Since 1935, mergers involving foreign buyers or target corporations were not given the same status as similar transactions involving US entities. Now, new Treasury Department and Internal Revenue Service rules may change this, opening up more overseas mergers to appealing tax-free status.
According to Steven Bortnick, a counsel in the New York office of law firm Dechert, the change could have important implications for US private equity firms that operate overseas, as is increasingly the case.
Historically, certain types of mergers between two entities formed in the U.S. have been given tax-free status if the transactions qualify as ?reorganizations.? The IRS defines seven types or reorganizations, from Type A to Type G.
Before the recent rule change, a merger involving either a foreign buyer or target company could only qualify for tax-free status if it were deemed either a Type C or a Type D reorganization. Type C ?reorgs? involve only the receipt of voting stock. Type D reorgs stipulate that one or more of the shareholders of the target entity must own a majority of the acquiring entity.
In a recent memo, Bortnick uses this example to illustrate the previous rule: ?If one UK corporation merged into a second UK corporation under the laws of England in return for stock worth $79 and cash of $21, where target shareholders owned 49 percent of the stock of the acquiring corporation? the deal would be taxable.
Under the new regulations, this merger would be treated as a ?statutory reorganization? and as such would be treated as tax free for both the corporations and the shareholders. ?Moreover, a stockfor-stock acquisition (which generally qualifies for tax-free treatment only if 100 percent of the consideration consists of voting stock) could be restructured by having the acquiring corporation form an acquisition subsidiary that would merge into the target corporation, with target shareholders receiving voting stock of the acquiring corporation, and up to 20 percent of other consideration,? writes Bortnick.
IT group meets in Arizona
A group of professionals who work as information technology specialists at private equity and venture capital firms met in Scottsdale, Arizona last month for a first-ever summit. Mark Weinstein, an IT director at Boston-based Charles River Ventures and a co-founder of the IT group, said 25 people attended the gathering, which was held in conjunction with a similar gathering of private equity firm general counsel. The summit represented a coming together of two loosely affiliated groups – the West Coast-oriented Venture Capital Information Technology Group and the East Coast-oriented Private Equity Chief Technology Officer Group. The gathering, held at The Phoenician resort, included demonstrations by several technology service providers, as well as discussions among the IT professionals about how technology might best serve the activities of today's private equity firms. ?A lot of these things devolve into geek fests,? said Weinstein. ?But we spent an awful lot of time talking about where IT fits into the business. Those of us who will be most successful going forward will be the ones who understand the business the best.? Weinstein noted that the IT group will plan another similar meeting.
NVCA supports federal spending on R&D
The National Venture Capital Association issued a call last month for continued spending on research, development and other programs that would solidify the ?global economic leadership? of the US. The association described these efforts as requiring bi-partisan partnership. Spending should back math and science education, federal funding for research and development projects and a streamlined immigration process for foreign-born students to study and remain in the US ?as innovators and entrepreneurs.?
European high yield association merges
The European High Yield Association has merged to become part of The Bond Markets Association (TMBA), the groups announced. In a statement, the high yield association said the merger would provide ?access to European regulators in order to make sure that issues affecting the European high yield market are taken into account before harmful regulations are enacted.? Concurrent with the merger, the high yield group has elected a 36-member board of directors. The London-based group will continue to hold public seminars and social events, it noted. The high yield association is chaired by Bryant Edwards. Its executive director is Gilbey Strub.
Ohio judge questions FOIA suit
A judge who is reviewing a lawsuit related to a FOIA request in Ohio has made a pre-trial order that brings further complexity to an already complicated case. Judge Richard Frye of the Franklin County Court of Common Pleas, who is reviewing an open-records lawsuit against the Ohio Bureau of Workers' Compensation, has said that the consulting firm that prepared a sensitive report on private equity valuations would likely have to be named in the suit. Responding to an open records request from local newspapers, the state insurance organization and major LP was earlier this year prepared to release information on the valuation of portfolio companies held by the private equity funds to which Ohio BWC had made commitments. Strong protests from GPs caused Ohio BWCto release only a version of a report, prepared by Ennis Knupp & Associates, that included fund-level IRR information. The insurance group then filed a declaratory judgment action with Franklin County to determine whether disclosure of portfoliocompany information would constitute a breach of state tradesecret laws. Judge Frye wrote in his most recent order: ?The basis for protecting trade secret confidentiality appears to turn upon confidentiality undertakings between Ennis Knupp and each fund? Without Ennis Knupp as either a plaintiff or a defendant in this case, it appears to the Court there may be an absent but indispensable party.?