Structuring Venture Capital, Private Equity And Entrepreneurial Transactions

by Levin, Jack S.; Ginsburg, Martin D.; Rocap, Donald E.

ISBN13: 9780735548855

ISBN10: 0735548854

Format: Paperback

Pub. Date: 2004-04-01

Publisher(s): Wolters Kluwer Law & Business

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Summary

Now, you can minimize your clients' tax liability and avoid legal pitfalls, As well as maximize returns on successful transactions and be prepared for all of the potential benefits, with Structuring Venture Capital Private Equity and Entrepreneurial Transactions . Here at last is one-step-at-a-time, start-to-finish structural guidance For The following common business transactions: Venture capital financing New business start-ups Brains-and-money deals Growth-equity investments Leveraged and management buyouts Industry consolidations Troubled company workouts and reorganizations Going public Selling a business Forming a private equity fund Guided by Levin's dynamic, transaction-by-transaction approach, you'll make the tax, legal, and economic structuring consequences of every deal benefit your client every time. In this extraordinary hands-on resource by the most sought-after authority in the field, you'll see exactly how to: Distribute the tax burden in your client's favor Maximize returns on successful transactions Control future rights to exit a profitable investment...and turn every transaction into a winning venture!

About the Author and Special Editors

Acknowledgments

Introduction

Nature and Use of This Book

(1)

General Description of Venture Capital and Private Equity Investing

(1)

Distinguishing Venture Capital/Private Equity Investing from Other Types of Investing

(3)

High Cost of Venture Capital/Private Equity Money

(1)

Typical Venture Capital/Private Equity Transactions

(6)

Traditional Start-Up Transaction

(1)

Growth-Equity Transaction

(1)

Troubled-Company Turn-Around Investment

(1)

Leveraged or Management Buyout

(2)

Industry Consolidation

(1)

Exit Strategies

(1)

Formation of Venture Capital, Private Equity, or Buyout Fund

(1)

History of Venture Capital/Private Equity Investing

(2)

Ancient History

(1)

Industrial Revolution and Merchant Bankers

(1)

U.S. in the 1940s and Thereafter

(1)

The Shifting Sands of Federal Tax Rates

(2)

Frequently Used Definitions

Structuring Start-Up Transaction

E's Proposed Structure---All Common Stock

(5)

Code §83(a) Adverse Tax Effect on E

(1)

E's Code §83(a) OI on Bargain Purchase of Newco Stock

(1)

Several Approaches for Avoiding or Minimizing Code §83(a) OI

(1)

Code §351

(1)

Temporal differentiation

(1)

Substantive differentiation

(1)

Split of Proceeds If Newco Not Successful

(1)

Split of Proceeds If Newco Successful

(1)

Interest Deduction

(1)

VC's Internal Rate of Return

(1)

E's Good-Faith Investment

(1)

E's Conditional Right to Retain Newco Stock

(1)

Vc's Proposed Structure---Non-Convertible Debentures and Preferred in Addition to Common

(15)

VC Senior Claim

(1)

E's Purchase of Common Stock

(1)

No Significant Code §83(a) OI

(1)

Modest Code §83(a) OI Risk

(1)

Recourse Note

(1)

Interest-Bearing Note

(1)

E's Interest Deduction

(1)

Vesting

(1)

Option to Repurchase from E at Cost

(1)

Time Vesting

(3)

Performance Vesting

(1)

No Code §83(b) Election

(1)

Code §83(b) Election or Failure to Legend Certificate

(1)

Newco Deduction

(2)

E's LTCG on Sale

(1)

Vesting Subsequently Imposed On Outstanding Stock

(2)

Other Issues

(1)

Post-Vesting Buy-Back from E

(1)

Accounting Charge

(1)

Granting Stock Option to E

(1)

Newco Sale of Stock to VC

(1)

Several Alternative Capital Structures

(2)

VC Convertible Debenture or Convertible Preferred

(1)

VC Participating Double Dip Preferred Stock

(1)

Terms and Tax Aspects of VC's Debenture and Preferred Stock

(1)

Structuring Control of Newco's Board

(1)

No Relationship Between Equity Split and Board Seats

(1)

E's Proposal

(1)

VC's Proposal

(1)

Neutral-Director Compromise

(1)

Veto-Power-Plus-Shifting-Director Compromise

(1)

Protecting Newco's Directors from Personal Liability

(1)

Control Over Subsequent Private Offering, IPO, OR Sale of Newco

(1)

Sec Compliance

(14)

Obligation to Register Securities with SEC

(1)

Exemptions from SEC Registration

(1)

SEC Reg. D

(1)

Rule 504

(2)

Rule 505

(1)

Rule 506

(1)

Integration

(1)

Look Through

(1)

Reg. D Notification

(1)

Sec Rule 701

(2)

Sec Rule 1001

(1)

Sec Reg. A

(1)

Restrictions on Resale of Newco Securities

(1)

Restricted Securities

(1)

Unrestricted Securities

(1)

Contractual Registration Rights

(1)

Newco Resistance

(1)

Piggy-Back Offering

(1)

Underwritten Offering

(1)

Short-Form S-2 or S-3

(1)

Reg. A

(1)

Rule 144

(1)

Compliance with State Securities Laws

(1)

Nature of VC

(12)

VC as SBIC

(4)

VC as BHC Subsidiary

(1)

BHCA

(1)

Reg. Y and the 5/25 rules

(1)

VC as SBIC

(1)

Reg. K

(1)

Merchant Banking Activity

(3)

Federal Reserve Act §23A

(3)

VC as Insurance Company

(1)

Special LTCG Advantages for Individuals

(1)

Key Issues and References

Structuring Newco as Flow-Through Entity

Newco as S Corporation

(14)

Limited Liability and General Characteristics

(1)

General

(1)

Limited Liability

(1)

Piercing the Corporate Veil

(1)

Environmental Cleanup

(1)

Pension Plan and Other ERISA Liabilities

(1)

Shareholder Participation in Negligent or Wrongful Act

(1)

Federal Income Tax Aspects

(1)

No Entity-Level Tax

(1)

S Compared to C

(4)

S Compared to Partnership or LLC

(1)

State Taxation

(1)

Arbitrary Tax Limitations on Use of S

(1)

One Class of Stock

(1)

75-Shareholder Limitation

(1)

Prohibition on Entity and Foreign Shareholders

(3)

Key Issues and References

(1)

Newco as Partnership

(21)

Limited Liability Issues and General Characteristics

(1)

General

(1)

Difficulties in Achieving GP Limited Liability

(4)

Difficulties in Achieving LP Limited Liability

(2)

Federal Income Tax Aspects

(1)

No Entity-Level Tax

(1)

Partnership Compared to S Corporation

(4)

State Taxation

(1)

Limitations on Achieving Partnership Tax Flow-Through Treatment

(1)

Publicly Traded Partnership Taxed as C Corporation

(1)

Check-The-Box Classification Rules

(1)

Determining Who Is a Partner

(1)

Taxation of Service Provider on Receipt of Partnership Interest

(4)

IPO

(1)

Foreign Person

(1)

Flexible Sharing Arrangements

(1)

Key Issues and References

(2)

Newco as LLC

(5)

Limited Liability and General Characteristics

(1)

General

(1)

Limited Liability

(1)

Other Issues

(1)

Federal Income Tax Aspects

(2)

State Taxation

(1)

Key Issues and References

(1)

Tax Limitations on Newco's Deductible Expenses

Capitalization of Pre-Opening Start-Up Expenses

(1)

Exceptions

(1)

Key Issues and References

Structuring Growth-Equity Investment in Existing Company

Proposed Growth-Equity Transaction

(2)

Oldco's Characteristics

(1)

VC Proposed Investment

(2)

Rearranging Oldco's Equity Through Redemption

(10)

Principal Tax Characteristics

(4)

Principal Non-Tax Issues

(2)

Redemption Example

(1)

Key Redemption Issues and References

(2)

Issuing Additional Oldco Common Shares (or Options) to Executives

(1)

Rearranging Oldco's Equity Through Tax-Free Recapitalization

(10)

Principal Tax Characteristics

(7)

Principal Non-Tax Issues

(2)

Recapitalization Example

(1)

Key Recapitalization Issues and References

(1)

Rearranging Oldco's Equity Through Preferred Stock Dividend Plus Formation of Newco to Hold All of Oldco's Common (And Part of Oldco's Preferred) Stock

(7)

Principal Tax Characteristics of Oldco's Pro Rata Preferred Stock Dividend

(2)

Example of Preferred Stock Dividend Plus Interposition of Newco to Own all of Oldco's Common (and Part of Oldco's Preferred) Stock

(2)

Tax Effects of Newco's Interposition

(1)

Issuing Additional Newco Common Shares (or Options) to Executives

(1)

Key Issues and References on Preferred Stock Dividend Plus Interposition of Newco and Selective Issuance of New Common Stock or Options

(2)

Passive Shareholder Incentive to Reduce Common Ownership

(1)

IRS Anti-Estate-Freeze Rules

(9)

Code §2701 Imputed Gift

(1)

Avoiding Code §2701

(1)

No-Family-Relationship Exception

(1)

No-Applicable-Retained-Interest Exception

(3)

Same-Class Exception

(1)

Proportionality Exception

(1)

Market-Quoted Securities

(1)

Calculating Code §2701 Gift

(1)

Four-Step ``Subtraction Method''

(2)

Common-Stock-10%-Minimum-Value Rule

(2)

Economics and Taxation of Executive Stock Options

(7)

NQO Tax Ramifications

(1)

NQO Income Tax Ramifications

(2)

Transfer Tax on NQO Gift

(1)

Vested NQO

(2)

Unvested NQO

(1)

ISO Tax Ramifications

(1)

Key Issues and References on Executive Stock Options

(1)

NQO grant to executive

(1)

Accounting for Options, Stock Sales, and Stock Grants

(28)

APB 25 Rules for Non-Variable Stock-Based Compensation

(2)

APB 25 Rules for Variable Stock-Based Compensation

(1)

Elective FASB 123 Rules for Stock-Based Compensation

(1)

FV of stock sale or award

(1)

FV of stock option

(1)

Using bid quotations to value option under FASB 123

(1)

Vesting rules

(1)

SARs

(1)

Choice between FASB 123 and APB 25

(1)

APB 25 Rules for Vesting and TARSAP

(2)

APB 25 Rules for Paying Stock Purchase Price or Option Exercise Price by Note

(1)

Stock purchase using non-recourse note

(2)

Option exercise using non-recourse note

(2)

Stock purchase using recourse note

(1)

Option exercise by recourse note

(1)

Stock purchase or option exercise with recourse note followed by conversion to non-recourse note

(2)

APB 25 Rules for Tax-Offset or Other Cash Bonus

(1)

APB 25 Rules for Option Repricing, Rescissions and Other Modifications

(1)

APB 25 repricing rule

(3)

APB 25 extension or renewal rule

(1)

APB 25 change in number of shares rule

(1)

APB 25 equity restructuring rule

(1)

APB 25 rules for other modifications

(1)

APB 25 rules for stock option rescission

(1)

FASB 123 repricing and other modification rule

(1)

APB 25 Rules for Accelerated Vesting

(1)

Timing of Accounting Charges

(1)

Illustration---NQO Tax and Accounting Aspects

(1)

Income Tax Aspects

(1)

APB 25 GAAP Aspects

(1)

FASB 123 GAAP Aspects

(1)

Negotiating Posture as Compared to Start-Up Transaction

(2)

Terms of VC's Debentures and Preferred Stock

(2)

Complying With Federal and State Securities Laws

(1)

Nature of VC

(1)

Special LTCG Tax Advantages for Individuals

Structuring Buyout

Buyout of Bigco Subsidiary or Division

(61)

Financing $100 Million Purchase Price

(1)

Three Separate Transactions

(1)

Acquisition

(1)

Debt Financing

(1)

Equity Financing

(1)

Key Issues and References on Buyouts in General

(1)

Key Acquisition Issues

(1)

Purchase Price and Related Issues

(1)

Purchase Price

(1)

Representations, Warranties, and Indemnification

(3)

Closing Conditions

(1)

Transition Services

(1)

Seller Paper

(1)

Transferring Target Assets and Contracts

(1)

Hard to Transfer Assets and Contracts

(1)

Sales Taxes and Real Estate Transfer Taxes

(1)

Real Estate Title Insurance

(1)

Union Contracts

(1)

Hart-Scott-Rodino Antitrust Reporting Act

(1)

Filing and Waiting Period

(1)

Size of Transaction

(1)

Size of Person

(1)

Exemptions

(1)

No Antitrust Exemption

(1)

References

(1)

Protecting Newco from Target Liabilities

(1)

Stock Acquisition

(1)

Asset Acquisition

(1)

Bulk sales act

(1)

De facto merger and successor liability

(1)

Avoiding Newco Exposure

(1)

Some Special Target Liabilities

(1)

Bigco's Unpaid Consolidated Federal Income Taxes

(1)

Target's and Bigco's Pension Plan and Other ERISA Liabilities

(2)

Withdrawal Liability for Underfunded Multiemployer Union Pension Plan

(1)

Effect of Target's Retiree Medical and Life Insurance Benefits on Newco's Financial Statements

(1)

Bigco Public Announcement

(1)

Regulated Industry

(1)

Key Debt Financing Issues

(1)

Negotiating Bank Loan

(1)

Negotiating Mezz Debt/Subordinated Debentures (or Seller Paper)

(4)

Negotiating Relative Rights of Various Financing Parties

(1)

Priorities, Express Subordination, and Structural Subordination

(1)

Priorities

(1)

No Newco shareholder liability

(1)

Express subordination and cut-offs

(1)

Structural subordination

(1)

Alternative acquisition structures

(1)

Purchasing Target's Stock

(1)

Purchasing Target's Assets

(1)

Purchasing Target's Stock Plus Amalgamation of Target and Newco

(1)

Reverse Subsidiary Cash Merger

(1)

Reverse Two-Party Cash Merger

(1)

Part Purchase Plus Part Redemption of Target's Stock

(1)

Fraudulent Conveyance Risk

(2)

Other Issues

(1)

Upstream guarantees

(1)

Effect of tax law on choice of acquisition structure

(1)

Key Equity Financing Issues

(1)

VC's and Mezz Lender's Equity

(1)

Issues in Evaluating Convertible vs. Warrants vs. Cheap Common

(1)

Purchasing Common Stock

(1)

Warrants---Tax Aspects

(2)

Convertible---Tax Aspects

(1)

Tax Allocation to Warrant or Common But Not Conversion Feature

(1)

SEC Rule 144 Holding Period

(1)

Recapitalization, Merger, or Other Tax-Free Reorganization

(1)

Anti-Dilution Provisions

(1)

Liabilities That Migrate Upstream Where One Person Owns Large Amount of Newco Stock

(1)

Pension Plan and Other ERISA Liabilities

(1)

Environmental Cleanup

(1)

Owner/operator liability

(1)

Veil-piercing

(1)

Direct ``operator'' liability

(1)

Meaning of control

(1)

Other Liabilities

(1)

Management's Equity

(1)

General Considerations

(1)

Sarbanes-Oxley Act §402 Executive Loan Prohibition

(5)

Board Control and Related Issues

(1)

SEC and State Securities Law Compliance

(1)

Nature of VC

(1)

Federal Income Tax Aspects of Buyout

(1)

Overview

(2)

Alternative Acquisition Structures

(1)

Summary

(1)

Purchasing Target's Stock With No Code §338 Election or §338(h) (10) Election

(1)

Purchasing Target's Assets

(1)

Purchasing Target's Stock with Code §338(h)(10) Election

(1)

Forward Cash Merger

(1)

Reverse Subsidiary Cash Merger

(1)

Reverse Two-Party Cash Merger

(1)

Taxation of Bigco's Gain

(1)

Newco's Tax Savings from Asset SUB

(2)

Allocating Asset SUB

(1)

Newco's Aggregate Basis

(1)

Residual Allocation

(1)

Key Issues and References on Tax Aspects of Bigco Subsidiary or Division Buyout

(1)

GAAP Purchase Accounting Rules

(1)

Currently Effective GAAP Rules

(3)

FASB Proposed Changes

(1)

Buyout of Private Company

(11)

Federal Income Tax Aspects

(1)

Target Is C Corporation

(3)

Target Is S Corporation

(1)

Target Is Partnership or LLC

(1)

§197 Amortization

(1)

Summary

(1)

Target Management Tax-Free Rollover

(1)

Shareholder Vote and Dissenters' Rights

(3)

Purchase Accounting

(1)

Golden Parachute Tax Rules

(1)

Special LTCG Tax Advantages for Individuals

(1)

Other Issues

(1)

Key Issues and References on Private Company Buyout

(1)

Buyout of Public Company

(14)

One-Step vs. Two-Step Buyout

(1)

Federal Income Tax Issues

(1)

Securities and Corporate Law Issues and Negotiating Strategies

(1)

Practical Scenario

(2)

Federal Securities Laws

(1)

Disclosing Negotiations with Target

(1)

Ownership Disclosure

(1)

Limits on Insider Trading

(1)

Tender Offer Rules

(2)

Federal Margin Regulations

(2)

Going Private Rules

(1)

Proxy Rules

(1)

State Corporate Laws

(1)

Target Board's Fiduciary Duty

(1)

Negotiations with Target

(1)

No-shop/fiduciary-out clause

(1)

Lockup

(1)

Breakup fee

(1)

Financing out

(1)

Neutral or supermajority voting requirement

(1)

Negotiations with Management

(1)

Other Takeover Issues

(1)

Key Issues and References on Management's Fiduciary Duties

(1)

Buyout Structured for Recap Accounting

Recap Accounting Overview

(1)

Recap Accounting Where Target's Old Shareholders Have Significant Continuing Ownership In Recapitalized Target

(1)

Use of Transitory MergerCo

(2)

Use of Newco to Acquire Target

(1)

Partnership or LLC Newco

(1)

Subsequent elimination of corporate Newco

(1)

Newco-Target merger

(1)

Corporate downstream ``C'' or ``D''

(1)

LLC downstream ``C'' or ``D''

100

(1)

Nature of Old Target Shareholder Retained Equity Interest

100

(1)

Old Target Shareholders Not Part of Collaborative Group with New Target Investors

101

(1)

Target Voting Common Stock

102

(1)

Target Stock Options

102

(1)

Newly Purchased Target Stock

102

(1)

Restrictions on Retained Equity Interest

103

(2)

Value of Retained Equity Interest

105

(1)

VC Ownership of Target Warrants or Convertibles

106

(1)

VC Ownership of Target Preferred Stock

106

(1)

Effect of Recap Accounting on Newco's Financial Statements

107

(1)

Uncertainty in Recap Accounting Rules

107

(1)

Effect of Post-Buyout Events on Recap Accounting

108

(1)

Structuring to Obtain Recap Accounting Where Target's Shareholders Are Numerous or Recalcitrant

108

(1)

Pro Rata Recap with Forced Merger

109

(1)

Non-Pro Rata Recap

109

(3)

Recap Accounting Where Target Is Partnership or an LLC

112

(1)

Tax Issues Involved in Recap Accounting

112

(1)

Taxation of Continuing Old Target Shareholders

112

(2)

Tax SUB for Target's Assets

114

(1)

Eliminating corporate Newco

114

(1)

Corporate downstream ``C'' or ``D''

114

(1)

LLC downstream ``C'' or ``D''

115

(1)

Target partnership or LLC

115

(1)

Taxation of VC

115

(1)

Recap Accounting Where Target Public Debt or Preferred Stock Remains Outstanding after Recap

116

(1)

Recap Accounting Where Target Has Significant New Independent Shareholder

117

(2)

Recap of a Bigco Division

119

(2)

Key Recap Accounting Issues and References

121

Terms and Tax Ramifications of Debt and Equity Securities

Types of Securities

(1)

Subordinated Debenture Sample Terms and Tax Ramifications

(17)

Term

(1)

Subordination

(1)

Typical Remedies

(1)

Interest Deferral

(1)

Holders Taxed on Deferred Interest as OID

(1)

Imputed Interest

(1)

Holders' Phantom OID Income

(1)

Six Prerequisites for Newco's Interest Deduction

(1)

Subjective Debt/Equity Test

(1)

DER

(2)

Overlap

(1)

Reasonable Terms

(1)

Act Like Creditor

(1)

Code §279---Subordinated Debentures with Warrants or Conversion Privileges

(2)

Code §163(e)(5)---OID and PIK Debentures

(1)

Code §163(j) Test #1---Interest Payable to ``Related'' Lender Which Is TEO or FP (or Fund with TEO or FP Partners)

(3)

Code §163(j) Test #2---Interest Payable on Debt ``Guaranteed'' by ``Related'' Person Who Is TEO or FP (or Possibly by Fund with TEO or FP Partners)

(1)

Code §163(l)---Debt Payable in, or by Reference to Value of, Issuer Equity

(3)

References

(1)

Preferred Stock Sample Terms and Tax Ramifications

(6)

Mandatory Redemption

(1)

Dividends

(1)

Typical Remedies for Newco Failure to Pay Preferred Dividends or Redeem Preferred Timely

(1)

No Deduction for Dividends

(1)

Timing of Dividend Taxation and DRDs

(1)

Return of Basis

(1)

FV Below Face

(1)

Management Code §83 Issue

(1)

VC Preferred OID Issue

(1)

Preferred Stock Redemption Treated as Dividend

(2)

References

(1)

Subordinated Debt VS. Preferred Stock

Structuring Consolidation of Fragmented Industry

Structure #1: Corporate Holding Company with Corporate Subsidiaries

(9)

Factual Situation

(1)

Analysis of Structure #1

(1)

Consolidated Federal Income Tax Return

(2)

Offset of Income and Losses Within Consolidated Group

(1)

Tax-Free Transfer of Funds Within Consolidated Group

(1)

Limitation on Amount of New-Sub Stock Issued to Management and/or Mezz Lenders

(1)

Limited Liability Protection for Newco's Owners

(1)

Newco's Limited Liability Protection from NewSub Obligations

(1)

IPO or Tax-Free Merger of Newco

(1)

Sale of Newco

(1)

Sale of Portion of Newco

(2)

Structure #2: Partnership or LLC Holding Company with Corporate Subsidiaries

(5)

Factual Situation

(1)

Analysis of Structure #2

(1)

No Consolidated Federal Income Tax Return

(1)

No Offset of Income from One NewSub Against Losses of Newco or Another NewSub

(1)

Difficulties in Making Tax-Free Transfers of Funds Between Various NewSubs

(1)

No Limitation on Amount of NewSub Stock Issued to Management and/or Mezz Lenders

(1)

Limited Liability for Newco's Owners

(1)

Newco Limited Liability Protection from NewSub Obligations

(1)

IPO or Tax-Free Merger of Newco

(1)

Sale of Newco

(1)

Sale of Portion of Newco

(1)

Structure #3: Partnership or LLC Holding Company with Partnership or LLC Subsidiaries

(6)

Factual Situation

(1)

Analysis of Structure #3

(1)

No Entity-Level Tax

(1)

Offset of Income and Losses

(1)

Tax-Free Transfer of Funds Between Businesses

(1)

No Limitation on Amount of NewSub Ownership Interest Issued to Management and/or Mezz Lenders

(1)

Limited Liability Protection for Newco's Owners

(1)

Newco Limited Liability Protection from NewSub Obligations

(1)

IPO or Tax-Free Merger of Newco

(1)

Sale of Newco

(1)

Sale of Portion of Newco

(1)

Structure #4: Single Corporate Structure

(3)

Factual Situation

(1)

Analysis of Structure #4

(1)

One Federal Income Tax Return

(1)

Offset of Income and Losses Within Single Income Tax Return

(1)

Tax-Free Transfer of Funds Between Businesses

(1)

No Ability to Issue Stock of Particular Business to Management and/or Mezz Lenders

(1)

Limited Liability Protection for Newco's Owners

(1)

No Newco Limited Liability Protection from Obligations of Particular Business

(1)

IPO or Tax-Free Merger of Newco

(1)

Sale of Newco

(1)

Sale of Portion of Newco

(1)

Structure #5: Single Partnership or LLC Structure

(4)

Factual Situation

(1)

Analysis of Structure #5

(1)

No Entity-Level Tax

(1)

Offset of Income and Losses

(1)

Tax-Free Transfer of Funds Between Businesses

(1)

No Ability to Issue Ownership Interests in Particular Business to Management and/or Mezz Lenders

(1)

Limited Liability Protection for Newco's Equity Owners

(1)

Protection from Obligations of a Particular Business

(1)

IPO or Tax-Free Merger of Newco

(1)

Sale of Newco

(1)

Sale of Portion of Newco

(1)

Structure #6: No Holding Company---Direct Ownership of Individual Corporations by Shareholders

(3)

Factual Situation

(1)

Analysis of Structure #6

(1)

No Consolidated Federal Income Tax Return

(1)

No Offset of Income from One NewSub Against Losses of Another NewSub

(1)

Difficulties in Making Tax-Free Transfers of Funds Between Various NewSubs

(1)

No Limitation on Amounts of NewSub Stock Issued to Management and/or Mezz Lenders

(1)

Generally No Newco Entity-Level Liabilities

(1)

NewSub Limited Liability Protection from Obligations of Another NewSub

(1)

IPO or Tax-Free Merger of the Enterprise

(1)

Sale of the Enterprise

(1)

Sale of Portion of the Enterprise

(1)

Structure #7: No Holding Company---Direct Ownership of Individual Partnerships or LLCs by Owners

(1)

Factual Situation

(1)

Analysis of Structure #7

(1)

No Entity-Level Tax

(1)

Offset of Income and Losses

(1)

Tax-Free Transfer of Funds Between Businesses

(1)

No Limitation on Amount of NewSub Ownership Interests Issued to Management and/or Mezz Lenders

(1)

Limited Liability Protection for Enterprise's Equity Owners

(1)

Newco Limited Liability Protection from Obligations of NewSub

(1)

IPO or Tax-Free Merger of Newco

(1)

Sale of Enterprise

(1)

Sale of Portion of the Enterprise

(1)

Other Key Issues

(1)

References

Structuring Turn-Around Investment in Overleveraged or Troubled Company

The Failed Buyout

(2)

Alternative Restructuring Transactions

(4)

Transaction #1---Partial Payments to Creditors in Cash, New Debt, and Common Stock Where Badco Has No Market-Traded Debt Securities

(1)

$20 Million New Equity

(1)

Stock Cancellations

(1)

Creditor Compromises

(1)

Badco's Post-Restructuring Stock Ownership and Balance Sheet

(1)

Transaction #2---Badco's Subordinated Debentures Are Market Traded

(1)

Fact Pattern Variations

(1)

Tax Rules Applicable to Debt Restructuring

(9)

Key Badco Tax Issues

(1)

Amount of Debt Cancellation

(1)

Valuing Consideration Issued by Badco in Restructuring

(1)

Meaning of Market Traded

(1)

Alternative Tax Treatments of Debt Cancellation

(1)

Cancellation of Debt Income

(1)

The AR-Instead-of-CODI Bankruptcy/Insolvency Exception

(1)

Insolvency Requirement for a Non-Bankruptcy Restructuring

(1)

Meaning of Insolvency

(1)

Order of AR

(1)

Timing of AR

(1)

Insufficient Attributes to Reduce

(1)

Equity Capital Infusion

(1)

Consolidated Group

(1)

Shareholder-Contribution Exception

(1)

New-Debt-Not-Materially-Different Exception

(1)

Related-Party Rules

(1)

Key Issues and References on Badco's CODI and AR

(1)

Tax Results of Alternative Restructuring Transactions

(6)

Transaction #1---No Market-Traded Debt

(2)

Transaction #2---Market-Traded Debt

(3)

Badco as S Corporation, Partnership, or LLC

(1)

Application of Code §163(e)(5)

(1)

Applicable Sec and Other Disclosure Rules

(2)

Exemptions from 1933 Act Registration

(1)

Form S-4 Registration

(1)

State Securities Laws

(1)

Other SEC Implications

(1)

Key Issues and References on Securities Law Impediments to Restructuring

(1)

Binding Dissenting Creditors to Restructuring

(3)

Non-Bankruptcy Restructuring

(1)

Pre-Packaged or Pre-Arranged Bankruptcy

(1)

Procedure for Pre-Packaged or Pre-Arranged Bankruptcy

(1)

Cram Down of Non-Consenting Class

(1)

Restructuring Under State Compromise or Arrangement

(1)

Badco's Ability to Use Its Remaining NOLCF

(5)

NOL Reduction for DC

(1)

NOLCF

(1)

Code §382 Taint

(2)

Code §382 Elimination

(1)

Built-In Losses

(1)

Built-In Gains

(1)

Code §382 Special-Elective Bankruptcy Rule

(1)

Code §269 Elimination

(1)

Standstill Agreement to Prevent Changes in Badco Shareholders

(1)

Key Issues and References on Future Usage of Badco's Pre-Workout NOLs

(1)

Code §384 Limitation on Use of Badco's Nolcf Against New Target's Big

Exit Strategies: Structuring IPO or Sale of VC-Financed Portfolio Company

Initial Public Offering

(4)

Methods for Reselling Restricted Securities

(1)

1933 Act Registration Statement on Form S-1

(1)

Underwritten Offering

(1)

Primary vs. Secondary Sales

(1)

Stock Exchange Listing vs. Nasdaq Stock Market

(1)

Special Form for Small Business Issuer

(1)

Short-Form 1933 Act Registration Statement for Subsequent Offerings

(1)

Blue Sky Compliance

(1)

No Gun Jumping

(1)

Balanced Prospectus

(1)

Post-IPO Obligations

(1)

1933 Act Registered Public Offerings Subsequent to IPO

(2)

Short-Form Registrations

(1)

Form S-3

(1)

Form S-2

(1)

Demand and Piggy-Back Registrations

(1)

Sec Rule 144 Sales After IPO

(5)

Information

(1)

Volume Limitation

(1)

Manner of Sale

(1)

1-Year Holding Period

(1)

Commencement of Holding Period

(1)

Acquisition From a Person Other Than Portfolio Company or an Affiliate

(1)

Convertible Security

(1)

Warrant

(1)

Possible Delay for Unvested Securities

(1)

Incorporation of Partnership or LLC

(1)

SEC Notification

(1)

2-Year Holding Period for Unlimited Non-Affiliate Sales

(1)

Partnership Fund Distribution in Kind

(1)

Rule 701 Securities

(1)

Resales of Portfolio Company Unrestricted Securities by Portfolio Company Affiliate

(1)

Portfolio Company Affiliate

(1)

Portfolio Company Non-Affiliate

(1)

Sale of Portfolio Company to Buyerco for Buyerco Stock, Notes, and/or Cash

(3)

BuyerCo Stock as Principal Consideration

(1)

BuyerCo Debt Instrument as Part of Consideration

(1)

BuyerCo Asset SUB

(1)

Representations, Warranties, and Indemnifications from Portfolio Company's Shareholders

(1)

Representations and Warranties

(1)

Survival

(1)

Deductible and/or Ceiling

(1)

Escrow or Other Security

(1)

Assumption of Liabilities

(1)

Special LTCG Tax Advantages for Individuals

(9)

Code §1202 LTCG Rate Reduction to 14% on ``Qualified Small Business Stock''

(6)

Code §1045 Tax-Free Rollover for ``Qualified Small Business Stock''

(2)

18% LTCG Tax Rate for Property Acquired After 12/31/00 Repealed

(1)

Executive Compensation Issues Where Corporation Becomes Publicly Held---$1 Million Deduction Limit

(7)

Basic Deduction Limit

(1)

Exception #1: Privately Held Corporation

(1)

Exception #2: Plan or Agreement in Place When Privately Held Corporation Becomes Publicly Held

(1)

Exception #3: Executive Not a ``Covered Employee''

(2)

Exception #4: Performance-Based Compensation

(1)

Non-Discretionary, Pre-Established, Objective Performance Goal

(1)

Compensation Committee Comprised Solely of 2 or More Outside Directors

(1)

Shareholder Disclosure and Approval

(1)

Compensation Committee Certification

(1)

Exception #5: Compensation Not Paid for Services as an Employee

(1)

Manifestly Unsound Tax Policy

(1)

References

Structuring Formation of Private Equity Fund

PE Fund as Partnership Versus Corporate Form

(6)

Tax Advantages of Selecting Partnership Form for PE Fund

(5)

Tax Advantages of Selecting Corporate Form for PE Fund

(1)

Industry Standard Generally Limited Partnership Form

(1)

Key Tax Issues and References

(1)

Profit and Loss Allocations Between GP and LPs

(2)

Profit Allocation

(1)

Loss Allocation

(1)

Income from Short-Term Investments

(1)

Buyout Fund Multiple Partnership Structure

(1)

Timing of Distributions to GP and LPs

(1)

Pro-LP Alternative---Full Payout

(1)

Pro-GP Alternative---Distribute Net Profits First

(1)

Middle Ground---FV Capital Account Test

(1)

Alternative Middle Ground---Distribute Contributed Capital and Expenses on Realized Investments First

(1)

GP Tax Distributions

(1)

Management Fee to GP

(2)

Life of PE Fund and Related Issues

(1)

Vesting and Tax Aspects of VC Principals' Interests in GP Entity

(5)

Department of Labor Plan Asset Regulations

(2)

Investment Company Act of 1940

(9)

Private Placement of PE Fund's Equity Interests

(1)

Investment Advisers Act of 1940

(5)

PE Fund as an SBIC

(2)

Secondary Sale of PE Fund LP Interest

Confidentiality

(1)

Required Consents and Related Rights

(1)

Typical Sale Conditions

(1)

All-Partner Giveback

(1)

Allocation of Income and Losses between Buyer and Seller

Appendix Statutes, Regulations, and Other Precedents

Internal Revenue Code of 1986

(192)

§1(a), (h), and (i)(2)

(4)

§11(a) and (b)

(1)

§61

(1)

§83

(2)

§108 (omitting (c)(1)(B), (c)(2)-(5), (d)(8)-(10), (f), and (g))

(5)

§162(m)

(2)

§163 (omitting (b), (c), (d)(4)(E), (d)(6), (e)(2)(C), (e)(3), (e)(4), (e)(5)(F), (e)(6), (f), (g), (h)(2)(E), (h)(3)(D), (h)(4)(A)(ii), (h)(4)(B), (h)(4)(D), (h)(5), (k), and (m))

(11)

§195

(1)

§197 (omitting (f)(5))

(5)

§243(a)-(c) (omitting (b)(1)(B), (b)(2)(B), and (b)(3))

(1)

§246A (omitting (c)(3))

(2)

§269

(1)

§279 (omitting (c)(5) and (i))

(4)

§280G

(3)

§301 (omitting (e) and (f))

(1)

§302 (omitting (f))

(3)

§305 (omitting (e) and (f))

(1)

§306 (omitting (f))

(3)

§311

(1)

§312(a)

(1)

§316(a)

(1)

§317

(1)

§318(a)

(2)

§331 (omitting (c))

(1)

§332

(1)

§334

(1)

§336 (omitting (d)(1)(B), (d)(2), (d)(3), and (e))

(1)

§337 (omitting (b)(2) and (d))

(1)

§338 (omitting (e), (h)(3)(C), (h)(6)(B), (h)(7), (h)(12-14), and (h)(16))

(4)

§351 (omitting (c), (e)(2), and (h))

(3)

§354(a) (omitting (a)(3))

(1)

§356 (omitting (b) and (d)(2)(C))

(1)

§358 (omitting (b), (c), and (g))

(2)

§368 (omitting (a)(2)(H) and (a)(3))

(4)

§382 (omitting (l)(2) and (l)(5)(F))

(11)

§384 (omitting (e))

(2)

§385

(1)

§421 (omitting (c))

(1)

§422 (omitting (c)(3))

(2)

§424 (omitting (j))

(2)

§447(d)(2)(C)(i) and (e)

(1)

§453(a)-(d), (f), and (k)(2)

(2)

§453A (omitting (b)(3) and (4))

(3)

§453B (omitting (e))

102

(1)

§465(a)(1) and (2)

103

(1)

§469 (omitting (c)(3), (c)(5), (c)(7), (d), (f), (h)(3), (i), (j), (k), and (m))

103

(4)

§483 (omitting (d)(2)-(4), (e), and (g))

107

(1)

§511(a)(1)

108

(1)

§512(a)(1), (b)(1), (b)(4), (b)(5), (c)(1), and (e)

108

(2)

§513(a)

110

(1)

§514(a), (b)(1), (c)(1), (c)(2)(A), and (d)

111

(2)

§691(a)-(c) (omitting (b)(2), (c)(1)(C), (c)(3), and (c)(5))

113

(3)

§§701-761 (omitting §702(d), §704(f), §706(b)(4)(B), (b)(5), (d)(2)-(4), §721(c)-(d), §724, §735, and §761(f))

116

(22)

§871(a) and (b) (omitting (a)(1)(B), (a)(1)(D), and (a)(3))

138

(1)

§875

139

(1)

§881(a) (omitting (a)(4))

139

(1)

§882(a), (b), and (c) (omitting (c)(4))

140

(1)

§1001 (omitting (e))

141

(1)

§1014(a) and (c)

142

(1)

§1017 (omitting (b)(4), (c), and (d))

142

(2)

§1032(a)

144

(1)

§1045

144

(1)

§1059 (omitting (c)(3)(C), (d)(2), (e)(2), and (e)(3))

145

(3)

§1202

148

(7)

§§1272-1275 (omitting §1272(a)(2), (a)(6), (b), §1274(b)(3), (c)(3)(A), (c)(3)(B), (c)(3)(E), (e), §1274A, and §1275(a)(1)(B), (a)(3), (b), (c)(2)-(4))

155

(7)

§§1361-1378 (omitting §1362(e)(5) and (6), §1366(f)(1) and (g), §1371(d), §1373, and §1375(c))

162

(23)

§1501

185

(1)

§1504(a) and (b)

186

(1)

§4999

187

(1)

§7704

188

(2)

§7872 (omitting (c)(1)(F), (c)(2)(C), (f)(11), (f)(12), and (g))

190

(5)

Treasury Regulations

195

(64)

Treas. Reg. §1.83-1--1.83-8 (omitting -6(a)(5) and -8(b))

195

(18)

Temp. Reg. §1.83-7T(a)

213

(2)

Treas. Reg. §1.305-1(b)(1), (c), -5(a), (b), (d) (Examples 4, 5, 7, 8, 9, and 10), -7(a), (b), and (c)(1)--(2)

215

(9)

Treas. Reg. §1.338(h)(10)-1

224

(10)

Temp. Reg. §1.338(h)(10)-1T(c)(2) and -1T(e)

234

(2)

Treas. Reg. §1.351-1 and -2 (omitting -1(a)(3)(ii) and -1(c)(6)(ii))

236

(4)

Treas. Reg. §1.1361-1(a), (b), (e), (g)(1)(i), (l) (omitting -1(b)(6) and -1(l)(7))

240

(12)

Treas. Reg. §1.1502-6

252

(1)

Treas. Reg. §301.7701-2 and -3 (``Check-the-box'' regulations)

252

(7)

Revenue Procedures and Revenue Rulings

259

(26)

Rev. Proc. 93-27

259

(1)

Rev. Proc. 2001-43

260

(2)

Rev. Rul. 69-6

262

(2)

Rev. Rul. 73-427

264

(2)

Rev. Rul. 75-502

266

(1)

Rev. Rul. 75-512

267

(2)

Rev. Rul. 76-364

269

(1)

Rev. Rul. 76-385

270

(1)

Rev. Rul. 78-250

271

(1)

Rev. Rul. 79-273

272

(2)

Rev. Rul. 85-106

274

(3)

Rev. Rul. 90-95

277

(3)

Rev. Rul. 95-70

280

(2)

Rev. Rul. 98-21

282

(3)

Federal Securities Laws

285

(68)

Securities Act of 1933

286

(1)

§2(a)(1), (4), (11), (12)

286

(1)

§3(a)(9), (10), (11)

287

(1)

§3(b)

287

(1)

§4(1), (2), (3), (4), (6)

287

(1)

§5

288

(1)

1933 Act Rules and Regulations

289

(1)

Sec Rule 144

289

(9)

Sec Rule 145

298

(2)

Sec Rule 147

300

(4)

Sec Reg. D

304

(13)

Sec Rule 701

317

(4)

Securities Exchange Act of 1934

321

(1)

§10 (omitting (a))

321

(1)

§13(k)(1)

321

(1)

1934 Act Rules and Regulations

322

(1)

Sec Reg. §240.10b-5

322

(1)

Investment Company Act of 1940

322

(1)

§2(a)(2), (3), (9), (13), (24), (42), (43), (46)-(48), (51)

322

(4)

§3(a), (b), (c)(1), (c)(3), (c)(7)(A), (c)(7)(E)

326

(3)

§6(b)

329

(1)

§48(a)

329

(1)

§55

330

(2)

Sec Reg. §270.2a51-1

332

(3)

Sec Reg. §270.2a51-2

335

(2)

Sec Reg. §270.2a51-3

337

(1)

Sec Reg. §270.3a-1

337

(1)

Sec Reg. §270.3a-2

338

(1)

Sec Reg. §270.3a-3

338

(1)

Sec Reg. §270.3c-1

339

(1)

Sec Reg. §270.3c-5

339

(1)

Sec Reg. §270.3c-6

340

(1)

Investment Advisers Act of 1940

341

(1)

§202(a)(11)

341

(1)

§202(a)(22)

342

(1)

§203(a)

342

(1)

§203(b)(3)

343

(1)

§203A

343

(1)

§205

344

(1)

§208(d)

345

(1)

§215

345

(1)

§222

346

(1)

Sec Reg. §275.203(b)(3)-1

346

(2)

Sec Reg. §275.203A-1

348

(1)

Sec Reg. §275.203A-2

349

(1)

Sec Reg. §275.205-3 (the ``heavy hitter rule'')

349

(4)

Bankruptcy Code

353

(8)

§101(5), (32)

353

(1)

§501(a)

354

(1)

§544(b)(1)

354

(1)

§548 (omitting (a)(2), (d)(2)(B)-(D), (d)(3), and (d)(4))

354

(1)

§550

355

(1)

§1125

356

(2)

§1145 (omitting (a)(3), (a)(4), and (d))

358

(3)

State Fraudulent Conveyance Statutes

361

(10)

Uniform Fraudulent Transfer Act

361

(6)

Uniform Fraudulent Conveyance Act (omitting §§13 and 14)

367

(3)

Examples of Statute of Elizabeth States

370

(1)

Virginia

370

(1)

South Carolina

370

(1)

Delaware Corporate, Partnership, and LLC Statutes

371

(66)

Del. General Corporation Law

373

(1)

§102

373

(1)

§145 (omitting (d), (e), (h), (i), and (k))

374

(2)

§146

376

(1)

§154

376

(1)

§160

377

(1)

§170(a)

378

(1)

§172

378

(1)

§173

379

(1)

§202

379

(1)

§244

380

(1)

§251

381

(4)

§252

385

(2)

§253

387

(1)

§259(a)

388

(1)

§261

389

(1)

§262 (omitting (f), (i), and (l)

389

(4)

§263(a)

393

(1)

§264(a)

393

(1)

§265(a) and (b)

394

(1)

§266(a) and (b)

394

(1)

§271

394

(1)

§388(a) and (b)

395

(1)

Del. Revised Uniform Limited Partnership Act

395

(1)

§17-208

395

(1)

§17-211(a), (b), and (h)

395

(2)

§17-212

397

(1)

§17-215(a), (b), and (g)

397

(1)

§17-217(a), (b), and (i)

398

(1)

§17-218(a), (b), (c), (d), (e), and (i)

398

(2)

§17-219 (omitting (e)(1)-(7))

400

(2)

§17-301(d)

402

(1)

§17-302 (omitting (c))

402

(1)

§17-303

403

(2)

§17-401

405

(1)

§17-402(a)

406

(1)

§17-403(b)

407

(1)

§17-404

407

(1)

§17-405 (omitting (c))

407

(1)

§17-501

408

(1)

§17-502(a)(1)

408

(1)

§17-503

408

(1)

§17-504

409

(1)

§17-602(a)

409

(1)

§17-603

409

(1)

§17-604

410

(1)

§17-605

410

(1)

§17-607

410

(1)

§17-702(a) and (d)

411

(1)

§17-704(a)

411

(1)

§17-801

412

(1)

§17-804

413

(1)

§17-901(a)

414

(1)

§17-902(a)

414

(1)

§17-907(a), (b), and (c)

415

(1)

Del. Limited Liability Company Act

415

(1)

§18-101(4), (6), (7), (10), and (11)

415

(1)

§18-107

416

(1)

§18-108

416

(1)

§18-207

416

(1)

§18-209(a), (b), and (g)

417

(1)

§18-210

418

(1)

§18-212(a), (b), and (g)

418

(1)

§18-214(a), (b), (h), and (i)

419

(1)

§18-215(a), (b), (d), (e), (f), and (h)

419

(3)

§18-216 (omitting (e)(1)-(7))

422

(1)

§18-301(b)(1), (d) and (e)

423

(1)

§18-302 (omitting (c))

424

(1)

§18-303

425

(1)

§18-305(g)

425

(1)

§18-306

425

(1)

§18-402

425

(1)

§18-403

426

(1)

§18-404 (omitting (c))

426

(1)

§18-405

427

(1)

§18-407

427

(1)

§18-501

427

(1)

§18-502(a)

427

(1)

§18-503

428

(1)

§18-504

428

(1)

§18-602

428

(1)

§18-603

428

(1)

§18-604

429

(1)

§18-605

429

(1)

§18-607

429

(1)

§18-702(a), (b), and (e)

430

(1)

§18-704

431

(1)

§18-705

431

(1)

§18-801

432

(1)

§18-803(a)

433

(1)

§18-804

433

(1)

§18-901(a)

434

(1)

§18-902(a)

435

(1)

§18-907(a), (b), and (c)

435

(1)

§18-1107(a)

435

(2)

Cases

437

(104)

In re International Radiator Co.

437

(2)

Turner v. Bernstein

439

(1)

Malone v. Brincat

440

(2)

Edelman v. Fruehauf Corp.

442

(6)

Hanson Trust PLC v. ML SCM Acquisition Inc.

448

(21)

Mills Acquisition Co. v. Macmillan, Inc.

469

(25)

Paramount Communications Inc. v. QVC Network Inc.

494

(15)

In re Fort Howard Corp. Shareholders Litigation

509

(14)

Black & Decker Corp. v. American Standard, Inc.

523

(18)

Other Materials

541

1916 Uniform Limited Partnership Act §7

541

(1)

1985 Revised Uniform Limited Partnership Act §§303, 607, 608, and 901

541

(3)

2001 Uniform Limited Partnership Act §§201(a), 303, 404, 508, 509, and 901(a)

544

(4)

American Bar Association Model Rule of Professional Conduct 1.7

548

(4)

The American Law Institute Federal Income Tax Project, Reporter's Study Draft 6/1/89, Subchapter C Supplemental Study, Harvard Professor William Andrews, pp. 13-37

552

(15)

Sheffield and Kimball, Organizing the Corporate Venture, (Practising Law Institute, ``Tax Planning for Domestic & Foreign Partnerships, LLCs, Joint Ventures & Other Strategic Alliances,'' vol. 7, 2003), §§301-304

567

(6)

Testimony Before the House Ways and Means Committee of Jack S. Levin (regarding proposed LBO Tax legislation), 2/2/89

573

Table of Internal Revenue Code Sections

(4)

Table of Treasury Regulations

(2)

Table of Treasury/IRS Rulings

(2)

Table of Federal Securities Laws, Rules, and Regulations

(2)

Table of Bankruptcy Code Sections

(2)

Table of State Fraudulent Conveyance Statutes

(2)

Table of Delaware Corporate, Partnership, and LLC Statutes

(2)

Table of Cases

(2)

Table of Other Laws

(2)

Table of Other Materials

Index

Structuring Venture Capital, Private Equity And Entrepreneurial Transactions

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