Tax and corporate considerations in mergers of
UK and US companies
Stephen Fiamma, Brenda Coleman and Richard Evans
26 November 2008
BS:1633511
Structuring UK:US Public Mergers
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Basic structural considerations
Use of DLC structures
US tax issues
UK tax issues
DLC Overview: Thomson Reuters
Thomson
Shareholders
Thomson
Reuters Corp
(Canada)
Thomson
Assets
Former Reuters
Shareholders
Equalization Agreement
Cross Guarantees
Combined
Business
(Not suitable for US companies)
Thomson
Reuters PLC
(UK)
Reuters
Assets
Our Transaction(s)
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Publicly listed purchaser
Publicly listed target
Consideration is a mix of cash and shares
Use of loan notes?
Financing the acquisition - in the UK or the US?
Buying into the US: Forward/Reverse Triangular Mergers
Before:
Acquirer
Shareholders
Target
Shareholders
Acquirer
(UK)
Target
(US)
Rest of
Acquirer Group
Acquirer
US Sub
Rest of Target
Group
Buying into the US: Forward Triangular Merger
After:
Original Acquirer
Shareholders
Former Target
Shareholders
Acquirer
(UK)
Rest of
Acquirer Group
Acquirer US Sub
(Target having merged
with and into it)
Rest of Target
Group
Buying into the US: Reverse Triangular Merger
After:
Original Acquirer
Shareholders
Former Target
Shareholders
Acquirer
(UK)
Rest of
Acquirer Group
Target (Acquirer US
Sub having merged
with and into it)
Rest of Target
Group
UK buying into the US: Basic issues
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Issue of shares by a UK PLC requires a prospectus
US merger often requires third party consents
US target shareholder approval
SEC registrations of offeror’s shares
Appraisal (dissenter) rights may be triggered on a
merger
Buying into the US: Obstacles Posed by US Tax
US domestic reorganization (rollover) rules
“Toll charge” on “outbound” transactions
“Anti-inversion” rules
US Domestic Reorganization Rules: Share-for-Share Deals/Sec. 351
 Transfers of “property” to corporation tax-free
 Transferor group must obtain 80% of vote and 80%
of all other classes of stock of transferee
 Transferor group must receive “stock” of transferee
US Domestic Reorganization Rules: Share-for-Share Deals/Sec. 351
Former Target
Former
Target
US
Shareholders
UKUK
Shareholders
Loan Note
UK Shareholders
Holders
15%
25%
Acquiror
UK Acquiror
UK
Target
Continuing
Acquiror USFormer
UK Shareholders
Shareholders
US Shareholders
Shareholders
60%
Target US
US Target
NO “80% CONTROL GROUP”
US Domestic Reorganization Rules: Share-for-Share Deals/“B” Reorganization
 One corporation acquires “control” of another solely
for voting stock of acquiror or its immediate parent
US Domestic Reorganization Rules: Share-for-Share Deals/“B” Reorganization
Target
Continuing
Acquiror USFormer
UK Shareholders
Shareholders
US Shareholders
Shareholders
15%
60%
Target US
Former Target
Former Target
US
Shareholders
Loan Note
UK Shareholders
Shareholders UKUK
Holders
25%
UK Acquiror
US Target
LOAN NOTES ARE “BOOT”
Acquiror
UK
“Toll Charge” on Outbound Transactions/Sec. 367
 Transactions otherwise tax-free still taxable if an
international element
 Last clear chance for US to tax
 Series of somewhat arbitrary rules which distinguish
taxable from tax-free reorganizations
 Control of foreign acquiror by US shareholders of
target a problem
“Toll Charge” on Outbound Transactions/Sec. 367
Target
UK Shareholders
Shareholders
Continuing
Acquiror USFormer
US Shareholders
Shareholders
Former
Target
US
Shareholders
UK Shareholders
UK Shareholders
55%
20%
Target US
UK Acquiror
25%
Acquiror
UK
US Target
FORMER TARGET US SHAREHOLDERS
CONTROL UK ACQUIROR
“Inversion” Transactions/Sec. 7874
 Designed to discourage expatriation of companies
from US
 Looks at ownership of acquiror by all former Target
shareholders
 60% overlap: Target loses use of tax attributes
 80% overlap: Acquiror becomes US resident
“Inversion” Transactions/Sec. 7874
UK Shareholders
US Shareholders
Continuing Acquiror Former Target
USTarget
Shareholders
US
Shareholders
US Shareholders
Former Target
UK Shareholders
60%
60%
20%
UK Shareholders
Acquiror
UK
20%
UK Acquiror
US Target
Target
US
60% CONTROL OF UK ACQUIROR BY FORMER
TARGET SHAREHOLDERS
“Inversion” Transactions/Sec. 7874
UK Shareholders
US Shareholders
Target
Continuing Acquiror Former
Target US
US Shareholders
Shareholders
US Shareholders
Former Target
UK Shareholders
5%
20%
UK Acquiror
US Target
75%
UK Shareholders
Acquiror
UK
“Inversion” Transactions/Sec. 7874
Continuing Acquiror Former Target
US Shareholders
Shareholders
Former Target
UK Shareholders
5%
75%
20%
UK
US Acquiror
US Target
80% CONTROL OF UK ACQUIROR BY FORMER TARGET
SHAREHOLDERS
US buying into the UK
Acquirer
(US)
Acquirer
UK Sub
Target
(UK)
US buying into the UK: Basic issues
 Transactions are not effected by merger (merger,
SEs and EU cross-border merger options exist)
 US purchaser will acquire UK target by offer or
scheme
 Public offer of securities in the UK: FSA-approved
prospectus requirement under FSMA
 Takeover of a UK PLC is governed by the Takeover
Code: offer document requirement
US buying into the UK: Offer or Scheme?
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Key differences
Target co-operation needed for a scheme
Acceptance levels/apathy and dissent
Flexibility
Timing
Competing bids
Presentation as a “merger”
Recent City Code amendments to scheme of
arrangement became effective on 14 January 2008
US buying into UK - UK Tax Objectives
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Relief for interest in UK (and US?)
Avoid withholding tax in the UK on interest
Minimise stamp duty
Rollover for UK shareholders
Interest relief in the UK (I)
US
UK Bidco
UK Target plc
 Form UK acquisition vehicle if
relief required for funding costs
in UK
 Place of incorporation of UK
Bidco?
 UK Bidco can be funded
directly by third party or from
within group
 Check the box on UK Bidco
 Hybrid debt
Interest Relief in UK (II)
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Anti avoidance rules
 Transfer pricing.
 Para 13, Sch 9 FA 1996, s.787 ICTA 1988.
 Arbitrage rules – chapter 4 part 2 F (No. 2) Act 2005.
 PBR – Worldwide cap on tax deductions for interest –
limited to group’s external finance cost.
Late payment of interest, para 2, Sch 9 FA 1996.
 Previous practice: funding bonds.
 Late interest payment rule disapplied/legislation awaited.
Group relief (avoid trapped losses).
Withholding tax.
Timing Issues.
Where no Treaty/Directive protection – quoted Eurobond.
Stamp Duty
 ½% stamp duty on share acquisitions (i.e. offer).
 No stamp duty on S.425 cancellation scheme
BUT
 If cancellation scheme - ensure no impact on
rollover relief
Rollover – Cancellation Scheme
 On a cancellation scheme
 Consideration paper need not be issued by bidder
 If shares issued, scheme qualifies as a reconstruction
and rollover available (even if also cash
consideration)
 But reclassify shares if mix and match or cash
alternative for shares to satisfy “proportionality”
requirement
 If cash and loan notes offered (and no shares) need
to do part transfer and part cancellation scheme to
get rollover relief for loan note
Rollover - Offer
Target
shareholder
US Parent
UK Bidco
UK Target plc
Target
shareholder
loan notes/
shares
 On an offer
 Consideration needs to
be issued by acquiring
company
 ‘Double rollover’ if
shares to be issued by
US parent
 Use of put/call options if
double rollover
 If loan notes to be
issued exchangeable
for US shares - non
QCBs, if shares to be
issued - non UK
incorporated Bidco.
Dual Headed Structures
 Tax treatment of equalisation payments.
 Residence issues.
 US/UK dual headed structures?
Redomiciliation of Topco
Topco
Other subs
UK
US
 Is a UK holding company
unattractive?
 PBR – foreign dividends
exempt.
 Uncertainty over CFC
rules, still subject to
consultation.
 New Topco may be Jersey
incorporated, Irish tax
resident with DAS.
 Advantage of structure
depends on facts.
Questions?
These are presentation slides only. The information within these slides does not
constitute definitive advice and should not be used as the basis for giving definitive
advice without checking the primary sources.
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