USA Law and Practice Contributed by: Elena Rubinov, George Casey, Heiko Schiwek, Vinita Sithapathy, Pierre-Emmanuel Perais and Clara Pang, Linklaters LLP
cant market liquidity and are integral to global financial activities, making them attractive for capital raising and trading. When companies do choose to list on foreign exchanges, complex issues arise, including conflicts of law and regulatory compliance challenges. Auction Process Sellers frequently employ auction processes for higher prices and optimal terms. During an auction, sellers provide potential buyers with a confidential information memorandum, and potential buyers submit initial indications of interest thereafter. A limited set of potential buyers is invited into the next phase of the auction to receive addi- tional due diligence materials and submit a markup of an auction draft transaction agreement with their final bid, typically four to eight weeks after the initial indications of interest. The signing of the transaction agreement generally follows shortly after the seller receives the final bids and selects the winning bidder. Typical Transaction Structures Typical transaction structures for the sale of a private- ly held E&I company with multiple investors include mergers, asset purchases or stock purchases; see 4.15 Privately Held Companies . Companies may also sell a controlling interest while offering investors the choice to remain as minority shareholders. Recently, spin-offs (where a parent company distrib- utes subsidiary stock to its shareholders and trans- fers the assets and liabilities of the divested business) have gained traction as a mechanism for investors and management to maximise enterprise value. Spin-off transactions are intricate and protracted due to complexities in disentangling the management, operations, assets and liabilities of multiple entities, while complying with Securities and Exchange Com- mission (SEC) regulations. 3. Spin-Offs 3.1 Trends: Spin-Offs Although spin-offs are not particularly popular among E&I companies, 2026 expects an increase in corporate
divestments of assets. Particularly in the power and mining sectors, divestments are likely to follow stra- tegic assessments of companies’ market segments, to maximise efficiency while capitalising on potential buyers’ desire to capture growth. 3.2 Tax Consequences A distribution of appreciated property by a corpora- tion to its shareholders would ordinarily trigger tax- able gain to the corporation and its shareholders. However, if the requirements for a spin-off under US federal income tax law are satisfied, a corporation’s spin-off of a subsidiary (the “SpinCo”) may qualify as a reorganisation under Section 355 of the US Inter- nal Revenue Code (the “Code”), resulting in tax-free treatment at the level of the corporation and its share- holders. Key requirements to be treated as a tax-free reorganisation under Section 355 include: • Control – the parent company must: (a) be in “control” of the SpinCo immediately before distributing the SpinCo’s stock to its shareholders; and (b) distribute control of the SpinCo as part of such distribution. • Valid corporate business purpose – the spin-off must be motivated by a valid corporate business purpose rather than a shareholder purpose or tax avoidance, and the parent company gener- ally obtains an investment bank opinion to sup- port such corporate business purpose. Examples include: (a) compliance with laws and regulations; (b) improving the company’s ability to borrow or raise capital; and (c) improving the operations of the separated businesses. • Five-year active trade or business – the business must have been an active trade or business (ATB) for at least five years preceding the spin-off, and the ATB must not have been acquired within this period. • No device – the spin-off must not be used “prin- cipally as a device for the distribution of earnings and profits” of the parent company or SpinCo; in other words, companies may not use spin-offs to distribute corporate earnings tax-free in a transac-
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