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Stephen Fiamma, Brenda Coleman and Richard Evans 26 November 2008 BS:1633511 Tax and corporate considerations in mergers of UK and US companies
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Stephen Fiamma, Brenda Coleman and Richard Evans26 November 2008BS:1633511
Tax and corporate considerations in mergers of UK and US companies
Structuring UK:US Public Mergers
Basic structural considerations Use of DLC structures US tax issues UK tax issues
DLC Overview: Thomson Reuters
Thomson Thomson ShareholdersShareholders
Former Reuters Former Reuters ShareholdersShareholders
Thomson Thomson Reuters Corp Reuters Corp
(Canada)(Canada)
ThomsonThomsonReuters PLC Reuters PLC
(UK)(UK)
Thomson Assets
Reuters Assets
Equalization Agreement
Cross Guarantees
Combined Business
(Not suitable for US companies)
Our Transaction(s)
Publicly listed purchaser Publicly listed target Consideration is a mix of cash and shares Use of loan notes? Financing the acquisition - in the UK or the US?
Buying into the US: Forward/Reverse Triangular Mergers
Before:
Acquirer Acquirer ShareholdersShareholders
Target Target ShareholdersShareholders
TargetTarget(US)(US)
Rest of Target Rest of Target GroupGroup
Acquirer Acquirer (UK)(UK)
Rest of Rest of Acquirer GroupAcquirer Group
AcquirerAcquirerUS SubUS Sub
Buying into the US: Forward Triangular Merger
After:
Original AcquirerOriginal AcquirerShareholdersShareholders
Former TargetFormer TargetShareholdersShareholders
AcquirerAcquirer(UK)(UK)
Rest ofRest ofAcquirer GroupAcquirer Group
Acquirer US Sub Acquirer US Sub (Target having merged (Target having merged
with and into it)with and into it)
Rest of Target Rest of Target GroupGroup
Buying into the US: Reverse Triangular Merger
After:
Original AcquirerOriginal AcquirerShareholdersShareholders
Former TargetFormer TargetShareholdersShareholders
AcquirerAcquirer(UK)(UK)
Rest ofRest ofAcquirer GroupAcquirer Group
Target (Acquirer US Target (Acquirer US Sub having merged Sub having merged
with and into it)with and into it)
Rest of Target Rest of Target GroupGroup
UK buying into the US: Basic issues
Issue of shares by a UK PLC requires a prospectus US merger often requires third party consents US target shareholder approval SEC registrations of offeror’s shares Appraisal (dissenter) rights may be triggered on a
merger
Buying into the US: Obstacles Posed by US Tax
US domestic reorganization (rollover) rules
“Toll charge” on “outbound” transactions
“Anti-inversion” rules
US Domestic Reorganization Rules: Share-for-Share Deals/Sec. 351
Transfers of “property” to corporation tax-free
Transferor group must obtain 80% of vote and 80% of all other classes of stock of transferee
Transferor group must receive “stock” of transferee
US Domestic Reorganization Rules: Share-for-Share Deals/Sec. 351
UK Shareholders
Target US
US Shareholders US Shareholders
AcquirorUK
UK ShareholdersContinuing Acquiror Shareholders
US Target
Former Target US Shareholders
UK Acquiror
Former Target UK Shareholders
Former Target UK Loan Note
Holders
60%15% 25%
Former Target US Shareholders
NO “80% CONTROL GROUP”
One corporation acquires “control” of another solely for voting stock of acquiror or its immediate parent
US Domestic Reorganization Rules: Share-for-Share Deals/“B” Reorganization
US Domestic Reorganization Rules: Share-for-Share Deals/“B” Reorganization
UK Shareholders
Target US
US Shareholders US Shareholders
AcquirorUK
UK ShareholdersContinuing Acquiror Shareholders
US Target
Former Target US Shareholders
UK Acquiror
Former Target UK Shareholders
Former Target UK Loan Note
Holders
60%15% 25%
Former Target US Shareholders
LOAN NOTES ARE “BOOT”
“Toll Charge” on Outbound Transactions/Sec. 367
Transactions otherwise tax-free still taxable if an international element
Last clear chance for US to tax
Series of somewhat arbitrary rules which distinguish taxable from tax-free reorganizations
Control of foreign acquiror by US shareholders of target a problem
“Toll Charge” on Outbound Transactions/Sec. 367
UK Shareholders
Target US
US Shareholders US Shareholders
AcquirorUK
UK ShareholdersContinuing Acquiror Shareholders
US Target
Former Target US Shareholders
UK Acquiror
Former Target UK Shareholders
20%55% 25%
Former Target US Shareholders
FORMER TARGET US SHAREHOLDERS CONTROL UK ACQUIROR
“Inversion” Transactions/Sec. 7874
Designed to discourage expatriation of companies from US
Looks at ownership of acquiror by all former Target shareholders
60% overlap: Target loses use of tax attributes
80% overlap: Acquiror becomes US resident
“Inversion” Transactions/Sec. 7874
UK Shareholders
Target US
US Shareholders US Shareholders
AcquirorUK
UK Shareholders
Continuing Acquiror Shareholders
US Target
Former Target US Shareholders
Former Target UK Shareholders
20%60% 20%
US Target
20%60%
60% CONTROL OF UK ACQUIROR BY FORMER TARGET SHAREHOLDERS
UK Acquiror
“Inversion” Transactions/Sec. 7874
UK Shareholders
Target US
US Shareholders US Shareholders
AcquirorUK
UK Shareholders
Continuing Acquiror Shareholders
US Target
Former Target US Shareholders
Former Target UK Shareholders
20%5% 75%
UK Acquiror
“Inversion” Transactions/Sec. 7874
Continuing Acquiror Shareholders
US Target
Former Target US Shareholders
Former Target UK Shareholders
20%5% 75%
80% CONTROL OF UK ACQUIROR BY FORMER TARGET SHAREHOLDERS
UK AcquirorUS Acquiror
Former Target US Shareholders
Continuing Acquiror Shareholders
US Target
Former Target US Shareholders
Former Target UK Shareholders
UK Acquiror
US buying into the UK
Acquirer Acquirer
(US)(US)
Acquirer Acquirer UK SubUK Sub
Target Target
(UK)(UK)
US buying into the UK: Basic issues
Transactions are not effected by merger (merger, SEs and EU cross-border merger options exist)
US purchaser will acquire UK target by offer or scheme
Public offer of securities in the UK: FSA-approved prospectus requirement under FSMA
Takeover of a UK PLC is governed by the Takeover Code: offer document requirement
US buying into the UK: Offer or Scheme?
Key differences Target co-operation needed for a scheme Acceptance levels/apathy and dissent Flexibility Timing Competing bids Presentation as a “merger” Recent City Code amendments to scheme of
arrangement became effective on 14 January 2008
US buying into UK - UK Tax Objectives
Relief for interest in UK (and US?) Avoid withholding tax in the UK on interest Minimise stamp duty Rollover for UK shareholders
Interest relief in the UK (I)
US
UK Bidco
UK Target plc
Form UK acquisition vehicle if relief required for funding costs in UK
Place of incorporation of UK Bidco?
UK Bidco can be funded directly by third party or from within group
Check the box on UK Bidco Hybrid debt
Interest Relief in UK (II) Anti avoidance rules
Transfer pricing. Para 13, Sch 9 FA 1996, s.787 ICTA 1988. Arbitrage rules – chapter 4 part 2 F (No. 2) Act 2005. PBR – Worldwide cap on tax deductions for interest –
limited to group’s external finance cost. Late payment of interest, para 2, Sch 9 FA 1996.
Previous practice: funding bonds. Late interest payment rule disapplied/legislation awaited.
Group relief (avoid trapped losses). Withholding tax. Timing Issues. Where no Treaty/Directive protection – quoted Eurobond.
Stamp Duty
½% stamp duty on share acquisitions (i.e. offer).
No stamp duty on S.425 cancellation scheme
BUT If cancellation scheme - ensure no impact on
rollover relief
Rollover – Cancellation Scheme
On a cancellation scheme Consideration paper need not be issued by bidder If shares issued, scheme qualifies as a reconstruction
and rollover available (even if also cash consideration)
But reclassify shares if mix and match or cash alternative for shares to satisfy “proportionality” requirement
If cash and loan notes offered (and no shares) need to do part transfer and part cancellation scheme to get rollover relief for loan note
Rollover - Offer
On an offer Consideration needs to
be issued by acquiring company
‘Double rollover’ if shares to be issued by US parent
Use of put/call options if double rollover
If loan notes to be issued exchangeable for US shares - non QCBs, if shares to be issued - non UK incorporated Bidco.
US Parent
UK Bidco
UK Target plc
Target shareholder
Target shareholder
loan notes/ shares
Dual Headed Structures
Tax treatment of equalisation payments.
Residence issues.
US/UK dual headed structures?
Redomiciliation of Topco
Is a UK holding company unattractive?
PBR – foreign dividends exempt.
Uncertainty over CFC rules, still subject to consultation.
New Topco may be Jersey incorporated, Irish tax resident with DAS.
Advantage of structure depends on facts.
Topco
UK
US
Other subs
Questions?
These are presentation slides only. The information within these slides does not constitute definitive advice and should not be used as the basis for giving definitive advice without checking the primary sources.
Allen & Overy means Allen & Overy LLP and/or its affiliated undertakings. The term partner is used to refer to a member of Allen & Overy LLP or an employee or consultant with equivalent standing and qualifications or an individual with equivalent status in one of Allen & Overy LLP's affiliated undertakings.
