Overview
- Frequently, a seller of a business will receive publicly traded shares of the buyer as part of a tax-free stock-for-stock exchange. The structures set forth herein allow the seller to monetize such shares in a tax-efficient manner
- To monetize the shares received in the exchange, the seller can enter into a derivative capital markets transaction or a derivative with its investment bank; examples of such are as follows:
- Mandatory Exchangeable Notes: A security issued by the Seller (i.e. holder of the Buyer’s shares) that mandatorily converts into Buyer shares after a designated period (usually 3-5 years); at the time of the mandatory exchange, the Seller incurs tax as if it had sold its Buyer shares
- Standard Exchangeable Notes: A security issued by the company which is exchangeable, at the holder’s option, into shares of the buyer; the term of the exchangeable security can be up to 30 years, allowing the company to accomplish tax deferral over a more significant period of time
- Collar Coupled with Loan: Seller enters into a put and call arrangement with its investment bank hedging its risk on buyer’s shares and borrows against hedged position. Hedge can typically be put on for up to a 10-year deferral period
- In addition to these strategies, the investment bank can develop a monetization strategy tailored to the Seller’s particular tax, accounting, and regulatory objectives
- Precedent transactions: Liberty/Media One