable to any IP that may be transferred to the new company. This should include consideration both of liens granted with respect to general intangibles of the existing company as well as liens and security interests that specifically identify the subject IP. Of particular concern are any liens or security interests for which a transfer to the new company would trigger a “due on sale” or other right of acceleration for the secured party.
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4. Structuring the Transaction (Who will Get What and How) Once it is clear what IP the existing company itself owns and uses, and what the various encumbrances with respect to such IP are, the parties can: (a) undertake a needs assessment to identify the IP to be made available to the new company; and (b) identify how the IP aspects of the spin-off should be structured in terms of the allocation of IP ownership and other rights.
4.1 Needs Assessment (What You should Look for) Frequently parties limit the needs assessment for the new company to an identification of existing IP covering products, tools and processes used by the new company as of the proposed closing date. NewCo’s IP needs assessment should also include careful consideration of: •• IP Needed for Future Spin-Off Company Business Operations. Consider, for example: 1. Current software that enables general business/administrative functions such as general IT operating systems, docketing programs, payroll and human resource tools; SAP/invoicing processing 2. Current development efforts to be transferred to the new company (and the new company’s plans for its future development). – Does the existing company control any IP that is necessary to pursue potential development projects? •• Defensive Needs. If the new company will operate in a field with pervasive patents and litigious competitors, what IP might the new company need to be able to compel a settlement with or otherwise deter would-be claimants?
4.2 Ownership Allocation The mere fact of the new company’s need to have the benefits of certain existing IP, of course, does not necessarily mean that the owned IP should be assigned to the new company (or that an agreement for licensed IP should be assigned to the new company). •• Benefits of Ownership. While freedom to use matter covered by IP may be obtained through either assignment or license, the IP owner is typically best positioned to use and control IP and thus to determine, for example: the form of IP protection; where (in what countries) IP protection is sought; when IP rights may be compromised/sacrificed; and when (and against whom) IP rights are enforced. •• General Ownership Allocation Considerations. A variety of factors influence whether the specific IP assets should be assigned or licensed to the new company (or whether the new company must make other arrangements) including:
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– Contractual or Regulatory Transfer Restrictions – For example, PRC technology transfer rules impose restrictions and requirements with regard to the transfer of IP. – Availability of Third Party Consent – Can required consents be obtained without additional cost? Would approaching the licensor for consent otherwise be problematic? – Relevance to Current and Future Business – Does the IP primarily relate to the business or technology of one or the other party? – Employees Transfer – Will the employees that developed the IP be transferred to the new company or be retained by the existing company? – Capacity to Exploit – Will one entity or another be better situated financially, or with market position, to exploit the technology? – Defensive Use – Is either the new company or the existing company in greater need of the IP for defensive purposes (either to bolster the patent portfolio as a whole or to avoid sector gaps)? – Pending Disputes – Is the existing company or the new company better positioned to favorably resolve any pending dispute? •• Jurisdictional Consideration. Ownership allocation decisions may also be affected by the IP rules specific to the jurisdictions in which the existing company or the new company is based or has subsidiaries (or in which the IP is located). Some countries, for example, require that technology developed within the country be owned by entities based in the country and require that the government also have use rights with respect to such technology. Certain countries also only permit trademark registration by entities based in such countries.
4.3 Transaction Documents Having decided which IP should be assigned and which should be retained, the IP transaction documents can be prepared to execute this plan. Whether the IP is assigned or licensed to the new company, however, is only the first aspect of structuring the IP transaction documents. Although it is impossible to canvass all of the various issues and potential transaction solutions, the following is a general selection of certain issues the parties may encounter. •• Assignments. – Timing of Transfer – Should a planned assignment of IP initially be licensed until an encumbrance can be cleared (e.g., a consent, dispute, or related agreement)?
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– Restrictive Covenants – If IP is to be shared, should the parties’ respective rights be limited to separate and distinct fields of use? – Subsidiaries and Related Companies – If any IP to be assigned is owned by an existing subsidiary or affiliate, the parties will need to determine how the transfer will be accomplished. Strategies include: (a) transferring such IP to the new company prior to the spin-off; (b) including a requirement that the existing parent company “cause” its subsidiary to transfer the IP to the new company; and (c) arranging for the direct transfer between the parties’ respective subsidiaries or affiliates, as applicable. •• License Grants and Grant Backs. IP licenses granted in connection with a spin- off are not necessarily equivalent to an assignment and, instead, are generally far more nuanced in that, for example: – Upstream Limitations – The license to the new company must conform to any in-bound license agreement or other third party commitments regarding restrictions on use. – Downstream Restrictions – The licenses granted to the new company must be consistent with other licenses granted by the existing company to other third parties (e.g., where the existing company has already granted an exclusive license to the IP to a third party). – Protection of Core Business – Even if not required by upstream or downstream compliance considerations, the parties often create field of use limitations so as to prevent either party from using shared IP to compete with the other party, but subject to antitrust constraints. – Background vs. Foreground IP – The license between the parties may have distinct license grants for “Foreground IP” (IP that is specifically identified and associated with a specific product or project) and “Background IP” (general IP that is not specifically identified, is not unique to a particular product or project). While rights to Background IP is often necessary to ensure that the parties have the IP they need to carry on their current business after separation, there is often discomfort in granting broad rights since the parties do not know exactly what they are “giving up.” Accordingly, Background IP licenses only permit the use of such IP to make and sell products that the licensee is making and selling as of the separation date. •• Rights to Improvement. Because the general intent of a spin-off is to separate the existing company and the new company going forward, rights to future technology are often of less importance. Nonetheless, rights to future improvements on the IP assigned upon divestiture may be pertinent where: – Continuing Commercial Relationship – The parties will continue an existing service relationship between themselves post-separation. In
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connection with such an agreement, the parties may make commitments to continue to provide access improvements to its technology in connection with the services (e.g., upgrades and updates to software developed by the party to software used by the other party). – Unblocking Licenses – Both companies contemplate independently pursing substantial development work on shared IP after separation. Because independent development is not a defense to patent infringement, each party’s development has the potential to block development avenues available to the other party with respect to the shared IP. The cross license between the companies, then, may include patent licenses to improvements as necessary to prevent such development blocking. •• Defensive Rights Rescue. Because a spin-off necessarily decreases the IP assets of both the parties, frequently one or both parties will feel more vulnerable to an infringement action by a third party (e.g., that party has fewer weapons with which to “fight back”). To mitigate such risk subject to antitrust restrictions, the parties might agree that if one party is sued, the other party may be required to: (a) bring whatever claims it may have against the original plaintiff; (b) assign certain relevant patents that may be asserted in a counterclaim against the original plaintiff; and/or (c) terminate any sublicense granted to the plaintiff under the defending party’s IP. •• Technology Transfer (Key Personnel). The parties should not overlook the transfer of any material and learning necessary to enable the new company to understand and effectively exploit the IP assigned or licensed by the existing company. Such a transfer may include the provision of materials including IP embodiments, instruction manuals, notebooks and similar items explaining the IP. Where the know-how is undocumented, the spin-off documents may include commitments to provide training and technical support necessary to effectuate a satisfactory technology transfer. If there are key individuals holding critical know- how (e.g., in the form of in-depth experience or expertise), it is important to ensure either that there is agreement (from the company and the individuals concerned) that such individuals will be transferred to the new company, or that they will be made available for a period post-completion to provide training and transitioning assistance. •• Tax Considerations. While tax related matters are beyond the scope of this Section and addressed elsewhere in this Handbook, the parties should remember to carefully consider IP-related tax considerations including transfer taxes and the establishment of IP holding companies. •• Antitrust and Competition Considerations (A Word of Caution). In considering any allocation of use rights for assets shared between the existing and new companies (whether by co-ownership, license or otherwise), it is important to consider the potential applicability of antitrust and competition law. While a detailed
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exploration of such laws is beyond the scope of this Section, it is sufficient to note that in certain jurisdictions a number of restrictions in IP license and transfer arrangements are unenforceable and in some cases illegal. Depending on the parties’ shares in the respective markets, problematic restrictions may include limitations on a party’s right to use its own IP as well as license restrictions that expressly or effectively allocate markets or customers amongst potential competitors.
5. Effectuating the Transaction In addition to the basic structural issues described above, there are other issues that should be addressed to properly effect the divestiture or spin-off from an IP perspective.
5.1 Repair Ownership Gaps To effectively transfer ownership of IP owned by the existing company prior to separation, the parties should ensure that any problems identified in the course of due diligence with respect to the documented chain of title have been corrected. That is, the parties should ensure that the existing company is the documented and, for registered IP, the record owner of all IP it purports to assign to the new company. Where chain of title problems exist, the parties may need to compile documents necessary to document ownership and chain of title (including prior assignment agreement, employee invention agreement). If any of such documents are missing, replacement documents may need to be executed. As mentioned above, however, where no prior assignment obligation can be documented, it may be necessary to provide the assignee at least some nominal consideration in order to ensure the new assignment document is legally binding. Once the existing and replacement documents have been compiled and executed with respect to registered IP, the assignments should be recorded with all of the applicable government registries.
5.2 Record Assignment of IP Typically, a number of short form confirmatory deeds of assignment are used to record the transfer of registered IP. Each jurisdiction’s registry has its own requirements with regard to the form of assignment documentation. Some jurisdictions require an assignment in local language; some countries require the assignment to be certified, notarized, legalized or even apostilled; some require assignment to be in the form of a deed, etc. Thus, in each jurisdiction in which registered IP is to be transferred, separate documents are used for each form of registered IP (patents, trademark registrations, registered designs and any applications for any of these). These short form documents may be executed at the time of separation. More often, however, the forms for such agreements are attached as exhibits to the general assignment document executed at separation. The individual pro-forma agreements can then be executed and recorded as a post-completion exercise.
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5.3 Record License Agreements In addition to recordation of assignments to owned IP, the assignment of certain contract rights to IP can also be recorded with the applicable national registries. This is not always essential, but failure to do so may have negative consequences under local law, including loss of priority and enforcement rights. Recordation of license assignments is most important where the license grants exclusive rights in the applicable IP, or the IP license consists of trademarks. Bear in mind that such recordation applies to certain of the third party licenses assigned to the new company as well as the licenses granted under the principal transaction agreements between the existing and new companies (including grants by the existing company to the new company as well as grant back license from NewCo to OldCo).
5.4 Obtain and Document Third Party Consents and Acknowledgements All consents obtained for an assignment of IP, for the assignment of an IP license or to sublicense IP should be documented in writing. Where the assignment of an agreement is at issue, it is ideal (whether or not consent is required) to document a complete novation (i.e., an express acknowledgement from the other party to the agreement that the new company takes the place of the existing company for all matters under the agreement going forward) to effectively release the existing company from liability incurred by the new company after the agreement is assigned. Note that even where an agreement by its terms does not expressly require consent or notice, written notice to the licensee of the assignment may be required for the assignment to be effective under local law.
5.5 Allocate Value As discussed above, in those jurisdictions where there may be requirements to pay a stamp duty on the transfer of a registered intellectual property right, it will be necessary to include both an apportionment of value in the asset transfer agreement for each of the registered rights, and a fair valuation figure for the national registration should be included in the short form assignment for each relevant country.
5.6 Comply with Other Jurisdiction Transfer Protocol Identifying the jurisdiction of creation and development is also critical for ascertaining and implementing the appropriate transfer process and requirements. In addition to following the proper registration and notice practices, if any, some jurisdictions have significant substantive transfer requirements. For copyright works (but not computer software), it is also important to check that any assignment documentation includes confirmation that an express waiver of the so called “moral rights” of the creator has been granted.
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Section 14 Transition services and other post-separation matters
The separation of businesses cannot be effectively implemented overnight. The separated business will continue to depend on the parent company to provide certain services essential to its operations. To ensure a smooth transition following the separation and in order to manage and sustain the new structure that results immediately subsequent to the separation process, one or more transition services agreements should be put in place between the parent company and the separated business for the provision of administrative, financial, management and other services. Typically, shared/transitional services include: •• information technology services, including desktop, data center, mainframe, voice communication and email systems and support; •• human resource services, including payroll processing and employee benefits plan administration; •• financial and accounting services; •• logistics services; •• procurement services; and •• marketing services. Even though transition services relate to the post-separation period, the process for identifying the types and scope of services to be provided, the length of time the services are likely to be needed and identifying how the services will be charged for should be started well before the target date for the separation. Representatives from different constituencies within the company should participate in this process, including employees who will remain with the existing company and employees who will be transferred with the separated business. It is vital, in this respect, to involve individuals who have intimate knowledge of the business operations being separated. Such a transition team should ideally be involved throughout the entire life-span of this process, from identifying the services to be provided to their eventual termination. The separated business will need to receive transition services to effectively operate during an interim period until such time as it can source its own services, at which point the transition services can be terminated. A schedule for phasing out and eventually terminating transition services must be considered and included in the transition services agreements. Certain services may only be needed for a short term and can be phased out over a span of 6 to 18 months. However, the parties may identify other services that they do not anticipate to be separated in the near term (more than 18 months generally serves as a guideline), and such services may be more appropriately addressed in a separate, long term shared services agreement.
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As the separated business becomes more independent and develops its own business goals, careful attention must be paid by both parties to observing the terms of the transition services arrangements and monitoring progress towards the agreed termination of services. The transition team that, ideally, was formed during the early stages of the process can be helpful in resolving issues before they develop into disputes and can serve to propose and monitor any changes to the transition arrangements that are necessary to fit the evolving needs of both parties. It should be noted that transition services related to information technology (“IT”) often present particularly thorny issues. For example, the company will need to determine whether any third party licensor or supplier consents are required to sublicense contracts relating to IT services and, if so, develop a plan for addressing such consents in a time- efficient manner. In some cases, additional seats or licenses may be required in order to transfer rights to the new entity. Another consideration is whether existing IT systems can be used without change or whether modifications are required in relation to the separated business. Finally, it should not be overlooked that the provision of transition services after the separated business is sold to a third-party buyer or is spun-off as a separate, publicly held company may have other legal ramifications, such as giving rise to data privacy questions or to implications under the Sarbanes-Oxley Act. For example, if in connection with the provision of payroll services, the parties are sharing systems that contain data on employees, it may be necessary to put in place a data privacy contract or other protections with respect to the use of such information. Sarbanes-Oxley compliance issues may arise in the context of accounting and financial transition services and the ability to assess internal controls over financial reporting.
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