Acquiring a Corporate Subsidiary or Division Strategies for Buyers and Sellers in Carveout Deals

Transcription

1 Presenting a live 90 minute webinar with interactive Q&A Acquiring a Corporate Subsidiary or Division Strategies for Buyers and Sellers in Carveout Deals THURSDAY, FEBRUARY 10, pm Eastern 12pm Central 11am Mountain 10am Pacific Td Today s faculty features: Dennis J. White, Partner, Verrill Dana, Boston Scott T. Whittaker, Member, Stone Pigman Walther Wittmann, New Orleans Murray J. Perelman, Partner, Bennett Jones, Toronto, ON, Canada Steven J. Joffe, Managing Director-Corporate Finance, FTI Consulting, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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4 Strafford Publications, Inc. Steven Joffe com NEW YORK Murray J. Perelman TORONTO Dennis J. White BOSTON Scott T. Whittaker NEW ORLEANS February 10, 2011

5 Disposition of a Business Unit by A Corporate Seller The Business Unit Can Take Different Forms A long standing g subsidiary An unincorporated division A new subsidiary into which assets have recently been dropped 5

6 Opportunities a buyer may be positioned to provide what the business unit requires to perform at a new, higher h levell Challenges the buyer must understand what it is buying and what the business unit requires to operate and succeed 6

7 The business unit no longer fits with the seller s overall business strategy Sale to generate cash to pay off debt, finance an attractive acquisition, stay solvent Disposition compelled by antitrust or other regulatory reasons A buyer would be well advised to understand the true reasons it affects timing, pricing, leverage 7

8 Typically, the business unit is dependant in some fashion upon the corporate parent or corporate affiliates. administrative/operational support vendor relationship customer relationship intellectual property It isn't always just one way This reality must constantly be kept in mind in planning due diligence, negotiating deal terms and fashioning post closing transitional arrangements. Can (should) a Seller plan ahead? 8

9 Financial i Statements t t for a business unit may be unavailable, incomplete or misleading the Parent may never have prepared consolidating financials allocation of group overhead may not reflect business realities related party transactions such as the leasing of property or the provision of raw materials may not be priced at market external payables and receivables may be intermingled with other members of the consolidated group 9

10 there may be group liabilities bl such as those associated with pension liabilities, tax liabilities and environmental liabilities for which the business unit may continue to be jointly and severally liable a lack of Sarbanes Oxley required controls may present a problem for a buyer that is public or plans to be public Affiliate Transactions Group Liabilities Operational Support Needed 10

11 The term spin off has different meanings to financial and tax professionals for financial professionals a spin off may involve nothing more than issuing stock of a subsidiary to the public to provide needed capital to its parent for tax professionals a spin off would involve a distribution of the stock of a subsidiary to the shareholders of its parent A spin off in a financial sense will not result in a tax with respect to the issuance of new shares of the subsidiary unless a corporate parent sells its own shares If more than 80 percent of the stock of the subsidiary (by vote and value) is sold to the public the subsidiary will no longer be eligible efor inclusion in a consolidated federal income tax return filed by its parent 11

12 the tax attributes (e.g. net operating loss carry forwards) of the subsidiary will leave the consolidated group but after reduction for attributes used by the group in that year any loss sustained by the parent when it sells its own stock of the spin off subsidiary may be disallowed for tax purposes under so called uniform loss rules A spin off in a tax sense will not result in a tax to the parent or its shareholders if the distribution of stock by the parent satisfies the following requirements: the distribution includes at least 80 percent of the total combined voting power and at least 80 percent of the total number of all other classes of stock of the subsidiary; 12

13 the subsidiary engaged in the active conduct of a trade or business, and was not acquired in a taxable transaction, during the five year period immediately before the distribution; the parent and the subsidiary engage gg in an active trade or business immediately after the distribution; the distribution is not a device for the distribution of the earnings of the parent, the subsidiary or both to the shareholders of the parent; and the distribution has an independent business purpose 13

14 Financial spin offs are generally used to monetize subsidiary value while tax spin offs are often used to separate wanted and unwanted business. In the latter case, real care must be taken to make sure that any post distribution sale of the stock of the parent or subsidiary is not pre arranged and thereby construed to be a device 14

15 Two basic structures: asset sale or stock sale Regardless of structure buyer must ensure it is getting the right assets and assuming the right liabilities Buyers Beware of Successor Liability: Statutory Liability: e.g. bulk sales laws; tax laws; environmental laws Jurisprudential Theories: e.g. product line theory; de facto merger 15

16 Methods of obtaining the right assets and avoiding unwanted liabilities: Due Diligence Documentation: reps and warranties; covenants and indemnification 16

17 338(h)(10) elections A Section 338 (h)(10) election to treat a sale of the stock of a subsidiary as a sale of the assets and tax free liquidation of such subsidiary for tax purposes is something that t must be considered d in any carve out Section 338 (h)(10) eliminates the need to transfer of title of assets and some of the sales and other transfer taxes attendant to asset sales 17

18 The buyer gets to mark the tax basis of the subsidiaries bidi i assets to market and reduce the cost of the transaction because of tax savings generated by additional tax depreciation of PP&E or tax amortization of goodwill or other intangibles Because the transaction is treated as a tax free liquidation of the subsidiary unwanted assets can be stripped out of the subsidiary in connection with the sale of stock without tax Net operating losses of the subsidiary can be used to offset any gain in the deemed sale of assets which is particularly valuable where losses will expire 18

19 A Section 338 (h)(10) ) election does present some traps for the unwary buyer A Section 338 (h)(10) election must be made by both the buyer and the seller and the seller may condition its agreement to join in an election on a make whole payment for any additional tax it might incur as a consequence of a deemed asset sale, rather than a stock sale Some states do not permit Section 338 (h)(10) elections and any election for federal income tax purposes may result in tax on the deemed sale of assets payable by the buyer 19

20 What Is The Value Of And The Proper Price For The Business Unit? Representations and Warranties Financial Statements and Reporting Adequacy of Assets Liabilities ERISA, environmental, others Earnouts, Seller Paper, Escrows Disfavored 20

21 Third Party Consents Release of Liens Assignment of Leases, Contracts Change In Control Triggers Use of Tradenames Logistics of Changing Signage, Labeling Interim License 21

22 Who is providing what ht to whom? Products, services or both? Availability ab ty(and dtiming) g)to replace Are post closing arrangements priced into the deal already? Include ongoing arrangements in the Purchase Agreement or in separate standalone documents? Do Transitional Services Agreements (TSAs) contain usual arm's length commercial arrangement contract terms? Are any essential services? 22

23 Some typical TSA provisions Duration, extension rights Pricing a la carte or fixed rate? 23