Nuts and bolts of accessing United States markets with Silicon Valley lawyer Louis Lehot
Looking to expand your business into the United States? Whether it’s for fundraising or commercial growth, a company “flip” has become a ubiquitous method of accessing U.S. markets. This involves creation of a corporation in America – typically a Delaware corporation taxed under subchapter C of the federal Internal Revenue Code (Delaware C corp). Then, it swaps shares with the home country company, rendering it a subsidiary of Delaware C corp in order to attract U.S. investors and customers.
Why Delaware? It’s often the best choice for new startups, whether the business was born in the U.S. or not. A Delaware C corp provides several benefits, including access to venture capital and a foot in the door to one of the world’s premier stock exchanges. Not to mention, the state of Delaware offers more standardized laws. These days, investors, private equity firms, and VCs tend to prefer for the company they conduct business with to be organized in Delaware.
When it comes to a “flip,” a non-U.S. based company, or HomeCo, creates a new Delaware C corp, also known as Topco. HomeCo stockholders contribute shares in HomeCo to Topco in exchange for shares of Topco, and become shareholders in Topco. Then, HomeCo becomes a wholly-owned subsidiary of Topco, and TopCo becomes the parent of HomeCo – with all shareholders and assets going into that entity. In addition, HomeCo can contribute assets to TopCo in exchange for shares, and the legacy HomeCo shareholders can become indirect shareholders in TopCo through continued holdings in HomeCo.
Here are key things for owners to consider when deciding if a “flip” is a fit:
- Can the Delaware “flip” be on a tax-free basis?
- Consider tax implications from how the technology will be shared or sold from one entity to another through a licensing agreement or sale agreement.
- Ensure the share exchange between HomeCo and Topco is completed in same way shares are held in HomeCo.
- A non-U.S. based company will benefit if it conducts a “flip” in the early stages of its operations.
- Consult tax and legal professionals where the non-U.S. based company is incorporated.
- If executives are relocating as part of the “flip”, consider whether an exit tax will be applied by the home country.
- There must be a share exchange agreement.
- Shares are not available right away, as there is a waiting period in non-U.S. based countries to register shares in Topco.
When it comes to the tax consequences of a “flip”, they are complex, and shareholders should get advice from tax advisers first. A well-structured “flip” should be tax neutral to the non-US based company and shareholders and should preserve the tax benefits of the non-US based company and shareholders. Once the “flip” is completed, the Delaware corporation will be a holding company without any operations, and its single asset will be 100% of the share capital of the non-US based company
A Delaware holding company structure has benefits as well as drawbacks, including:
- new taxes owing due to the “flip”, such as franchise taxes, sales taxes, payroll taxes and income tax
- by forming a parent company in Delaware, the company could be exposed to the risk of litigation in the U.S.
A “flip” can provide a beneficial route to new financing and increased shareholder value long term, but the company’s management team should carefully examine if a “flip” makes sense in the early stages of the financing lifecycle.
Looking to expand your business into the United States? Whether it’s for fundraising or commercial growth, a company “flip” has become the popular method of entering U.S. markets. This involves creation of a corporation in America – typically a Delaware corporation taxed under subchapter C of the IRC (Delaware C corp). Then, it is carried out with the home country company, rendering it a subsidiary of Delaware C corp in order to attract U.S. investors and customers.
About Louis Lehot:
Louis Lehot is a partner and business lawyer at the international law firm, Foley & Lardner LLP.
Louis operates from three of the firms’ offices based in Silicon Valley, San Francisco, and Los
Angeles. Louis Lehot is a member of several teams and groups in the firm such as the Private
Equity & Venture Capital, M&A and Transactions Practices, and also the Technology, Health
Care, Life Sciences, and Energy Industry Teams. Louis Lehot assists and advises his clients at
all stages of their career, guides them to achieve hyper growth, go public, and obtain optimal
liquidity events through an array of legal and business instruments, processes, and strategies.
He has experience in handling a number of high tech cases in different fields, and is known to
be one of the leading corporate lawyers in the San Francisco and Silicon Valley area. He is
likewise acclaimed by his peers and press. The Chambers of USA quoted “Louis Lehot is known
for the high quality of his advice, his responsiveness and passion for his clients.”