There are a lot of things to consider when a European company decides to open operations in the United States, and a common structure to do so is anecdotal known as the flipping of an American company over a European entity, often in order to attract American investors. Many US investors prefer to invest in US entities (usually Delaware C companies), so when a European company catches the interest of a US investor, they are often asked to take a leap in investment.
A flip is a business structuring exercise when a European company creates an American topco by asking all European shareholders to bring the shares they hold in the European company to a new Delaware C company in exchange for topco shares, thus becoming shareholders. in topco, and the European entity becomes a 100% subsidiary of topco. Therefore, a new American company is added on top of the European company, moving everyone into that entity. Then, American investors invest in the newly created Delaware topco alongside former European shareholders who have just weakened.
Some things to consider when considering a flip:
- It should be ensured that the exchange of shares takes place in the same proportion as the way in which the shares are held in the European company; do not treat shareholders differently.
- The earlier in the life of the business, the easier the flip will be. In other words, the more shareholders there are in the European company, and the more time passes or the value created, the more complicated the flip.
- It is essential to understand the tax laws of the European country where the company is incorporated. A flip could be viewed by local tax authorities as a sale of the company and, as such, there may be taxes associated with the exchange of shares. Lawyers and advisers familiar with local tax laws are essential.
- Each shareholder will be required to sign the share exchange agreement, so keeping shareholders well informed will help ensure a smooth transaction (see also point 2 above; the sooner the better) .
- Special attention should also be paid to stock options and other incentive compensation plans to ensure that their tax and vesting provisions, among other things, remain intact, optimal and enforceable, if possible. .
- If the founders (or others) receive shares that are subject to forfeiture (restricted stock), discuss the applicability of filing an 83 (b) choice, even if the beneficiary is not (yet) subject to US taxation.
- There is often a waiting period in European countries for actions to be registered in the name of the US topco, so be sure to allow extra time in the schedule taking into account said waiting period.
In short, a flip is a popular transaction used by European companies who are looking for American investors, or who have already attracted American investors, and who are asked to make a turnaround in relation to the investment. Although it sounds simple, it is actually a complicated transaction that must involve the advice and guidance of corporate and tax lawyers in both countries. Care must be taken to avoid potentially irreversible consequences on the road.
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