Overall Perspective on Tax Planning Not a one-time thing

Transcription

1 The Impact of Tax Reform on Deal Structure, Tax Leveraged Opportunities in the Life Sciences, and Other Financial Considerations for Life Sciences Deals Drew Adams, Vice President, Tax, PerkinElmer Tom Burke, Chief Financial Officer & Treasurer, Hydra Biosciences Barry J. Quirke, Tax Partner, McDermott Will & Emery Al Sokol, Corporate Partner, McDermott Will & Emery Moderator: Alexander Lee, Partner, McDermott Will & Emery

2 Overall Perspective on Tax Planning Not a one-time thing Tax planning for exit starts at the start. It never ends When company is formed and when stakeholders receive equity (VCs and your team) Do it while growing, and during licensing and joint ventures When exiting look for structuring alternatives to maximize deal value Building value for security holders directly affected by long term tax optimization Goal #1: for company stakeholders to keep more of the exit proceeds Goal #2: for an M&A buyer to be incentivized to pay a higher price 2

3 When Investing 3

4 At the Start Tax Planning for Exit - Not a one-time thing Early structuring decisions affect later results VCs Usually prefer portfolio in corporate form - avoids attribution of company s tax status to them If intending multiple future exits from separate IPs (eg, if have platform IP), some investors favor reducing double tax risk by investing in LLC parent company with corporate subsidiaries. Executive teams Usually avoid tax on receipt/holding/vesting by using options. But high tax on exercise, and usually short term cap gains on exit. Usually minimize exercise price by using preferred/common stock structure Always hope for long term capital gains from any exits Overall other tax considerations Does it appeal to future M&A buyers to position your IP ownership overseas? May permit future buyer to fold the IP into the transfer pricing of its existing non-us holdings of IP But harder to implement after the IP has gained a lot of value. 4

5 Investment Strategies - Direct Investment Structure Investor Current Ownership Target Company Drug/ Device Drug/ Device Drug/ Device 5

6 Sample LLC Deal Structure Pass-Through Entity Parent LLC Corporate Subsidiary Corporate Subsidiary Corporate Subsidiary Drug/ Device Drug/ Device Drug/ Device 6

7 While Growing and Commercializing 7

8 While Growing the Company Tax Planning for Exit - Not a one-time thing Licensing and collaborations If you out license, must manage taxes on license royalties Protect licensor from licensee s foreign withholding taxes use tax treaties and also insert a tax gross-up provision Protect US licensor from US income tax by applying accumulated, historic NOLs. Managing double tax If intent to have multiple, serial licenses or exits, then if NOLs are insufficient to offset the income/payments, then a corporate structure could yield double tax when distribute the net income to owners. Tax on two-step deal - license coupled with a later buyout option 8

9 Commercialization Strategies: License/Royalty Structure Investor Target Company Drug/ Device 9

10 Commercialization Strategies: Joint Venture Structure Investor Target Company Joint Venture Drug/ Device 10

11 When Exiting Acquisition and Disposition 11

12 While Selling/Exiting the Company (1 of 2) Tax Planning for Exit - Not a one-time thing Tax Planning by BUYER - avoid surprises, and maximize value If target has revenue must lower its tax rate (perhaps by moving operations), validate its intercompany transfer pricing, optimize its use of foreign tax credits, NOLs and E&P, and assess tax basis in assets. Some buyers prefer that a target offshore its IP before M&A deal, during the stub tax period this is more highly valued, and will utilize historic NOLs that might otherwise be limited anyway post-deal. If target is purely a cost center must assess the utilization of its NOLs Small to medium companies rarely have tax managers. Ensure that parachute payment approvals are obtained. Ensure that all stock options were granted at fair market value 12

13 While Selling/Exiting the Company (2 of 2) Tax Planning for Exit - Not a one-time thing Tax Planning by SELLER Anticipate and align with Buyer s own tax goals. Eg, tax rate adjustments (perhaps by moving operations), intercompany transfer pricing, use of foreign tax credits, NOLs and E&P, offshore Seller s IP to deploy some of its NOLs, etc. Avoid noncompliance tax penalties from em ee stock/comp rules parachute payments ; options granted at FMV; large taxes/options exercise price withheld from employees Consider tax effects of possible contingent payments biodollar/earnouts, contingent value rights, or priority review rights. Ensure that optionholders realize that they get ordinary income rates (not long term capital gains) unless the parent company is an LLC, or unless they exercise options a year ahead of time. If Buyer pays with shares, be sure to use a tax-free reorganization 13

14 Effect of Tax Reform Proposals? Territorial tax proposal (contrast to US worldwide tax system) Large US corporates could more easily use their accumulated foreign profits ($2 trillion overseas). This could increase buyside M&A in US by reducing its cost. E.g., might bring the foreign profits back to US tax-free (or with only a minimum tax), and then use in US buy-side M&A. New pass through tax of 25% may increase value of LLC biotechs (not corporate) New CAPEX (immediate expensing) rules will increase the value of medtech equipment companies - the rules improve the after-tax effect of CAPEX 14

15 Effect of Tax Reform Proposals? cont. Cap gain shift up to ordinary income reduces value of VC/PE s carried interest and of any of their repurposed management fees. But VC/PE conceivably avoid this penalty by using the new 20% pass through tax? Will Congress act against foreign VCs/pharma to level playing field? But, likely that foreign VCs will continue to be exempt on sales of US portfolio investments (via the permanent establishments or trade/business rules). Interest deduction limits could increase cost of leverage in buy-side M&A. Cut in corporate tax rates will lower value of targets that have NOLs. Other tax changes are largely irrelevant for now 15

16 McDermott Will & Emery. McDermott operates its practice through separate legal entities in each of the countries where it has offices. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome.