This section describes strategies for a company seeking to dispose of a business to do so in a tax-efficient manner. Each strategy provides the seller with a significant deferral of the tax liability associated with the sale of the business while providing a substantial disposition of the risk of the business immediately. Moreover, most of the strategies provide the seller with current monetization, either through up-front cash proceeds or other mechanisms (e.g. debt retirement through push-down and/or debt-for-debt/equity swaps).
In evaluating the merits and considerations of various structured sale alternatives, in addition to their shareholder value impact, we have focused on five primary criteria that we believe to be of importance to the seller's management:
- Risk transfer/retained corporate interest
- Extent of monetization
- Scope of continuing involvement
- Tax efficiency
- Ease of execution
In a leveraged partnership, the seller of a business contributes that business to a partnership with the buyer. The seller receives a large leveraged distribution from the partnership which reduces its economic interest to a very small amount. To obtain tax deferral, the seller must guarantee the debt which funds its distribution and satisfy certain other structural requirements, set forth herein.
In a like-kind exchange, the two parties exchange tangible or intangible assets (other than goodwill) of a similar character in a tax-free transaction, with each party taking a carryover basis in the asset received.
Mixing Bowl Partnership
In a mixing bowl partnership, the seller and buyer effectuate an exchange of businesses by contributing the assets to a partership, in which the seller obtains substantially all of the economics and control over the assets contributed by the buyer, and the buyer obtains substantially all of the economics and control over the assets contributed by the seller. After a seven-year period, the partnership can be unwound and the asset exchange formalized.
In a monetizing spin-off, the company spinning off the business utilizes a substantial portion of the shares of the spun-off company to retire debt in an exchange which is tax-free under the spin-off rules (a "debt/equity swap"). The company can also push down debt to the subsidiary being spun off, in excess of its tax basis in the subsidiary on a fully tax-free basis (a "debt/debt swap").
In a sponsored spin-off, a company can tax-efficiently monetize its subsidiary through a structured sale to a financial sponsor. Under this transaction, the seller effectively sells 49% of the equity of the subsidiary to a financial sponsor on a permanently tax-free basis, and spins off the remaining 51% of the equity tax-free to its public shareholders.
Reverse Morris Trust
In a Reverse Morris Trust transaction, a business to be divested is spun off by the seller tax-free and immediately merger with the buyer in a pre-negotiated transaction (alternatively, all assets other than those being sold can be distributed, with the remaining entity merging with the buyer). In the context of the spin-off transaction, the seller can achieve substantial monetization by debt pish-down to (or upstream dividend from) the subsidiary business and effecting debt-for-debt and debt-for-equity exchanges, all subject to the 50% Morris Trust limitations.
Double Reverse Morris Trust
In a Double Reverse Morris Trust transaction, two public companies spin off their respective subsidiaries to their shareholders. The spun companies subsequently merge together to form a new publicly traded company. This enables companies to "unlock" the value of their subsidiaries in a tax-efficient manner at both the corporate and shareholder levels.
In a Supercharged IPO, a seller divests a business through a public offering (or series of offerings) and recoups a substantial portion of the tax cost through annual tax-sharing payments for the value of the tax step-up received by the public NewCo.
In a JV IPO structure, two companies form a joint venture, which can be subsequently monetized via an IPO. The two primary shareholders of the JV are allowed to transfer debt to the JV (typically in proportion to their respective ownership percentages).
In a stock-for-stock monetization transaction, the seller of a business receives publicly traded shares of the buyer as consideration and then enters into a derivative capital markets transaction to monetize the shares without triggering a tax laibility. Typically, the seller would issue a security which is mandatorily exchangeable into the shares at a future time providing the seller with immediate cash proceeds while deferring the tax to the exchange date.
A Cash-Rich Split-Off transaction is an M&A technique whereby the seller exchanges the stock of the company for stock of a "cash-rich" subsidiary of the company ("SplitCo"). SplitCo is capitalized up to 66% cash and 34% assets that include a five-year Active Trade or Business; alternatively, a "stock-for-stock" cash-rich split-off structure can also be employed to achieve the same end result.
In a Prepaid Lease transaction, the seller of long-lived tangible assets (such as real estate and PP&E) and the buyer enter into a tax-efficient lease transaction whereby the seller receives up to 90% of the asset's value in up-front cash proceeds, with the balance received at the end of the lease term. The seller's tax liability is amortized as rental income over the term of the lease, allowing for substantial tax deferral.
Exhibit 6.1 – Comparison of Various Tax-Efficient Strategies
|Structure||Degree of Current
|Scope of Continuing
|Mixing Bowl Partnership|
|Reverse Morris Trust|
|Double Reverse Morris Trust|
= Greatly Accomplishes
= Somewhat Accomplishes
= Does Not Accomplish