USA LAW AND PRACTICE Contributed by: George Casey, Heiko Schiwek, Elena Rubinov, Vinita Sithapathy, Kristina Trauger, Pierre-Emmanuel Perais, Clara Pang and Gregory Gewirtz, Linklaters
Control The parent company must be in “control” of the SpinCo immediately before the parent company dis- tributes the SpinCo’s stock to its shareholders. The parent company must also distribute control of the
In the USA, firm exclusions to RWI coverage include: • known risks;
• intent or fraud by the insured; • forward-looking statements; • purchase price adjustments; and • sanctions violations.
SpinCo as part of such distribution. Valid Corporate Business Purpose
US carriers are typically more willing to underwrite matters such as tax, contamination, product liability and data protection than insurance providers in other jurisdictions, subject to thorough due diligence.
The spin-off must be motivated by a valid corporate business purpose and not by a shareholder purpose or for tax avoidance. Examples of valid corporate business purposes include: • compliance with laws and regulations; • improving a company’s ability to borrow or raise capital; and • improving the operations of each of the separated businesses. The parent company will generally obtain an opinion from an investment bank in support of such valid cor- porate business purpose. Five-Year Active Trade or Business The business intended for the spin-off must have been actively engaged in trade or business (ATB) for at least five years preceding the spin-off. To meet this five-year requirement, the ATB must not have been acquired within this look-back period. No Device The spin-off must not be used “principally as a device for the distribution of earnings and profits” of either the parent company or the SpinCo. This requirement ensures that a company does not use a spin-off to distribute corporate earnings tax-free in a transaction that would otherwise be taxed as a dividend for US federal income tax purposes. 5.3 Spin-Off Followed by a Business Combination When a spin-off is followed by a business combina- tion, it is often structured as either a Morris Trust or a Reverse Morris Trust transaction. These arrangements involve the parent company spinning off a business and subsequently merging either itself or the SpinCo with a third party.
5. Spin-Offs 5.1 Trends: Spin-Offs
In recent years, spin-offs – involving a parent com- pany distributing to its shareholders subsidiary stock along with the transfer of the assets and liabilities of the divested business – have gained traction as a pre- ferred mechanism for investors, boards and manage- ment teams aiming to maximise enterprise value. Spin-off transactions are notably intricate and pro- tracted due to the complexities involved in disentan- gling the management, operations, assets and liabili- ties of multiple entities, alongside the various filing requirements of the Securities and Exchange Com- mission (SEC). 5.2 Tax Consequences A distribution of appreciated property by a corpora- tion to its shareholders would ordinarily trigger tax- able gain to both the corporation and its sharehold- ers. However, provided that both the statutory and non-statutory requirements for a spin-off under US federal income tax law are satisfied, a corporation’s spin-off of a subsidiary (“SpinCo”) may qualify as a reorganisation under Section 355 of the US Internal Revenue Code (the “Code”), resulting in tax-free treat- ment at the level of the corporation and its sharehold- ers. Some of the key requirements for a spin-off to be treated as a tax-free reorganisation under Section 355 are as follows.
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