A Tax Professional’s Guide to Acquisition
Agreements
TEI – Carolinas Chapter
Todd Schroeder
Matthew Mauney
Raleigh, NC
September 25, 2015
Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common
terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an
"office" means an office of any such law firm.
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Agenda
– Crafting Acquisition Agreements
– Tax Representations and Due Diligence
– FIRPTA
– Tax Compliance and Tax Costs
– Tax Treatment Indemnity Payments
– Escrow Considerations
– Transaction Expenses
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Crafting
Acquisition
Agreements
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General items to consider - Seller
– What type of process is the sale process?
– Auction
– Strategic disposition
– Anti-trust
– Is tax-free transaction available?
– Stock sale v. asset sale?
– Who is the Buyer?
– Competitor
– Private equity
– Are we the target?
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General items to consider - Buyer
– What type of transaction is it?
– Auction
– Strategic disposition
– Anti-trust
– Stock sale v. asset sale
– Who is the Seller?
– Competitor
– Private equity
– Is the target a widely held company?
– Impact of stock option expense deductions
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Stock vs. Asset Transactions
Taxable Stock Acquisition
Taxable Asset Acquisition
•
•
Buyer gets FMV tax basis in assets
•
Target’s NOLs not available to Buyer •
•
No carryover of tax methods
•
No transfer of historic liabilities to
Buyer
•
Increases structuring flexibility
•
Usually a double level of tax for
•
corporate Seller and its shareholders
•
Generally Buyer’s preference
Buyer gets carryover tax basis in assets
Tax attributes (including NOLs) generally
carryover, subject to limitations
•
Usually single level of tax for Seller unless
Target is a sub of consolidated group
•
Historic liabilities of Target transfer to
Buyer
•
Generally an individual Seller’s preference
(if transaction is not tax free)
Section 338 Election: Step-up in basis of
assets but NOLs not available (distributed
to Seller under Section 381)
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Tax
Representations
and Due
Diligence
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Role of tax representations
– Role of tax representations can vary depending on type
of transaction
– Generally 3 primary purposes
– Due diligence
– Indemnity
– Walk away rights
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Tax representations – Issues to consider
– Survival periods
– Disclosures for exceptions to representations
– Stock sales v. assets sales
– Public v. private transactions
– Representations in other sections that could impact tax
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Tax Due Diligence
– Seller Due Diligence
– Identify what will be sold
– Quantify cost of sale
– Confirm possible indemnification risks
– Determine historic exposures remaining with Seller
– Identify transfer tax costs of transaction
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Tax Due Diligence
– Buyer Due Diligence
– Identify possible tax exposures that Buyer could be
responsible for after closing.
– Timing of due diligence
– Pre-Signing v. Pre-Closing
– Quantify the impact of possible limitations of postclosing use of attributes/incentives
– Consider post-acquisition integration plan
– Identify transfer tax costs of transaction
– Confirm whether withholding applies to purchase
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FIRPTA
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FIRPTA
– Applies to all sales of real property located in the United
States
– Applies to the sale of a domestic corporation if the target
owns a significant amount of U.S. real property, in terms
of asset fair market values
– Purchaser must withhold 10% of the consideration unless
an exception applies, e.g., receipt of withholding
certificates
– Certificate of non-foreign status or non-USRPI
Certificate
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Tax Compliance
and Tax Costs
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Tax Compliance
– Tax return preparation
– Direct taxes
– Indirect taxes
– Straddle period taxes
– Tax audits
– Amended tax returns
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Tax Costs
– Purchase price allocation
– Covenants not to compete
– Tax indemnification
– Withholding taxes
– Transfer taxes
– Caps and deductibles
– Purchaser tax acts
– Current and deferred tax liabilities
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Tax Treatment of
Indemnity
Payments
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Tax Treatment of Indemnity Payments
– Applies to all indemnity payments, not just tax
– Computational approaches
– Purchase price adjustment
– Gross-up for taxes
– Tax-effected
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Escrow
Considerations
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Who Owns the Escrowed Property?
– What is the contingency?
– Separate tax escrow?
– Which party is entitled to income earned on the escrowed
proceeds?
– Which entity is allocated the annual tax liability?
– Installment sale implications
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Transaction
Expenses
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Buyer Expenses
– Generally, costs incurred in a taxable acquisition are
capitalized into the acquired stock or assets
– capitalized costs include those paid on or after the
earlier of: (1) delivery of LOI, offer letter or other
similar proposal; or (2) board approval of the
acquisition
– expenses incurred before that time still must be
capitalized if they are “inherently facilitative,” e.g.,
valuation of target, negotiations, or structuring
– If the acquisition fails, the costs are recoverable
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Seller Expenses
– Does the expense create a benefit beyond one year or
create a separate asset?
– Costs to fend of hostile acquisitions should be
deductible
– Break-up fees should be deductible
– Cash settlement of employee stock rights should be
deductible as compensation
– Constructive dividend to shareholders when paid as part
of a stock acquisition?
– 70% deductibility safe harbor for success-based fees
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Thank You
Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common
terminology used in professional service organizations, reference within the organization to a “partner” means a person who is a
partner, or equivalent, in a member firm or its affiliate. Similarly, reference to an “office” means an office of any such law firm.
©2015 Baker & McKenzie 24