Transcript Slide 1
Tax and corporate considerations in mergers of UK and US companies Stephen Fiamma, Brenda Coleman and Richard Evans 26 November 2008 BS:1633511 Structuring UK:US Public Mergers Basic structural considerations Use of DLC structures US tax issues UK tax issues DLC Overview: Thomson Reuters Thomson Shareholders Thomson Reuters Corp (Canada) Thomson Assets Former Reuters Shareholders Equalization Agreement Cross Guarantees Combined Business (Not suitable for US companies) Thomson Reuters PLC (UK) Reuters Assets 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 Shareholders Target Shareholders Acquirer (UK) Target (US) Rest of Acquirer Group Acquirer US Sub Rest of Target Group Buying into the US: Forward Triangular Merger After: Original Acquirer Shareholders Former Target Shareholders Acquirer (UK) Rest of Acquirer Group Acquirer US Sub (Target having merged with and into it) Rest of Target Group Buying into the US: Reverse Triangular Merger After: Original Acquirer Shareholders Former Target Shareholders Acquirer (UK) Rest of Acquirer Group Target (Acquirer US Sub having merged with and into it) Rest of Target Group 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 Former Target Former Target US Shareholders UKUK Shareholders Loan Note UK Shareholders Holders 15% 25% Acquiror UK Acquiror UK Target Continuing Acquiror USFormer UK Shareholders Shareholders US Shareholders Shareholders 60% Target US US Target NO “80% CONTROL GROUP” US Domestic Reorganization Rules: Share-for-Share Deals/“B” Reorganization 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 Target Continuing Acquiror USFormer UK Shareholders Shareholders US Shareholders Shareholders 15% 60% Target US Former Target Former Target US Shareholders Loan Note UK Shareholders Shareholders UKUK Holders 25% UK Acquiror US Target LOAN NOTES ARE “BOOT” Acquiror UK “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 Target UK Shareholders Shareholders Continuing Acquiror USFormer US Shareholders Shareholders Former Target US Shareholders UK Shareholders UK Shareholders 55% 20% Target US UK Acquiror 25% Acquiror UK US Target 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 US Shareholders Continuing Acquiror Former Target USTarget Shareholders US Shareholders US Shareholders Former Target UK Shareholders 60% 60% 20% UK Shareholders Acquiror UK 20% UK Acquiror US Target Target US 60% CONTROL OF UK ACQUIROR BY FORMER TARGET SHAREHOLDERS “Inversion” Transactions/Sec. 7874 UK Shareholders US Shareholders Target Continuing Acquiror Former Target US US Shareholders Shareholders US Shareholders Former Target UK Shareholders 5% 20% UK Acquiror US Target 75% UK Shareholders Acquiror UK “Inversion” Transactions/Sec. 7874 Continuing Acquiror Former Target US Shareholders Shareholders Former Target UK Shareholders 5% 75% 20% UK US Acquiror US Target 80% CONTROL OF UK ACQUIROR BY FORMER TARGET SHAREHOLDERS US buying into the UK Acquirer (US) Acquirer UK Sub Target (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 Target shareholder US Parent UK Bidco UK Target plc Target shareholder loan notes/ shares 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. Dual Headed Structures Tax treatment of equalisation payments. Residence issues. US/UK dual headed structures? Redomiciliation of Topco Topco Other subs UK US 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. 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.