10 Key Issues for US Flip Transactions
When structuring a flip transaction – a deal in which shareholders in an overseas company exchange their shares for shares in a new US company – there are multiple initial issues to consider as outlined below. In a flip transaction, the new US company becomes the parent company, and the overseas company becomes a wholly owned subsidiary of the parent.
1. Tax planning and tax clearances (if required) for current shareholders
To identify taxes triggered by the flip for current shareholders in an overseas company and determine future tax consequences (e.g., controlled foreign corporation rules):
- Consider tax consequences for individual and corporate/institutional shareholders.
- Explore steps to minimize tax impact (e.g., individuals holding shares through a corporate entity).
- Find out whether other arrangements could alleviate costs if the flip is taxable for a shareholder.
2. Cap table review
Do smaller or friends and family shareholders wish to participate in the flip, or should they be bought out by larger shareholders?
3. Relocation of management and/or employees
Is relocation – permanent or secondment (temporary) – of overseas employees or founders to the US required? Consider:
- Secondment or relocation terms, tax equalization, etc.
- Immigration clearance or visas – think about employee eligibility and the timing of the visa process.
4. Incorporation in the United States
A flip typically is incorporated as a Delaware corporation. The timing depends on commercial needs, financial resources and other factors. Ask:
- Is the goal to complete the flip as soon as possible or just prior to a US financing?
5. Share exchange/flip process
Determine the method of exchanging shares in the overseas company:
- Share purchase or exchange agreement, especially if there is a small number of shareholders.
- Using “drag-along” rights in articles and constitutional documents.
- Scheme of arrangement or other court-sanctioned reorganization process (least desirable).
6. US securities compliance procedures
For the issue of shares in the new US company, identify appropriate US securities law exemptions (e.g. accredited investors).
7. Overseas company shareholders
Identify securities law compliance procedures (e.g., information memorandum, filings, notices, etc.) based on country of residence of shareholders for:
- Sale/exchange of overseas company shares.
- Issue of securities (shares or warrants to shareholders, options to employees, etc.) in the new US company.
8. Overseas company share options
How should you handle existing options or warrants: exercise, cancel or replace?
9. Business or asset transfer to US
If some or all of the overseas company’s business is relocated to the US, consider:
- Third-party consents/novation of agreements and change-of-control issues in key contracts.
- Identifying and scheduling all assets, contracts, and liabilities.
- Do government grants restrict transfer of intellectual property to US?
- Does the flip affect the overseas company’s tax losses? (And how to maintain and utilize going forward?)
10. Intercompany arrangements
Agree on the post-flip role of the new US company and the overseas company based on commercial, operational and tax-planning needs – and document with appropriate arm’s-length intercompany agreements.