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Spin-Offs and Carve-Out Divestitures: Navigating Legal and Tax Challenges

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Spin-Offs and Carve-Out Divestitures: Navigating Legal and Tax Challenges Presenting a live 90-minute webinar with interactive Q&A Spin-Offs and Carve-Out Divestitures: Navigating Legal and Tax Challenges Key Considerations for Deal Structuring, Economic Terms, Due Diligence, Asset Transfers, and More THURSDAY, AUGUST 28, 2014 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Andrew M. Eisenberg, Partner, Jones Day, Washington, D.C. Peter E. Izanec, Partner, Jones Day, Cleveland The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10. 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Program Materials FOR LIVE EVENT ONLY If you have not printed the conference materials for this program, please complete the following steps: • Click on the ^ symbol next to “Conference Materials” in the middle of the left- hand column on your screen. • Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the slides for today's program. • Double click on the PDF and a separate page will open. • Print the slides by clicking on the printer icon. Spin-off and Carve out Divestitures – Navigating Legal and Tax Challenges Andrew M. Eisenberg, Partner – Washington D.C. [email protected] Peter E. Izanec, Partner – Cleveland, Ohio [email protected] Note This presentation and the accompanying oral discussion should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. This presentation and the accompanying oral discussion is not intended to, and does not, create any attorney-client relationship. The views set forth in this presentation and given in the accompanying oral discussion are the personal views of the authors and do not necessarily reflect those of Jones Day. 6 Subjects 1. Overview – Transaction Types 2. Tax Issues • Basic Requirements – The As, Bs and Cs • Traps – North-South; Creating Control; Indemnity Payments • Planning Opportunities – Cash-rich split offs and REIT Spins (OpCo/PropCo structures) 3. Getting It Done • Overview of SEC filing requirements • Overview of the corporate issues 7 1. Overview – Transaction Types 8 Tax Efficiency in Divestitures • Aims at minimizing taxable capital gains (and, if applicable, ordinary income) recognized in the transaction • A concept of the utmost importance in M&A: if a tax-free structure can be found that satisfies the non-economic corporate goals of the divesting parent, then it will often present a compelling value that taxable structures will be unable to match 9 The Basics: Types of Structures • “Spin-Off” • “Split-Off” • “Split-Up” • “Reverse Morris Trust” • “Asset Swap” 10 Spin-Offs (Distribution) A spin-off is a transaction in which each D shareholder receives C stock with respect to such holder’s D stock. Before After S/Hs (Pro-rata) S/Hs distribution of C stock to S/Hs D D C C 11 Split-Offs (Redemption) A split-off is a transaction in which the D corporation distributes C stock in redemption of a portion of its stock. Before After S/H1 S/H2 S/H1 S/H2 Distribution of D C D C stock to S/H2 in redemption of D stock C (non pro-rata) 12 Split-Ups (Liquidation) A split-up is a transaction in which the D corporation liquidates and distributes the C1 and C2 stock in complete liquidation. Before After S/H1 S/H2 S/H1 S/H2 Distribution of C1 C2 D C stock to S/H2 in liquidation of D (non pro-rata) C1 C2 13 Reverse Morris Trust Transactions An RMT is a spin-off or split-off combined with a second step merger in which C merges with another entity C stock is typically converted into stock of the surviving entity in the merger Before Step 1: Spin/Split Step 2: Merger and Result Legacy Legacy RMT S/H Legacy S/H (or Legacy Legacy/ S/H tendering tendering Partner S/H) S/H D S/H S/H D Merged D C D Entity C 14 Asset and Stock Swaps • As name suggests, structured as a like-kind exchange of one collection of assets for another • Typically would be structured as an exchange of shares in subsidiaries of the two transacting parties, and potentially coupled with a right- sizing dividend on one side to make the transferred values match 15 Tax Aspects of Asset and Stock Swaps • Asset Swaps – Could be tax-free if like-kind exchange rules apply – i.e., the groups of assets are personal properties of a like class and are considered to be of a “like kind” for purposes of section 1031 • Stock Swaps – Like-kind exchange rules not applicable to stock swaps. Section 1031(a)(2)(B) • Pre-Stock Swap dividend to equalize values – may be tax-free if both the target subsidiary and the exchanging shareholder are members of the same consolidated group, but tax-free distribution results in downward basis adjustment under consolidated return rules 16 2. Spin-off Tax Issues & Requirements 17 Tax-Free Break Ups – Section 355 Transactions/D Reorganizations • Section 355 • Spin-Offs • Split-Offs • Split-Ups • Divisive “D Reorganizations” – Section 368(a)(1)(D) transactions are generally the same as Section 355 transactions, except that property is transferred to the “Controlled” corporation in the transaction. • Like-kind exchanges and asset swaps 18 General Tax Effects of Qualifying as a Section 355 Transaction • The Distributing Corporation • Generally will not recognize gain or loss on distribution of C (or C1 and C2) stock. – Exceptions for distribution of appreciated property other than C stock and C stock in Section 335(d) and (e) transactions. • The Shareholders • Generally will not include any amount in taxable income, or recognize gain on receipt of C stock. – Exception for boot – Boot in a spin-off → Section 301 distribution – Boot in a split-off or split-up → Gain = to lesser of gain realized or FMV of boot • C stock tax basis = portion of D stock basis based on FMV (Carryover basis) • Tacked holding period • The Controlled Corporation • Asset basis = C’s historical tax basis (Carryover basis) • C may succeed to a portion of D’s E&P 19 Requirements of a Section 355 Transaction a. Active Trade or Business - Both D and C must be engaged in the active conduct of a trade or business b. Business purpose – There is a substantial not-tax purpose for the distribution c. Control –D owns C stock satisfying the 80% control requirement, and D distributes C stock satisfying the 80% control requirement. d. Device – The transaction is not principally a device for the distribution of the E&P to the D shareholders at capital gain rates. e. Neither section 355(d) or section 355(e) is violated f. The distribution must satisfy both continuity of shareholder interest (COSI) and continuity of business enterprise (COBE). 20 Active Conduct of a Trade or Business Requirement • Both D and C must be engaged in the active conduct of a trade or business (“ATB”) immediately after the distribution • Trade or Business • a specific group of activities carried out for the purpose of earning income or profit, including every operation that forms a part of the process of earning income or profit, including collection of income and payment of expenses • Active Conduct • perform active and substantial managerial and operational functions • Use of independent contractors alone is not sufficient 21 Active Conduct of a Trade or Business - Five-year requirement • A corporation is engaged in an ATB only if: • The corporation itself is engaged in the trade or business; • The trade or business has been actively conducted throughout the 5-year period ending on the date of the distribution; • The trade or business was not acquired by D or C in a taxable transaction within the 5-year period (unless an expansion of existing trade or business); and • Control of the C which was conducting the 5-year trade or business was not acquired directly by D within the 5-year period in a taxable transaction (unless an expansion of existing D trade or business).
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