USA LAW AND PRACTICE Contributed by: George Casey, Heiko Schiwek, Elena Rubinov, Pierre-Emmanuel Perais, Clara Pang and Gregory Gewirtz, Linklaters LLP
• improving a company’s ability to borrow or raise capital; and • improving the operations of each of the sepa- rated businesses. The parent company will generally obtain an opinion from an investment bank to support there being a valid corporate business purpose for the planned spin-off. 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 prof- its” of either the parent company or the SpinCo. This requirement ensures that a company does not use a spin-off to distribute corporate earn- ings tax-free in a transaction that would oth- erwise 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 com- bination, it is often structured as either a Mor- ris Trust or a Reverse Morris Trust transaction. These arrangements involve the parent company spinning off a business and subsequently merg- ing either itself or the SpinCo with a third party. In a Morris Trust transaction, the parent compa- ny transfers all assets – except those intended to be merged with the third party – to the SpinCo. The remaining parent company then merges with the third party. Conversely, in a Reverse Mor-
ris Trust transaction, the assets to be combined with the third party are transferred to the SpinCo. After this transfer, the SpinCo then merges with the third party. Both Morris Trust and Reverse Morris Trust transactions can be structured to be tax-free, provided specific conditions are met. Notably, one of these conditions is that the third party must be smaller than the SpinCo, ensuring that the parent company’s shareholders maintain a majority stake in the merged entity. 5.4 Timing and Tax Authority Ruling The key preliminary considerations for a spin-off include identifying the assets and liabilities to be allocated and preparing audited financial state- ments for the business to be spun off. Transac- tion agreements will also need to be drafted to effect the separation of the divested business from the retained business, as well as to set out post-separation covenants and relevant SEC fil- ings – including a Form 10 registration statement and information statement, which will also need to be prepared. Depending on the complexity of the transaction and the potential US tax leakage that could arise if the transaction did not qualify as a tax-free spin-off, a company that is planning a spin-off transaction may wish to submit a letter-ruling request to the IRS to obtain a ruling that the spin-off qualifies as a tax-free reorganisation under Section 355 of the Code. The IRS gen- erally takes approximately six months from the date the request is submitted to grant a ruling. This timeline may be shortened if the company submits a request to “fast-track” the ruling pro- cess, which the IRS may grant if certain require- ments are satisfied.
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