Driving change. Achieving results.

Transcription

1 Driving change. Achieving results. Proactively adapting to new tax realities Latin America Tax Summit, Rio de Janeiro 29 February to 2 March

2 Raising Capital on Public Markets in a Challenging Environment John F. Haley, Esq. Broad and Cassel, Co-Head of Latin American Practice Group Manuel Sobrino UBS Investment Bank, Director Greg Featherman KPMG in the US, Partner Rodrigo Stein KPMG in Chile, Partner

3 Agenda SPACs Concept, History and Features SPACs Why SPACs, SPACs 101, SPACs vs. P/E and Evolution/ Appetite SPAC Target is a U.S. Corporation U.S. Tax Considerations Tax Considerations for South American investor SPAC Target is a Latin American Corporation U.S. Tax Considerations Local Tax Considerations 3

4 SPACs Concept History Features John F. Haley, Esq. Broad and Cassel, Co-Head of Latin American Practice Group 4

5 What is a SPAC? A Special Purpose Acquisition Company ( SPAC ) is a company formed for the purpose of raising capital through an initial public offering ( IPO ) of its securities followed by the consummation of a business combination with an operating business selected by the SPAC management team. The SPAC is led by a management team with prior M&A and/or operating experience. The management team must consummate a business combination within months of the SPAC IPO or be forced to dissolve and liquidate all assets to the public shareholders. 5

6 SPACs A Brief History The first SPAC offering came to market in The second round of SPACs was initiated in August subsequent SPAC offerings have raised gross proceeds of approximately $25.5 billion. 115 SPACs have successfully completed a business combination since August Post-business combination, the target companies that merged with SPACs have completed numerous follow-on public equity and debt financings. The third round of SPACs initiated in January Since the beginning of 2010, 41 SPACs have raised approximately $3.46 billion. 6

7 The SPAC Highlighted Features Equity capital raised through fully registered initial public offering 100% or greater of gross IPO proceeds held in trust pending consummation of a business combination Liquidation of trust to public shareholders if the SPAC fails to consummate a business combination within months Stockholder approval of business combination is required Full disclosure to SPAC shareholders prior to vote on the proposed business combination 7

8 The SPAC Highlighted Features (cont d) SPAC Shareholders have the right to receive the cash per share in trust if either: The SPAC shareholder submits its shares for redemption in a transaction that otherwise consummates; or The SPAC fails to consummate a business combination in the allotted time (liquidation) Voting and redemption rights of public SPAC shareholders limit approval to only well-received business combination transactions Insiders receive approximately 20% of post-ipo shares One year lock-up of insiders shares No participation in liquidating distribution & SPAC Sponsors 8

9 Trust Account The trust account guarantees a minimum liquidation value per common share of the SPAC in the event that a business combination is not effected within an18 to 21 month period. 100% or greater of the gross IPO proceeds are placed into a trust account and invested in short-term U.S. government securities (treasuries) The assets of the trust account are only released if: A business combination is approved; or A business combination is not consummated within months of the initial SPAC offering Provides a minimum liquidation value per share to public SPAC shareholders in the event that a business combination is not effected or to SPAC shareholders that seek conversion in the event that the business combination is approved 9

10 SPAC Sponsor Attributes Outstanding reputation and brand name recognition in the market Significant acquisition and deal structuring experience Proprietary deal sourcing network Developed network in the investment community Track record of creating shareholder value Understanding of private to public arbitrage Commitment and infrastructure to support the SPAC Attractive deal structuring ability 10

11 SPACs Listed on U.S. Exchanges SPAC Offerings Number of Offerings Amount (Billions) SPAC Offerings Since $ 25.5 Seeking a Business Combination 14 $1.6 Announced a Business Combination 0 $0.1 Completed a Business Combination 115 $14.1 Liquidated 73 $9.7 SPAC Offerings Underwritten by EBC Since $3.8 Seeking a Bussiness Combination 5 $0.5 Announced a Business Combination 1 $0.1 Completed a Business Combination 38 $2.4 Liquidated 14 $0.9 As of January 6, 2014 Source: Public Company Filings 11

12 SPACs Why SPACs SPACs 101 SPACs vs. P/E Evolution/ Appetite Manuel Sobrino UBS Investment Bank, Director 12

13 Why SPACs? SPACs provide a quick and flexible execution process with attractive economics and upside potential Sponsor Team's Perspective (Management Team) IPO Investor's Perspective Seller's (Target's) Perspective Relatively quick time frame compared to traditional private equity Ability to assess investment before actually investing SPAC has public acquisition currency (IPO proceeds) and does not rely on debt financing Opportunity to monetize proprietary deal flow Attractive economics if acquisition completed with opportunity to capture further upside Downside protection Access to private equity-like investment Assurance of liquidity through publicly traded securities Upside through warrants Alignment of interest through sponsor capital at risk No management fees or salaries paid 'Fast track' IPO Partner with well-known sponsor team Potential to roll-over equity and maintain upside Private equity input without private equity dominance Ability to pinpoint negotiated valuation as opposed to IPO bookbuilding exercise Potential SPAC Acquisition Scenarios Private equity portfolio monetization Corporate carve-outs Roll up acquisition platform De-leveraging / capital restructuring

14 SPAC Shareholder Evolution / Appetite Select segment of the original SPACs' IPO investors are long-term holders upon assessing M&A opportunities Generally at the M&A announcement or as we get closer to the M&A closing, there is a core set of "dedicated SPAC" (Arbitrage, financially driven) investors who consistently redeem in a predictable pattern Once the M&A announcement is public, new fundamental / sector focused investors meet with the management team and start to analyze the investment opportunity. Typically this is when we start to see new investors come in at the back-end to support the acquisition and create positive momentum in the stock There has only been one successfully completed US SPAC acquiring a LatAm company (Andina Acquisition Corp acquired Colombia's Tecnoglass Inc) and we've seen very limited participation from LatAm focused investors come into the name

15 Mechanics of a SPAC Unit SPACs are an acquisition vehicle which allows an investor to co-invest 'publicly' side-by-side with a best-in-class sponsor Post-IPO M&A Announcement Shareholder Vote and M&A Close Post-Liquidation Original $10.00 Cash: $10.00 guaranteed at Liquidation IPO Unit Price: $10.00 Common Share IPO Unit Warrant (1/2 share) Trading Prior to Acquisition Announcement Common Share: ~$10.00 ~$10.00 Warrant (1/2 share): $0.0-$0.25 $0.0-$0.25 Unit separates into two freely tradable securities SPAC Liquidates Investor Chooses to Redeem Shares Investor does not Redeem Shares Post-Acquisition Close (Assumes Share Price at $13.00) Cash: $10.00 $10.00 Original $10.00 guaranteed at redemption Post-Acquisition Close (Assumes Share Price at $13.00) Common Share: $13.00 Warrant (1/2 share): $0.75 $0.75 Remaining upside through warrant Warrant (1/2 share): $0.75 If SPAC fails to find an acquisition target within the deadline, all IPO proceeds are returned to public investors $13.00 $0.75

16 SPAC vs. P/E While each alternative offers different objectives, a SPAC maximizes flexibility and value along with alignment of public investor interests Sponsor promote and warrants provide significant upside potential compared to the standard 2/20 structure Process Overview Sizing Capital Raise Timing SPAC Public offering with similar but accelerated process as a regular way US IPO Structural enhancements given acquisition vehicle Recently have been on the larger size in the $ mm High quality management team will allow for larger than average deal size US SPACs generally within $50-500mm 8-10 weeks for SPAC IPO Private Fund Raise Longer time horizon with opportunity to individually negotiate investor commitments May start privately and once platform/portfolio is established, have potential liquidity opportunities by coming to the market place later on(similar to BXMT) Various range of sizes 9-12 months Timing to Liquidity Instant 5-7 years

17 SPAC vs. P/E (cont.) While each alternative offers different objectives, a SPAC maximizes flexibility and value along with alignment of public investor interests Benefits Considerations SPAC Public company after IPO Opportunity to vote for a potential transaction Readily available access to capital markets for further financing Control over the investment decision High alignment between Sponsor and investors Focus of Sponsor making 1 specific investment Potentially low liquidity for newco post merger No initial research coverage on the newco from a bulge bracket bank Limited access for local investors because US only listing Acquisition deadline of months Initial investment by sponsors for 20% promote No visibility into acquisition target at time of IPO Private Fund Raise Not dependent on capital markets volatility Ability to privately negotiate investor commitments Prevalent management incentive structure that's easy to understand No public company currency Less alignment between Sponsor and investor

18 LatAm Related SPAC Issuers GP Investments Acquisition Corp Garnero Group Acquisition Corp Andina Acquisition Corp Pricing Date 5/19/2015 6/26/2014 3/19/2012 Sponsor Fersen Lambranho (Chairman); Antonio Bonchristiano (CEO & CFO) Mario Garnero (Chairman & CEO); Javier Martin Riva (CFO) Julio Torres, Luis Eduardo Robayo Salom (Co-CEOs and Directors) Deal Size $173mm $144mm $40mm Book runners Citi EarlyBird EarlyBird Comments GP Investments backed SPAC GP Investments is a leading alternative investment firm in Latin America, managing more than $5.0bn of assets In 1975, Mario Garnero founded the Brasilinvest Group, a merchant bank based in Brazil In August 27, 2015, Garnero signed a definitive agreement with Grupo Colombo, a leading apparel retailer in Brazil. In December 2013, Andina closed its merger with Tecnoglass, Inc. a glass manufacturer based in Colombia In November 2015, Andina priced its second SPAC Andina Acquisition Corp II (also $40mm in size)

19 SPAC Target is a U.S. Multinational 19

20 SPAC is non-us entity listed in the US with Latam Investors Latam Investors SPAC Target USCO Brazil Mexico Chile 20

21 U.S. Tax Considerations SPAC Target is a U.S. Corporation Greg Featherman KPMG in the US, Partner 21

22 U.S. Anti-Inversion Rules Generally, foreign corporations are subject to U.S. tax only on (i) income that is effectively connected to a U.S. trade or business or (ii) U.S.-source passive income. By contrast, a U.S. corporation is subject to tax on all of its income, regardless of where earned. Under the U.S. Anti-Inversion Rules, a foreign corporation that acquires a U.S. corporation may be recharacterized itself as a U.S. corporation (and taxed accordingly). The U.S. Anti-Inversion Rules apply, specifically, if the former shareholders of the U.S. corporation own 80% or more of the stock of the acquiring foreign corporation. Specific tax penalties apply when the ownership percentage is 60% or greater (but less than 80%), but the foreign acquiring corporation is respected as a foreign corporation. As described on the following slide, and as most relevant for SPACs, for purposes of determining this percentage, stock of the foreign corporation acquired for cash is excluded. 22

23 U.S. Anti-Inversion Rules (cont.) Example 1 Application of U.S. Anti-Inversion Rule Investors fund SPAC (a foreign entity) with $80 of cash. SPAC buys U.S. Target, with 20% of former U.S. Target shareholders rolling over and becoming SPAC shareholders. Stock held by SPAC Investors (80%) is disregarded because it was acquired with cash. Former U.S. Target shareholders therefore own 100% of SPAC shares (20/20). SPAC is itself treated as a U.S. corporation and taxed accordingly. Example 2 Application of the De Minimis Rule Investors fund SPAC (a foreign entity) with $96 of cash. SPAC buys U.S. Target, with 4% of former U.S. Target shareholders rolling over and becoming SPAC shareholders. Stock held by SPAC Investors (96%) is not disregarded when former U.S. Target shareholders own less than 5% of SPAC shares (the De Minimis Rule ). The ownership percentage is 4% (4/100) and the U.S. Anti-Inversion Rules do not apply. SPAC is respected as a foreign corporation. 23

24 Withholding Tax Considerations Many jurisdictions impose a withholding tax on certain types of passive income (e.g., dividends, interest, rents, or royalties); sometimes the withholding tax is applied on a gross, rather than a net, basis. U.S. tax law imposes a 30% withholding tax on certain outbound payments ( FDAP income ), calculated on a gross basis, paid by U.S. corporations to its non-u.s. shareholders. FDAP income generally includes dividends, interest, rents, royalties, and payments for services (e.g., salaries, wages, or other service-related compensation). This withholding tax can be reduced or eliminated if the foreign recipient is located in a country that the U.S. has an income tax treaty with (and the benefits of the treaty can be obtained). The jurisdiction of formation of a SPAC that acquires a U.S. SPAC Target may therefore determine the U.S. tax cost of dividend and interest payments from the U.S. SPAC Target to the SPAC. 24

25 Debt Pushdown If the SPAC Target is a U.S. corporation, there may be an ability to reduce the SPAC Target s effective tax rate through intercompany debt (which gives rise to deductible interest payments). However, there may be limitations on the ability to achieve this benefit (e.g., thin capitalization rules, earnings stripping rules, Income tax treaty analysis). 25

26 Other Considerations Stock v. Asset Acquisition Consider tax basis step up in assets if stock acquisitions Impact of acquisition on tax attributes Post Acquisition Integration Moving non-u.s. assets out of U.S. taxing jurisdiction ( out from under planning ) Exit considerations No non-resident capital gain, but consider FIRPTA (if SPAC is real estate heavy) 26

27 Tax Considerations for South American investor SPAC Target is a U.S. Corporation Rodrigo Stein KPMG in Chile, Partner 27

28 SPAC jurisdiction of incorporation Most South American jurisdictions provide relief for international double taxation by way of a credit method (in contrast to participation exemption) A foreign tax credit may only available if income is subject to tax in jurisdiction where SPAC is resident and not for income taxes paid by indirect investment if in a different country The available foreign tax credit may be enhanced if SPAC is resident in a country that has an income tax treaty with the investors countries There are negative tax consequences imposed by many South American jurisdictions for investments held in a low tax jurisdiction Greater tax rates Control presumption and passive income presumption for CFC purposes Transfer pricing implications Other When determining appropriate jurisdiction consider treaty as well as domestic law anti treaty shopping provisions and potential impact of BEPS initiatives 28

29 SPAC Target is a Latin American Corporation 29

30 SPAC is non-us entity listed in the US with US Investors US Investors SPAC Target Latam Brazi Mexico Chile 30

31 U.S. Tax Considerations SPAC Target is a Latin American Corporation Greg Featherman KPMG in the US, Partner 31

32 Controlled Foreign Corporation (CFC) Rules If the SPAC or the SPAC Target is a non-u.s. corporation, and the ownership of either or both is a concentration of U.S. persons, the CFC rules may apply These rules generally apply if more than 50% of the vote or value (taking into account certain indirect ownership and attribution rules) of the SPAC or SPAC Target is owned by U.S. persons that own 10% or more of the voting power of the SPAC (or SPAC Target) (a U.S. Shareholder ). If the SPAC or SPAC Target is a CFC, U.S. Shareholder must take into account annually their share of the SPAC or SPAC Target income (regardless of whether the income is distributed). 32

33 Passive Foreign Investment Company (PFIC) Rules If the SPAC or the SPAC Target is a non-u.s. corporation, the PFIC Rules may apply. A non-u.s. corporation is a PFIC if (i) at least 75% of its gross income is passive income or (ii) at least 50% of its assets produce or are held for the production of passive income. U.S. shareholders of a PFIC are taxed regardless of their ownership percentage in the PFIC (and certain indirect ownership and attribution rules apply). How a U.S. shareholder of a PFIC is taxed depends on whether a qualified electing fund (QEF), mark-to-market (MTM), or no election has been made. QEF election: U.S. shareholder receives pro rata share of PFIC s E&P as dividend or net capital gain. MTM election: Annual appreciation or depreciation of PFIC stock is treated as ordinary income or loss. No election: distributions from PFIC are taxed as ordinary income and are also assessed an interest charge. 33

34 Local Tax Considerations SPAC Target is a Latin American Corporation Rodrigo Stein KPMG in Chile, Partner 34

35 Tax Structuring General Considerations Share deals are more common and straightforward generally in the region Most Latin American jurisdictions impose withholding tax on payments of dividends, interest, royalties by local entities. The amount of withholding tax can be reduced or eliminated by tax treaties in some situations. A holding Company in a tax treaty jurisdiction is typically considered, however currently substance requirements, reporting obligations and BEPS considerations need to be addressed. Most countries in the region also impose capital gains taxes on the sale or disposition of an investment. In some countries capital gains my be taxed at lower rates tan regular business income Some jurisdictions also impose tax and withholding obligations on proceeds not only from the direct sale, but also on the indirect sale of local companies. Debt funding is generally efficient and a use of a captive finance entity for debt funding should be considered Thin capitalization Interest withholding tax Interest deductions Use a local jurisdiction acquisition vehicle Goodwill deduction opportunities Tax basis step-up possibilities May be required from deal perspective if business Will be jointly held with third party investors 35

36 What a Latam investment structure could look like US Investors SPAC Intermediate Holding (Treaty Country) Finance Co. Brazil Acquisition Vehicle Mexico Acquisition Vehicle Chile Acquisition Vehicle Brazi Mexico Chile 36

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