USA LAW AND PRACTICE Contributed by: George Casey, Heiko Schiwek, Elena Rubinov, Pierre-Emmanuel Perais, Clara Pang and Gregory Gewirtz, Linklaters LLP
indemnified liabilities by including various limi- tations such as de minimis claims thresholds, deductibles, caps, etc, and by insisting on a time limit in the purchase agreement for the survival of the representation, warranties and indemnifi- cation clause post-closing. Representation and Warranty Insurance In the USA, buy-side representations and war- ranties insurance (RWI) policies continue to be used in private-target M&A (although their use appears to be declining in comparison with the immediately post-COVID-19-pandemic years). The presence of RWI in a transaction can alter some of the standard market practice points described above. In the USA, firm exclusions to RWI coverage include: • known risks;
boards and management teams that are aiming to maximise enterprise value. Spin-off transactions are notably intricate and protracted due to the complexities involved in disentangling the management, operations, assets and liabilities of multiple entities, along- side the requirement to file pertinent documents with the Securities and Exchange Commission (SEC). 5.2 Tax Consequences A distribution of appreciated property by a cor- poration to its shareholders would ordinarily trig- ger taxable gain to both the corporation and its shareholders. 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 treatment 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. Control The parent company must be in “control” of the SpinCo immediately before the parent company distributes the SpinCo’s stock to its sharehold- ers. The parent company must also distribute control of the SpinCo as part of such distribu- tion. Valid Corporate Business Purpose The spin-off must be motivated by a valid corpo- rate business purpose and not by a shareholder purpose or for tax avoidance. Some examples of a valid corporate business purposes include: • compliance with laws and regulations;
• intent or fraud by the insured; • forward-looking statements; • purchase price adjustments; and • sanctions violations.
US carriers are typically more willing to under- write matters such as tax, contamination, prod- uct liability and data protection than insurance providers in other jurisdictions, subject to thor- ough due diligence.
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 preferred mechanism for investors,
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