Good practice dictates the use of a transaction agreement called „contribution agreement“ and not a „purchase agreement“ where the parties intend to tax rollover capital for rollover participants. The characterization of the booking form as a purchase of shares or assets invites an IRS agent`s argument that the form of the booking requires tax treatment. The use of a contribution agreement ensures that the form of the transaction is a form in which the standard is tax-free (subject to cash management). In the contribution agreement, it is also useful to describe in detail the tax aspects of the transaction, including recognition by rollover buyers and participants, that the transaction involves at least partially a tax-exempt rollover. At least, a sales contract should clearly state that the rollover equity of the transaction is governed by CRI 351 or 721 and is intended by the parties for a tax-exempt exchange and not an acquisition of equity. Although less common, it is not uncommon to see the rollover as a separate or subordinate class of equity. For example, the PE fund can invest in preferred shares, while sellers roll in common shares. In these situations, it may be necessary to directly evaluate rollover capital on the basis of senior class pricing as the basis for rollover value (with a „backsolve“ technique). This is common when the rollover represents a separate class of Junior Equity. The value per unit of working capital is often adjusted for the „face value“ or amount mentioned in the transaction securities – where the nominal price per share is often attributed to the capital of the senior pe fund – since the rollover is a junior category with secondary characteristics. If some owners of the target entity do not continue to be indirect owners after the acquisition, their equity may be cashed into the target company in order to purchase the remaining members of the seller group as part of the transaction. If the acquisition vehicle is a pass-through LLC/joint venture, financial buyers routinely use a „blocker“ company between their investors and the new LLC when the latter owners are foreign investors or exempt investors seeking to avoid the transfer of active commercial or commercial income (which generates UBIT for exempt shareholders).
The unfavourable tax treatment granted in the future as part of a rollover transaction should be taken into account by the founders of the target entity when adopting their share plans. The answer is brief: take equity, but there are business and governance issues that often lead companies to adopt capital plans rather than equity grants. The easiest way to obtain a tax-deferred rollover transaction, but not often used because of the buyer`s concern about potential liabilities in the target transaction, is for the buyer to purchase less than 100% of the target entity`s equity. In general, buyers prefer structuring transactions that allow for a basic increase. An asset purchase not only meets the desired basic step and generally allows the buyer to avoid unknown commitments and unwanted obligations of the target company. A buyer`s concerns about the commitments and obligations of the target entity can often be mitigated (but not resolved) by the duty of care and compensation obligations of rollover participants. However, in some stores, regulatory issues or concerns about third-party approvals may overcome these issues and indicate the choice of action.