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Transcript
LLC’s, LLP’s, DST’s, LP’s:
Why And How Are Alternative Entities
Used In Cross Border Transactions
Ellisa Opstbaum Habbart
Partner
The Delaware Counsel Group, LLP
Program Chair
1
TABLE OF CONTENTS
Document
Page
DOING BUSINESS IN DELAWARE: THE CORPORATE STATE
3
A GENERAL OVERVIEW OF DELAWARE LLCS
6
DELAWARE LLCS AND DELAWARE CORPORATIONS: A COMPARISON
9
DELAWARE SERIES LLC
14
THE DELAWARE STATUTORY TRUST: FLEXIBILITY AND BENEFITS
FOR INVESTORS
16
DELAWARE STATUTORY TRUSTS
20
A COMPARISON OF THE LAWS GOVERNING DELAWARE STATUTORY
TRUSTS AND MARYLAND CORPORATIONS OPERATING AS REITS
34
OVERVIEW OF SIGNIFICANT 2007 AMENDMENTS TO THE DELAWARE
LLCA, DRULPA, DRUPA AND THE DGCL
40
PRESENTATION OF ROBIN JOHNSON AND IAN MOLYNEUX
44
DIFFERENT STRUCTURES ACROSS EUROPE
68
HOLDING COMPANY IN EUROPE-COMPARATIVE TAX
ASPECTS AS AT OCTOBER 1, 2007
92
2
Doing Business in Delaware: The Corporate State
Why Delaware?
Half of the Fortune 500 companies are incorporated in Delaware. Businesses of all types and sizes
benefit from Delaware law. Ease in formation of entities, quickly closed deals and expedited resolutions
to corporate disputes are just a few of the advantages Delaware offers.
Expedited Resolutions
Unmatched in any other jurisdiction, the Delaware Court of Chancery is known worldwide for its wellreasoned and well-developed body of corporate law. With over 100 years of corporate law
jurisprudence, businesses have taken comfort in this Court’s ability to resolve business disputes quickly
and fairly.
Cutting Edge Corporate and Business Law Legislation
The Delaware Bar has a unique relationship with the Delaware Legislature in that each draws from the
other’s expertise and knowledge. Delaware corporate lawyers review and comment on proposed
legislation and address issues in current laws. This collaborative relationship ensures that the Delaware
law governing corporations and alternative business entities remains on the cutting edge in addressing
legal issues.
3
Immediate Access
The Division of Corporations of the Office of the Secretary of State uses state-of-the-art technology that
provides immediate access to filings, certificates of good standing and general corporate and alternative
entity information.
The Delaware Entity Advantage
Corporations
-limited liability for shareholders
-well-developed corporate governance law
Limited Liability Companies
-contractual flexibility
-limited liability for members and managers
Statutory Trusts
-contractual flexibility
-advantages over common law trusts for business purposes
Limited Partnerships
-contractual flexibility
-limited liability for limited partners
TOP TEN REASONS TO DO BUSINESS IN DELAWARE
10.
Half of the Fortune 500 companies are incorporated in Delaware
9.
Well-developed corporate governance law
8.
Contractual flexibility
7.
Expedited resolutions
4
6.
Ease in formation
5.
Cutting edge corporate and business law legislation
4.
Collaborative relationship between Delaware Bar and Delaware Legislature
3.
Immediate access to the Division of Corporations of the Office of the Secretary of State with
state-of-the-art technology
2.
Delaware Court of Chancery - over 100 years of corporate law jurisprudence
1.
Delaware rated #1 overall in US Chamber of Commerce Study
This document is prepared for information purposes only and should not be relied upon as or be considered legal advice.
Please contact us if you have specific questions regarding this information. Copyright © 2004, 2008, The Delaware Counsel
Group, LLP.
5
A General Overview of Delaware LLCs
Statutory Framework
In Delaware, limited liability companies (“LLCs”) are created and governed by Chapter 18 of
Title 6 of the Delaware Code Annotated, the Delaware Limited Liability Company Act (the “Act”). 6
Del . C. §§ 18-101 et seq. An unincorporated form of business organization, LLCs allow for passthrough taxation of a partnership with limited liability of all parties involved.
Formation – Filing Certificate of Formation
A Delaware LLC is formed by filing a Certificate of Formation with the Delaware Secretary of
State, together with the appropriate fee. The required provisions include: (i) name of LLC; (ii) the
name and address of the LLC’s registered agent; (iii) and any other provisions determined by the
members. The Certificate of Formation must be executed by one or more authorized persons.
The Operating Agreement
After the Certificate of Formation, the parties must draft and execute the limited liability
company agreement. The agreement will provide the detailed provisions for the operation of the LLC.
If the agreement does not address a certain issue, then by default, the Act supplies the terms. The
agreement will address:
•
Capital Contributions
•
Allocation and Distribution Provisions
6
•
Management
•
Transfer and Buyer-Sell Provisions
•
Dissolution
Capitalization
The Act provides general guidance as to the form of contribution. The agreement should contain
provisions which address initial capital contributions.
Allocation and Distribution
Consulting with qualified tax experts is crucial when determining the allocation and distribution
provisions.
Management
An LLC may be managed by a designated manager or the equivalent of a corporate Board of
Directors or by the equity owners of the LLC themselves (the “Members”). The former is called a
“Manager Managed LLC” and the latter is called a “Member Managed LLC”.
In a Manager Managed LLC, the manager may have sole and absolute control over the LLC or
may have more limited ability to take action without the consent of the Members. In a Member
Managed LLC, no management team is put into place and no power is delegated to a Manager, Board of
Managers or Board of Directors. Rather, the Members themselves make all decisions with respect to the
LLC. The extent of control granted to a Manager and the manner in which Members make decisions
depends upon the provisions set forth in the LLC Agreement as agreed upon by the parties.
Transfer and Buy-Sell Provisions
The agreement should address transfers and define a “transfer” and what is being transferred. It
is necessary to distinguish between a member’s “investment” in an LLC and the sum total of a
member’s rights in an LLC, including any right to vote or consent to matters.
7
Operation/Control
The parties will want to address many of the management issues, including replacement of
managers, meetings of members and actions by members without a meeting. All can be addressed in the
agreement and the Act provides great flexibility to the parties.
Fiduciary Duties of Members and Managers
The Act is silent with respect to the standard of care and degree of loyalty imposed upon
members and managers. The Act provides, however, to the extent there are duties, these duties can be
expanded, restricted or eliminated by the agreement. 6 Del. C. § 18-1101(c).
Once the structure of the LLC is determined, appropriate standards are then established to
determine the duties the parties owe to one another and the basis for any liability owed between the
parties and to the LLC. In contrast to the corporate structure, duties and liabilities that may otherwise
exist in law or in equity may be expanded, restricted or even eliminated in the LLC Agreement. If no
provisions on this issue are addressed in the LLC Agreement, a member or manager’s exposure is
limited to his or her investment; third parties cannot look to them personally to meet any financial
obligation. Third parties may look to the assets of the LLC only. Moreover, consistent with the concept
that the parties to the LLC determine what they expect from one another, the parties may provide for
indemnification that is compatible with such terms. Unlike the Delaware General Corporation Law, the
Act does not impose any standards for indemnification nor does it impose a set of mechanics that must
be followed to obtain it.
Dissolution
The Act provides events that will cause dissolution including (1) the time specified in the LLC
Agreement, if not specified, the LLC has perpetual existence; (2) upon the happening of events set forth
in the LLC Agreement; (3) the vote as specified in the LLC Agreement; or (4) judicial dissolution.
Excerpted from Delaware Limited Liability Company Forms & Practice Manual, Data Trace Legal Publications, Inc., by
Ellisa Opstbaum Habbart and Wayne J. Carey.
8
Delaware LLCs and Delaware Corporations:
A Comparison
Delaware LLC (DE LLC)
Governing Documents
Delaware Corporation (DE Corp.)
Certificate of Formation
•Filed with the Delaware Secretary of
State.
Delaware Certificate of Incorporation
•Filed with the Delaware Secretary of
State.
•One page document available to the
public that includes only name of LLC
and name and address of its Delaware
registered agent.
• Only document filed with the Delaware
Secretary of State and available to the
public other than annual franchise tax
filing. Must include provisions relating
to capitalization (classes and rights of
shares), super majority voting rights, and
certain governance provisions.
LLC Operating Agreement
•A contract governing the parties’
relationship. The freedom to establish the
rights and obligations of the parties by
contract is subject to very limited
exceptions.
•Shareholder approval is required to
amend Certificate of Incorporation. The
Certificate of Amendment is filed with
the Delaware Secretary of State.
•LLC Operating Agreement is a private
document, not filed with the Delaware
Secretary of State.
By-Laws
•By-laws set forth corporate governance
guidelines; may be amended by board of
directors if so provided.
•Procedure or requirements for
amendments to the LLC Operating
Agreement can be set forth in the
Operating Agreement, need no public
filing.
9
Delegation of
Management
•Business and affairs can be managed by
members, managers or delegated to
another person or entity.
•No limitation on power to delegate
management.
Duties of Fiduciary
Manager/Director
Liability
Series and Classes of
Ownership Interest
•The parties to the LLC Operating
Agreement establish and thereby may
limit or eliminate by contract the
fiduciary duties of the manager(s) and
any manager delegatees.
•LLC Operating Agreement establishes
liability of all parties to third parties and
to each other; can restrict liability, subject
only to public policy exceptions; i.e.
implied covenant of good faith and fair
dealing.
•The board of directors, in accordance
with the statute, by-laws and powers set
forth in the Certificate of Incorporation,
manages the affairs of a DE Corp.
•The board of directors has the authority
to delegate duties with respect to ordinary
course of business decisions to officers.
•Fiduciary duties of the board of
directors are governed by common law - duty of care and loyalty; good faith.
•Can limit director liability to
shareholders and corporation for
monetary damages in Certificate of
Incorporation – cannot limit liability
where director received an improper
benefit, conduct was not in good faith or
breach of duty of loyalty.
•The parties establish the
limitation/extent of management liability
to members and other parties providing
management and investors with more
certainty, if drafted precisely.
•DE Corp. can renounce certain
corporate opportunities available to the
corporation in its certificate of
incorporation.
•No punitive damages in Delaware Court
of Chancery, a court of equity.
•No punitive damages in Delaware Court
of Chancery, a court of equity.
•LLC Operating Agreement establishes
classes, groups or series of shares or
“membership interests.”
•May establish different classes or series
of shares in Certificate of Incorporation
and give directors the power to designate
the rights, powers and preferences of
preferred stock (“blank check preferred”).
•Management may amend rights, powers
and authority of existing shares or
interests to the extent provided in the
agreement.
•LLC Operating Agreement can limit
liability between series of shares or
interests.
•Shareholder approval required to amend
rights, powers and authority of existing
shares.
•No filing required with Delaware
Secretary of State to establish a new
10
class, group or series or to amend rights,
power and authority of existing shares,
however, the Certificate of Formation
must provide for series.
Sale of
Interests / Shares
•LLC Operating Agreement addresses
transfer and sale of interests.
•May restrict share sale or transfer by a
shareholder agreement.
•May distinguish between transfer of
economic interests and all rights of a
member / investor.
Shareholder / Member
Voting Rights,
Meetings, Quorum,
Record Dates and
Proxies 1
•LLC Operating Agreement establishes
manager and member voting rights with
respect to LLC Operating Agreement
amendments, mergers and sales of assets.
•No requirement to have an annual
meeting.
•LLC statute imposes no rules with
respect to notice of meetings, quorum
requirements, record dates, or proxies
Removal of Managers/
Directors
•LLC Operating Agreement can
prescribe any requirements and the
process for removal of managers.
Shareholder or
Investor Liability
•Limited to investment unless otherwise
provided.
•Statute establishes certain required
voting rights for shareholders - - may
require higher vote on matters in the
Certificate of Incorporation.
•Statute requires annual shareholder
meetings including notice and record
date.
•Generally, statute requires a majority of
shareholders to establish quorum for
voting.
•Statute provides that directors can be
removed with or without cause by a
majority shareholder vote unless
otherwise provided in the Certificate of
Incorporation.
•Limited to investment.
•Capital contributions, as well as
allocations and distributions, are set forth
in the LLC Operating Agreement.
Indemnification
•LLC Operating Agreement may provide
indemnification for any manager,
director, officer, employee or other
person from and against any and all
claims, and provide for advancement of
fees and expenses.
•Statute allows indemnification for
directors, officers, employees and agents
and for expenses in defending against a
proceeding, for settlements, judgments,
penalties and fines. Statute also allows
for advancement of fees and expenses.
1
New York Stock Exchange or NASDAQ rules may impose requirements for shareholder voting and other matters beyond
the requirements of Delaware law.
11
•By-Laws or certificate may make
indemnification mandatory and also
provide for advancement of fees and
expenses.
Shareholder / Member
Right of Inspection of
Business Records
•LLC Operating Agreement may limit or
expand the members’ statutory right to
inspect business records.
•Shareholder has a statutory right to
inspect the books and records of a DE
Corp., including the shareholder list,
under certain circumstances.
Taxation
•LLCs allow for pass-through taxation of
a partnership.
•Corporate taxation
Development of
Business Laws
•Common law well developed by
Delaware Court of Chancery.
•Common law well developed by
Delaware Court of Chancery.
•Delaware business law is the most
developed in the United States and
extends to LLCs as well as corporations.
•Delaware business law is the most
developed in the United States and
extends to LLCs as well as corporations.
• Delaware Courts, including wellknown Court of Chancery, ranked #1 by
U.S. Chamber of Commerce study.
• Delaware Courts, including wellknown Court of Chancery, ranked #1 by
U.S. Chamber of Commerce study.
Courts
• LLC Operating Agreement may
prescribe rules regarding derivative cases,
including demand requirements.
Legislature/
Government
• Delaware lawyers work with legislature
to continually update business laws as
needed to reflect changing business
environment.
• Delaware lawyers work with
legislature to continually update business
laws as needed to reflect changing
business environment.
• Delaware Legislature very responsive
to business needs and accustomed to
changes and innovation in business laws.
• Delaware Legislature very responsive
to business needs and accustomed to
changes and innovation in business laws.
12
• Easy access to and extensive
experience of Delaware Secretary of
State Division of Corporations.
• Easy access to and extensive
experience of Delaware Secretary of
State Division of Corporations.
A form of this chart was published in the Newsletter of the Committee on Partnerships and Unincorporated Business
Organizations comparing Delaware Statutory Trusts to Maryland Corporations, July 2002, Volume XIX, No. 3 at 16. The
chart was expanded as part of the April 2003 ABA Section of Business Law program on REITS and compared Delaware v.
Maryland v. Virginia. This chart is prepared for information purposes only and should not be relied upon as or be considered
legal advice. Copyright © 2005, 2008, The Delaware Counsel Group, LLP.
13
Delaware Series LLC
Certificate of Formation
•
Series must be provided for in the certificate of formation filed with the Delaware Secretary of
State.
•
Language can be as simple as stating that a series has been provided for or will be provided for
in the LLC operating agreement.
•
No requirement to identify any specific series.
•
Notice of limitation of liabilities of a series.
Limitation of Liability
•
•
•
•
LLC maintains separate and distinct records for each series.
Assets of series are accounted for separately from other LLC or series assets.
LLC operating agreement so provides.
Notice of limitation of liability of the series is set forth in certificate of formation.
What is a Series?
-
Each series can have:
•
Different members;
•
Different managers;
•
Different LLC interests;
14
•
Different Assets; or
•
Different business purpose or investment objective.
What Issues Arise?
•
•
•
•
How do you qualify a series with an LLC in a jurisdiction that does not recognize a series LLC?
What if the jurisdiction requires a listing of managers for Annual Reporting requirements?
California requirement that each series register do business as a foreign entity.
Do you list all the managers in the series as well?
This document is prepared for information purposes only and should not be relied upon or be considered legal advice. Please
contact us if you have specific questions regarding this information. Copyright © 2004, 2008, The Delaware Counsel Group,
LLP.
15
THE DELAWARE STATUTORY TRUST: FLEXIBILITY AND
BENEFITS FOR INVESTORS
A statutory trust could be the vehicle of choice for many investors. Historically, business trusts,
governed by the common law, originated as an alternative to corporations (that many states did not
permit to invest in real estate). The Massachusetts Business Trust is probably the best known of such
entities.
Delaware is one of several states that have codified the common law principles regarding the
existence and structure of statutory trusts. On October 1, 1988, it enacted the Delaware Statutory Trust
Act (formerly known as the Delaware Business Trust Act), which is contained in 12 Del. C. Chapter 38.
The Act has been amended almost bi-annually since its adoption to insure that it provides great
flexibility, including the ability to limit the liability of all parties involved and to obtain the tax treatment
desired: corporate, pass-through.
A Delaware Statutory Trust is a statutory entity that is created by the execution of a governing
instrument and the filing of a Certificate of Trust with the Delaware Secretary of State. The governing
instrument is an agreement entered into between one or more trustees and one or more persons who are
to own equity interests in the Delaware statutory trust. Only one trustee is required in order to create a
statutory trust. The trustee, or, if there is more than one trustee at least one of the trustees, must be either
(1) a natural person who is a resident of Delaware, or (2) an entity that has Delaware trust powers. There
are a number of banks in Delaware that can provide the requisite Delaware Trustee services. 2 Once
created, the statutory business trust is recognized as a separate legal entity.
2
Although a Delaware banking institution is often used to meet the requirement of a Delaware trustee, in practice, the
Delaware trustee is provided with nominal duties only. Its role is similar to that of a registered agent in a Delaware
corporation. This is desirable given parties do not wish to have a trustee impose itself on the statutory trust’s activities.
16
A Statutory Trust is Similar to but Different than a Corporation
A Delaware statutory trust is similar to a corporation in that the beneficial owners of the trust
have no greater liability than that of a stockholder in a corporation. That is, if the governing instrument
does not provide to the contrary and if the beneficial owners comply with the formalities of the
governing instrument, with few exceptions, their liability is limited to the amount of their required
investment.
In contrast to a corporation, it is possible to structure the Delaware statutory trust so that it is
taxed as a pass through entity, such as a partnership, for income tax purposes. Alternatively, the
statutory trust may be structured to obtain grantor tax treatment or corporate tax treatment. All that is
required is the inclusion of appropriate provisions in the governing instrument.
Similar to a corporation, the Act provides that once formed, a Delaware statutory trust has
perpetual existence and is not terminated by the death, incapacity, dissolution, termination or bankruptcy
of a beneficial owner, or the transfer of a beneficial interest. However, it is important to note that all of
the foregoing may be altered by the terms of the governing instrument.
A Statutory Trust is Similar to a Limited Partnership and
a Limited Liability Company
A Delaware statutory trust is similar to a limited partnership and a limited liability company in
that the Act leaves it to the parties to the governing instrument to craft many of the provisions regarding
the governance of the trust. However, unlike the general partner of a limited partnership, no party to a
Delaware statutory trust has unlimited liability. Unless the governing instrument provides to the
contrary, the trustee, when acting in such capacity, is not personally liable to third parties for any act,
omission or obligation of the trust.
A statutory trust is further similar to a limited partnership and a limited liability company in that
the Act prohibits creditors of the beneficial owners from obtaining possession of, or otherwise
exercising legal or equitable remedies with respect to, the property of the trust. As a result, a beneficial
owner’s creditor may receive only what the beneficial owner is entitled to according to the terms of the
governing instrument. Moreover, since the trustee is liable only to the Delaware statutory trust and the
beneficial owners for any act, omission or obligation of the trust or of another trustee (unless a different
standard is provided for in the governing instrument), the recourse of creditors of the Delaware statutory
trust (such like that of corporate creditors) is limited to the value of its assets. In contrast, the trustee’s
liability to the Delaware statutory trust and to the beneficial owners is triggered if the trustee does not
meet the requisite standard of care set forth in the governing instrument (subject to good faith and fair
dealing limitations).
17
Establishing the Standard of Care
If no standard of care is provided in the governing instrument, the Act directs that the Delaware
law applicable to trusts provide the standard. This triggers the standard applicable to fiduciaries
generally, which requires the trustee to “act with the care, skill, prudence and diligence under the
circumstances then prevailing that a prudent person acting in a like capacity and familiar with such
matters would use to attain the purposes of the account.”
Equity Owners May Direct Trustee
Although the Act begins with the premise that the business and affairs of the statutory trust are to
be managed by or under the direction of the trustees, it permits the governing instrument to include
provisions that give the beneficial owners the right to direct the trustee in the management of the trust’s
business and affairs. This includes the ability to provide in the governing instrument that certain actions
require the consent of a given percentage of the beneficial owners.
Actions such as the sale of the trust’s assets, the purchase of trust assets, the dissolution of the
trust, the merger of the trust, the appointment of new trustees and the creation of a new series of
beneficial interest are just a few of the matters over which the beneficial owners may have a voice in the
activities and success of the Delaware statutory trust. These rights and powers may be conveyed to and
exercised by the beneficial owners without the risk of their subsequent characterization as trustees. As a
result, to the extent the governing instrument so provides, beneficial owners are able to act without
subjecting themselves to liability to the statutory trust, the other beneficial owners or third parties for
their participation.
Other Persons May Direct Trustees
The Act also contemplates the use of persons or entities other than the beneficial owners to direct
the trustee’s management over the trust’s affairs and business. The Delaware statutory trust has the
option to engage persons or entities with particular expertise in activities conducted by the trust. Such
persons, typically called managers or administrators, could be appointed by the trustee. Their
appointments may also be made subject to the approval of the beneficial owners.
These experts may be used in varying degrees and capacities depending in large part on the skills
and experience of the trustee and the needs of the Delaware statutory trust. They could direct the trustee
in managing the day-to-day affairs of the trust or direct the trustee faced with a major policy or business
decision, or anything in between these two extremes. These experts are permitted to act in such
capacities without being treated as trustees. As such, they are not subject to the liabilities of trustees.
18
Trustees May Delegate Their Duties
In addition to the ability to structure the governing instrument so that the beneficial owners and
other persons and entities direct the trustee in its management of the Delaware statutory trust, the Act
explicitly provides that a trustee may delegate his duties as trustee. The only requirement is that the
delegatee work under the trustee’s direction. As a result, experts may be used to provide services to the
trust. However, the governing instrument should set forth a process by which the trustee reviews or has
veto power over the expert’s actions.
One Entity May Include Different Equity Owners and Trustees
It is possible for the governing instrument to provide for different classes, groups or series of
beneficial interests, beneficial owners and trustees. Therefore, the standard of care applicable to a
trustee, the liability of a trustee and the rights, powers and duties of the trustee to manage the Delaware
statutory trust can be varied. Similarly, a beneficial owner’s ability and the voting rights and other
powers afforded to a beneficial owner can also be varied.
____________________________________________________________________________________
If you have any questions regarding this article, please contact The Delaware Counsel Group, LLP at (302) 576-9600. This
article is prepared for informational purposes only and should not be relied upon as or be considered legal advice. Copyright
© 2005, 2008, The Delaware Counsel Group, LLP.
19
Delaware Statutory Trusts
I.
Background Summary of the Delaware Statutory Trust
A.
Introduction. A statutory trust (or often times referred to as a “business trust” and will
be used interchangeably throughout this summary) is a form of voluntary business association created by
a trust instrument pursuant to which property is conveyed to one or more trustees (or the trust itself) to
hold and manage the property for the benefit of the beneficial owners. The modern business trust
developed in Massachusetts to avoid a statutory provision prohibiting corporations from dealing in real
estate. See Minkin v. Commissioner of Revenue, 425 Mass. 174, 680 N.E.2d 27, 30 (1997); Annot., 88
A.L.R.3d 704, 711 (1978). In State Street Trust Co. v. Hall, 31 Mass. 299, 41 N.E. 2d 30, 34 (1942) the
Court stated that:
[Business trusts] have been recognized for many years as a common and lawful
method of transacting business in this Commonwealth. It has been said that this method
of conducting a commercial enterprise originated in this Commonwealth as the result of
the inability to secure chargers for acquiring and developing real estate without a special
act of the Legislature. Accordingly, the usual purpose of these early organizations was to
deal in real estate, but with passing years business trusts have greatly increased in number
and have been used extensively in conducting nearly all kinds of industrial and
commercial activities.
The statutory trust is structurally analogous to other business entities (corporations, limited partnerships,
limited liability companies) where management and control is separated from equitable ownership. The
use of the common law business trust as an alternative business entity has a long history in the United
States. See J. Langbein, The Secret Life of the Trust; The Trust as an Instrument of Commerce, 107
Yale L.J. 165 (1997). Its use, however, has (and still does to an extent) present uncertainties and risks
that are peculiar to trusts and trust law, including (1) the potential liability of trustees for torts and
contracts of the trust; (2) common law trust principles restructuring the ability of trustees to delegate
powers, act beyond the terms of the trust instrument, or engage in transactions with the trust; (3)
20
possible non-recognition of limited liability of beneficial owners, including imposition of a “control
test”; (4) potential non-recognition of the business trust as an entity entitled to transact business; (5)
possible restriction on ability to protect trust property from creditors of beneficial owners; and (6)
unfavorable tax treatment. However, those risks have been addressed by the statutory recognition of
business trusts in a number of states, including Delaware.
B.
Advantage of Business Trusts. Business trusts were used to avoid some of the
governance and procedural requirements imposed on corporations by the subject State corporation
statute. Essentially, the law of the business trust is drafted into the trust instrument. See J. Langbein,
The Secret Life of the Trust, 107 Yale L.J. at 184. “The flexibility to eliminate governance procedures
that are obligated under the corporate form has been one great attraction of the trust form. For example,
the trust instrument can be drafted to dispense with routine shareholder meetings.” (citations omitted).
The business trust has also been used to avoid corporate taxation or to otherwise obtain advantageous
tax treatment. See e.g., Crocker v. Malley, 249 U.S. 223 (1919). Finally, the business trust structure
could shield its owner/shareholder from personal liability. See Williams v. Inhabitants of Milton, 215
Mass. 1, 8, 102 N.E. 355 (1913). The advantages which led to the proliferation of the business trust as a
form of association have been discussed at length by numerous scholarly articles. See J. Langbein, The
Secret Life of the Trust, supra; Bogert, Law of Trust and Trustees, §247; Jones, The Massachusetts
Business Trust and Registered Investment Companies, 13 Del. J. Corp. L. 421 (1988); C. Magruder, The
Position of Shareholders in Business Trusts, 23 Column. L. Rev. 423 (1923); Comment, Massachusetts
Trusts, 37 Yale L.J. 1103 (1928); N. Issacs, Trusteeship in Modern Business, 42 Harv. L. Rev. 1048
(1929).
C.
Risks of Using Non-Statutory/Common Law Business Trusts. Several jurisdictions
impose a “control test” to determine shareholder liability – i.e., personal liability is imposed (and the
trust is disregarded) when shareholders exercise too much control in the management of the trust.
Williams v. Inhabitants of Milton, 215 Mass. 1, 102 N.E. 355 (1913); Frost v. Thompson, 219 Mass.
260, 106 N.E. 1009 (1914). Where beneficial owners retain control over the trustees, the common law
business trust fails and shareholders will not be entitled to limited liability. The First National Bank of
New Bedford v. Chartier, 305 Mass. 316, 25 N.E.2d 733 (1940). There was also a risk that other
jurisdictions would not recognize a common law business trust as a separate entity or enforce its terms,
including the limited liability of shareholders. See Means v. Lumpia Royalties, 115 S.W. 2d 468 (Tex.
App. 1938). Common law business trusts were also not always successful at obtaining the desired tax
advantages. See Morrissey v. Commissioner, 296 U.S. 344, 80 L.Ed. 263, 56 S. Ct. 289 (1935)
(common law business trusts which possessed corporate attributes were held taxable associations rather
than as property held in trust).
D.
Delaware Statutory Trust Legislation. Statutory business trust statutes have been
enacted by several states, including Delaware, to eliminate many of the uncertainties associated with
common law trusts. The Delaware Statutory Trust Act; 12 Del. C. §3801 et seq. (the “Delaware Act”),
which was enacted in 1988, provides, among other things, that the business trust is a separate legal entity
and that the personal liability of the beneficial owners are limited to the same extent as stockholders in a
Delaware corporation. Under the Delaware Act, the rights, obligations and liabilities of the trustees and
21
the beneficial owners of the trust can be varied to suit investors’ needs. The Delaware Act also allows
the beneficial owners or even third parties to control the actions of the trustees or other persons
authorized to manage the trust. The Delaware Act contains specific provisions that make it attractive for
use by registered investment companies, including the authorization of separate series or portfolios. The
Delaware Act also contains provisions that enhance the “bankruptcy remote” qualities of a business
trust, including limitations on the ability of beneficial owners to trigger dissolution and limitations on
the rights of creditors of beneficial owners. In 2002, the legislative amendments to the statute changed
the title and all references to “business trusts” within the Delaware Act to “statutory trusts” to avoid any
implication that a trust formed under the Delaware Act constitutes a “business trust” under Bankruptcy
Code definitions.
II.
III.
Common Current Uses of Statutory or Business Trusts.
A.
Asset-Backed Securities Transactions.
B.
Collateralized Mortgage Obligations (CMOs and REMICs).
C.
Real Estate Investment Trusts (REITS).
D.
Leveraged Leasing Transactions.
E.
Mutual Funds and Investment Companies.
F.
Liquidating Trusts.
G.
Private Investment Funds, Joint Ventures and Strategic Alliances.
H.
Trust Preferred Securities Transactions.
Summary of Delaware Legislative Developments.
As mentioned above, the Delaware Act was enacted in 1988 to codify the organizational rules
applicable to the “business trust” and to authorize a statutorily recognized flexible alternative business
entity. The legislative synopsis to the 1988 statute provides:
This bill statutorily recognized common law trusts created for business purposes as the State of
Massachusetts did many years ago. A business trust is the favored form of entity for money
market mutual funds, and for real estate investment trusts, and other investment entities involved
in the securitization of debt.
22
Senate Bill No. 355, 66 Del. Laws Ch. 279 (1988); See Nakahara v. The NS 1991 American Trust, Del.
Ch., C.A. No. 15905, Chandler, C. (March 20, 1998) slip. op. at 17-18 (“The principal purpose of the
[Delaware Act] was to statutorily recognize the existence of the business trust in Delaware, a business
form that was implicitly recognized by the statutory laws of the State [of Delaware]”).
The Delaware Act has been and continues to be periodically amended in order to accommodate
developments in common business practices. The Delaware Act has been amended in 1990, 1991, 1992,
1996, 1998, 2000, 2002, 2004 and 2006.
Prior to 1998, business trusts were generally recognized under Delaware law although the law
applicable to such entities was not entirely clear. Several statutes in the Delaware Code included the
term “business trust” in definitions of “person” or “organization.” Two reported Delaware cases
discussed, to some degree, the existence and operations of business trusts. In Saminsky v. Abbott, Del.
Ch., 185 A.2d 765 (1961) shareholders of an investment company governed by the Investment Company
Act and organized as a common law business trust sued the trustees for excessive recurrent charges and
management fees. The court, finding that business trusts are more analogous to corporations than
personal trusts, held that the corporate law doctrine prohibiting payment of compensation amounting to
waste was applicable to common law business trusts. In Commonwealth Trust Co. v. Capital
Retirement Plan, Del. Ch., 54 A.2d 739 (1947), the Court held that a trustee (who, under the trust
indenture, had sole authority to manage the trust) was not entitled to receive monthly payments required
under the trust indenture where the trustee failed to participate in management of the trust or to provide
the required services. The 1988 senate bill expressly provided that the Delaware Act would have no
effect on the existence or validity of common law business trusts created before or after the effective
date of the statute and that common law business trusts could elect to be governed by the Delaware Act
by filing a certificate of trust. 66 Del. Laws Ch. 279, §2 (1988).
IV.
General Statutory Provisions Governing Statutory Trusts.
A.
Definitions.
1.
Statutory Trust. The statutory definition of “Statutory Trust” generally
incorporates the common law concept and the modern requirements of a written instrument and the
filing of a document with the secretary of state. The Delaware Act, for example, provides at §3801(a):
“Statutory trust” means an unincorporated association which: (1) Is created by a
governing instrument under which property is or will be held, managed, administered,
controlled, invested, reinvested and/or operated, or business or professional activities for
profit are carried on or will be carried on, by a trustee or trustees or as otherwise provided
in the governing instrument for the benefit of such person or persons as are or may
become beneficial owners or as otherwise provided in the governing instrument,
including but not limited to a trust of the type known at common law as a "business
trust," or "Massachusetts trust," or a trust qualifying as a real estate investment trust
23
under § 856 et seq. of the United States Internal Revenue Code of 1986 [26 U.S.C. § 856
et seq.|, as amended, or under any successor provision, or a trust qualifying as a real
estate mortgage investment conduit under § 860D of the United States Internal Revenue
Code of 1986 ›26 U.S.C. § 860D], as amended, or under any successor provision; and
(2) Files a certificate of trust pursuant to § 3810 of this title.
Any such association heretofore or hereafter organized shall be a statutory trust and a
separate legal entity. The term "statutory trust" shall be deemed to include each trust
formed under this chapter prior to September 1, 2002, as a "business trust" (as such term
was then defined in this subsection). A statutory trust may be organized to carry on any
lawful business or activity, whether or not conducted for profit, and/or for any of the
purposes referred to in paragraph (a)(1) of this section (including, without limitation, for
the purpose of holding or otherwise taking title to property, whether in an active or
custodial capacity). Neither use of the designation "business trust" nor a statement in a
certificate of trust or governing instrument executed prior to September 1, 2002, to the
effect that the trust formed thereby is or will qualify as a Delaware business trust within
the meaning of or pursuant to this chapter, shall create a presumption or an inference that
the trust so formed is a "business trust" for purposes of Title 11 of the United States
Code.
The 2006 legislative amendments to the Delaware Act clarified that a statutory trust “shall be a
separate legal entity, the existence of which as a separate legal entity shall continue until cancellation of
the statutory trust’s certificate of trust.” 12 Del. C. § 3810(a).
2.
Governing Instrument. Under the Delaware Act, a governing instrument is
defined as any “any instrument (whether referred to as a trust agreement, declaration of trust or
otherwise) which creates a statutory trust or provides for the governance” of its business and affairs. 12
Del. C. §3801(f). The Delaware Act further provides that the governing instrument may consist of one
or more documents, including bylaws, and may contain any provision that is not inconsistent with law or
the certificate of trust. Id. The 2000 legislative amendments clarified that the governing instrument may
consist of separate instruments – one instrument that creates the statutory trust and one or more others
that govern its internal affairs. The 2002 legislative amendments clarified that a statutory trust is not
required to execute the governing document and is bound by it whether or not the governing document
is executed. Id. The 2006 legislative amendments confirm that beneficial owners and trustees are also
bound by the governing instrument regardless of whether they sign them. Id.
3.
Beneficial Owner. The Delaware Act defines a beneficial owner as “any owner
of a beneficial interest in a statutory trust, the fact of ownership to be determined and evidenced
(whether by means of registration, the issuance of certificates or otherwise) in conformity to the
24
applicable provisions of the governing instrument of the statutory trust.” 12 Del. C. §3801(b). Thus, a
statutory trust is not required to issue certificates evidencing beneficial interests.
4.
Trustee. The Delaware Act defines trustee as “the person or persons appointed as
a trustee in accordance with the governing instrument of a statutory trust, and may include the beneficial
owners or any of them.” 12 Del. C. §3801(c). The defined term “person” is broadly defined to include
entities as well as natural persons. 12 Del. C. §3801(d).
B.
Formation. Similar to most limited partnership and limited liability company statutes,
the Delaware Act provides that a statutory trust is “formed” at the effective time of the filing of the
initial certificate of trust. 12 Del. C. §3810(a)(2). Section 3810(a)(2) was added to the Delaware Act in
the 1996 amendments.
1.
Certificates of Trust. A Delaware statutory trust must file a certificate of trust
with the Delaware Secretary of State, setting forth the following required information: (i) the name of
the statutory trust and (ii) the name and address of the Delaware resident trustee (or trustees). 12 Del. C.
§3810(a). The certificate of trust may also contain any information that the parties desire including, for
example, a future effective date provision, provisions respecting the internal management of the
business trust, and provisions, authorized by 12 Del.C. §3804(a), that provide for limitation of liabilities
among series or portfolios of the statutory trust. Unless the certificate contains a future effective date
provision, it is effective when filed. The certificate of trust must be executed by all of the trustees of the
statutory trust. 12 Del.C. §3811(a).
2.
Delaware Resident Trustee. At least one trustee of a Delaware statutory trust
must be a resident of Delaware, or if a non-natural person, it must have its principal place of business in
Delaware. 12 Del. C. §3807. However, if a statutory trust is, becomes or will become a registered
investment company under the Investment Company Act of 1940, it is not required to have a resident
Delaware trustee so long as such statutory trust has and maintains in Delaware a registered office, which
may but need not be its place of business in the state and a registered agent for service of process on the
statutory trust. 12 Del. C. §3807(b) and (c).
3.
Certificates of Amendment. The certificate of trust may be amended at any time
by the filing of a certificate of amendment with the Delaware Secretary of State and must be amended if
information set forth therein changes rendering the certificate materially false. 12 Del. C. §3810(b).
The authority of trustees to amend the certificate may be made subject to requirements set forth in the
certificate of trust or the governing instrument, such as a requirement for prior approval by the beneficial
owners. A certificate of amendment must be executed by at least one trustee. 12 Del. C. §3811(a)(2).
25
4.
Restated Certificate of Trust. The certificate on file with the Secretary of State
may be integrated into one restated certificate of trust at any time for any purpose as the trustees may
determine. Such certificate must set forth the following: the present name of the statutory trust and the
name under which the statutory trust was originally formed if such name has been changed, the date of
the filing of the original certificate of trust, and the information required to be included in a certificate of
trust. 12 Del. C. §3810(c). A restated certificate must be executed by at least one trustee. 12 Del. C.
§3811(a)(2).
5.
Certificates of Correction. The Delaware Act permits the correction of any
certificate filed with the Secretary of State which “is an inaccurate record of the action therein referred
to, or was defectively or erroneously executed.” 12 Del. C. §3810(e). A certificate of correction, which
must be signed by at least one of the trustees, shall be effective as of the date of filing of the original
certificate that is being corrected, except as to those persons who are substantially and adversely affected
by the correction. 12 Del. C. §§3810(e) and 3811(a).
6.
Certificate of Cancellation. The certificate of trust of a statutory trust must be
canceled by the filing of a certificate of cancellation upon the completion of winding up of the trust’s
business. 12 Del. C. §3810(d). The filing of a certificate of cancellation terminates the separate legal
existence of the statutory trust. It must be executed by all of the trustees unless otherwise provided in
the governing instrument. 12 Del. C. §3811(a)(3).
7.
Execution and Filing of Certificates. Trustees who execute certificates are
deemed to swear or affirm, subject to penalties for perjury, that the facts stated in the certificates are
true. 12 Del. C. §3811(c). The Delaware Act also permits any person, including a trustee, to execute any
certificate or governing instrument by an agent or attorney-in-fact. 12 Del. C. §3811(b). Signatures on
Delaware certificates may be by facsimile and certificates may be filed by electronic transmission. 12
Del. C. §3812(e). Under the Delaware Act, a filing fee of $200 must be paid at the time of the filing of
any certificate and no filing is effective until such fee is paid. 12 Del. C. §§3812(c) and 3813.
8.
Use of Names Regulated. The name of a statutory trust set forth on the
certificate of trust must distinguish the trust from the name of any domestic or foreign corporation,
partnership, limited partnership, limited liability company or statutory trust reserved or registered with
the Delaware Secretary of State, unless the written consent of the previously registered entity is obtained
and filed with the Secretary of State. 12 Del. C. §3814. The name of a statutory trust may contain the
name of a beneficial owner or trustee.
26
C.
Contributions by Beneficial Owners.
1.
Form of Contribution. Under the Delaware Act, beneficial owners can
contribute any form of property to a statutory trust in exchange for its beneficial interest. Moreover, a
person may become a beneficial owner or receive a beneficial interest in the statutory trust without
making any contribution. 12 Del. C. §3802(a).
2.
Enforcement of Contribution Obligation. Except as provided in the trust
instrument, a beneficial owner is obligated to the statutory trust to perform any promise to contribute to
the trust, despite inability to perform because of death, disability or any other reason. If a beneficial
owner fails to make a required contribution of property or services, it is obligated at the option of the
statutory trust to contribute cash equal to the contribution not made. 12 Del. C. §3802(b). The
governing instrument can provide for any type of penalty against the interest of a beneficial owner who
fails to make a required contribution. 12 Del. C. §3802(c).
D.
Liability of Beneficial Owners and Trustees.
1.
Beneficiaries. The modern business trust statutes reject the “control test” that
would impose liability on beneficial owners who exert “control” over the trustees or the management of
the trust. Under the Delaware Act, for example, except as otherwise provided in the trust’s governing
instrument, the beneficial owners have the same limitation of personal liability as stockholders of a
Delaware corporation. 12 Del. C. §3803(a). Under the Delaware corporate law, shareholder liability for
corporate obligations is limited to the shareholder’s investment in the corporation. 8 Del. C. §102(b)(6)
(“…the stockholders or members of a corporation shall not be personally liable for the payment of the
corporation’s debts except as they may be liable by reason of their own conduct or acts.”). Moreover,
the Delaware Act expressly permits the beneficial owners to participate in the management of the trust
without being deemed trustees or otherwise losing the limited liability that attaches to the status as a
beneficial owner. See 12 Del. C. §3801(c) and 3806(a).
2.
Trustees. Under common law, trustees of business trusts, like trustees of
personal trusts, were generally liable for obligations of the trust. Trustee liability was addressed by
inserting exculpatory provisions in the governing instrument and, more importantly, in contracts
between the trust and third parties. The modern statutes eliminate this concern by providing that trustees
are not liable for the statutory trust’s obligations. Under the Delaware Act, a trustee is not personally
liable to any person, other than to the statutory trust or a beneficial owner, for actions taken while acting
in the capacity of trustee. 12 Del. C. §3803(b). With respect to fiduciary duties and liabilities among
trustees, the trust and beneficial owners, the statute provides that (1) the trustees will not be liable to the
27
trust or beneficiaries for acts taken in good faith reliance on the provisions of the governing instrument
and (2) the fiduciary obligations and liabilities of a trustee may be varied or eliminated by the governing
instrument of the trust. 12 Del. C. §3806(c). The implied covenant of good faith and fair dealing in the
governing instrument may not be eliminated. Id.
3.
Other Persons. Since the Delaware Act permits management authority to be
vested in or delegated to persons other than trustees, the Delaware Act provides that officers, employees,
managers or other persons who may manage the business and affairs of the statutory trust (pursuant to
§3806(b)(7) of the Delaware Act) are not personally liable to any person, other than to the statutory trust
or a beneficial owner, for actions taken while acting in such capacity. 12 Del. C. §3803(c). Like
trustees, managers and officers will have limited liability for good faith actions in reliance on the
governing instrument. 12 Del. C. §3806(d).
E.
Rights of Beneficial Owners in Trust Property.
1.
Nature of Beneficial Interest. Under the Delaware Act, except as provided in
the governing instrument, a beneficial owner has an undivided beneficial interest in trust property and
“shall share in the profits and losses of the statutory trust in the proportion (expressed as a percentage) of
the entire undivided beneficial interest in the statutory trust owned by such beneficial owner.” 12 Del.
C. §3805(a). The beneficial interest is personal property and a beneficial owner has no interest in
specific trust property. 12 Del. C. §3805(c). The governing instrument of a statutory trust may
authorize an unlimited number of shares. See Nakahara v. The NS 1991 American Trust, Del. Ch., C.A.
No. 15905, Chandler, C. (March 20, 1998) slip op. at 26 n. 67. Unless otherwise provided in the
governing instrument, beneficial interests are freely transferable. 12 Del.C. §3805(d). Once a beneficial
owner becomes entitled to a distribution, he or she obtains the status of creditor of the statutory trust
with respect to the distribution, except if the governing instrument provides otherwise. 12 Del. C.
§3805(e).
2.
Rights of Creditors. The Delaware Act expressly provides that “[n]o creditor of
the beneficial owner shall have any right to obtain possession of, or otherwise exercise legal or equitable
remedies with respect to, the property of the statutory trust.” 12 Del. C. §3805(b). The title to trust
property may be vested in one or more trustees, but shall not be subject to claims against the trustee
which are unrelated to the statutory trust.
28
F.
Management of Statutory Trust. The statutory provisions addressing management of
statutory trusts are very flexible and generally defer to the right of the parties to the governing
instrument to draft governance provisions appropriate for their needs. This carries on the practice
relating to common law business trusts which recognized that the governing instrument essentially
established the “law of the entity.” See J. Langbein, The Secret Life of the Trust, supra. The Delaware
Act at §3806 provides that, except as otherwise provided in the governing instrument, the business and
affairs of a statutory trust shall be managed by or under the direction of its trustee. Moreover, with
respect to organizational structure, the Delaware Act permits the governing instrument to create classes
or groups of beneficial owners, classes or groups of trustees, separate series or portfolios of the statutory
trust, and classes of interests within series. Voting rights and management rights may be granted or
denied to any such group or class of beneficial owners or trustees. The 2006 legislative amendments
confirm that meetings may be held by telephonic or other communications.
1.
Power to Direct the Trustee. To the extent provided in the governing
instrument, any person (including a beneficial owner) may direct trustees or other persons in the
management of the statutory trust. Under §3806(a) neither the power to give direction nor the exercise
thereof by any person (including the beneficial owner) shall cause such person to be a trustee. The 1998
amendments to the Delaware Act clarified that there is the contractual power to direct the management
of the trust and that such power does not necessarily result in the imposition of fiduciary or other duties
on the person exercising such power.
2.
Power to Delegate. The governing instrument of a Delaware statutory trust may
provide for the appointment, election or engagement, either as agents or independent contractors of the
statutory trust or as delegatees of the trustees, officers, employees, managers or other persons who may
manage the business and affairs of the statutory trust and may have such titles and such relative rights,
powers and duties as the governing instrument shall provide. 12 Del. C. §3806(b)(7). Delegating
management authority to a person other than the trustee has been recognized for common law business
trusts. See Commonwealth Trust Co. v. Capital Retirement Plan. Del. Ch., 54 A.2d 739 (1947) (trustor
retained management power over the trust property). The 2004 legislative amendments clarified that the
trust agreement “may provide rights to any person, including a person who is not a party to the
governing trust, to the extent set forth therein.” §3806(b)(8).
3.
Series of Portfolios. The Delaware Act permits the governing instrument to
establish separate series of the trust which may each have its own investment objective or purpose,
beneficial interests, trustees, managers, assets and liabilities. 12 Del. C. §3806(b)(2). The Delaware Act
also provides that the debts and liabilities of a series will be enforceable against the assets of that series
only and not against the trust’s general assets or the assets of any other series so long as (1) the
governing instrument so provides, (2) the certificate of trust sets forth the limitation of interseries
liability, and (3) separate and distinct records are maintained for each series and the assets of each series
are accounted for separately from the other assets of the trust or any other series thereof. In addition,
29
unless otherwise provided in the governing instrument, none of the trust’s general debts and liabilities or
the debts and liabilities of any other series will be enforceable against the assets of such series. 12 Del.
C. §3804(a). The 1998 amendments to the Delaware Act further clarified that the dissolution and
winding up of a series will not trigger the dissolution of the trust. 12 Del. C. §3808(f).
4.
Treasury Interests. In 1996, a section was added to the Delaware Act that
expressly provided that a business trust may redeem or repurchase its beneficial interests and that such
repurchased interests will be deemed cancelled, unless otherwise provided in the governing instrument.
12 Del. C. §3818.
5.
Information Rights. Also in 1996, Section 3819 was added to the Delaware Act
to provide for information and inspection rights for beneficial owners similar to the inspection rights of
corporate shareholders, limited partners of limited partnerships and members of limited liability
companies. See 8 Del. C. §220; 6 Del. C. §§17-305 and 18-305. Unlike the corporate and partnership
provisions, however, the Delaware Act permits the governing instrument to limit or completely restrict
the rights of beneficial owners to inspect the books and records of the trust (subject only to public policy
and securities laws requirements).
G.
Existence and Dissolution of Statutory Trusts.
1.
Dissolution by Beneficial Owner. A concern with respect to common law
business trusts is the ability of a settler or a beneficial owner (or a creditor of a beneficial owner) to
terminate the trust and gain access to the trust property. Under common law, a beneficial owner does
not generally have authority to cause or compel the dissolution of a business trust. State Street Trust Co.
v. Hall, 311 Mass. 299, 41 E.E. 2d 30 (1942); But see Papale-Keefe v. Altomare, 38 Mass. App. Ct. 308,
647 N.E.2d 722, 727 (1995) (sole beneficial owner of a Massachusetts business trust was authorized to
terminate the trust). The Delaware Act provides that, except as provided for in the governing
instrument, the statutory trust shall have perpetual existence, and a statutory trust may not be terminated
or revoked by a beneficial owner or other person except in accordance with the terms of its governing
instrument. 12 Del. C. §3808(a). Moreover, the death, incapacity, dissolution, termination or
bankruptcy of a beneficial owner will not cause termination of a Delaware statutory trust. 12 Del. C.
§3808(b). The 2006 legislative amendments set forth that the existence of a statutory trust that has
encountered an event of dissolution under its governing instrument may be continued by the unanimous
vote of beneficial interest holders.
2.
Dissolution and Winding Up of a Statutory Trust. The Delaware Act, as
amended in 1996, provides for dissolution procedures analogous to dissolution procedures for limited
partnerships and limited liability companies. The Delaware Act does not provide any specific events of
30
dissolution but instead leaves it entirely up to the governing instrument to provide dissolution events. 12
Del. C. §3808(a), (b) and (c). The Delaware Act does require that a person designated in the governing
instrument wind up the affairs of the trust. 12 Del.C. §3808(d). The Delaware Act also requires that all
current, contingent and unmatured claims and liabilities be paid in full or provided for prior to any
distribution to beneficial owners. 12 Del.C. §3808(e). A trustee who complies with Section 3808(e)
will not be liable to claimants of the dissolved statutory trust by reason of the trustee’s actions in
winding up the trust. Id. The 1998 Amendments to the Delaware Act require that the winding up of
dissolved series must follow the same requirements to satisfy claims prior to distributing assets to
beneficial owners of such series. 12 Del. C. §3808(g).
H.
Applicability of Trust Law. Traditional trust principles are generally applicable to
common law business trusts. See Papale-Keefe v. Altomare, 38 Mass. App. Ct. 308, 647 N.E.2d 722,
726 (1995). Under the Delaware Act, Delaware common law trust principles will apply to Delaware
statutory trusts to the extent not otherwise provided in the governing instrument or the Delaware Act.
12 Del. C. §3809. However, notwithstanding this provision, it is likely that corporation law fiduciary
concepts (as opposed to potentially more stringent trust law) will apply, at least by analogy, to trustees
of statutory trusts that are structured similarly to corporations. See Richardson v. Clark, 372 Mass. 859,
861-862, 364 N.E.2d 804 (1977) (“Business trusts possess many of the attributes of corporations and for
that reason cannot be governed solely by the rules which have evolved for traditional trusts.”); Saminsky
v. Abbott, Del. Ch., 185 A2d 765 (1961). Also, several other business trust statutes provide that
corporate law will govern the affairs of the business trust. See Indiana Code Ann. §23-5-1-9 (1998);
Kansas Stat. Ann. §17-2035 (1997). The 2006 legislative amendments set forth that a governing
instrument may not eliminate the implied contractual covenant of good faith and fair dealing.
I.
Merger and Consolidation; Conversions.
1.
Merger. The Delaware Act provides that a statutory trust may merge or
consolidate with another business entity under the laws of Delaware or any other jurisdiction. 12 Del. C.
§3815. Unless otherwise provided in the governing instrument, all trustees and all beneficial owners
must approve a merger. In order to effect a merger, the statutory trust must enter into a merger
agreement with the constituent entities to the merger and file a certificate of merger or consolidation
with the Delaware Secretary of State. The Certificate of Merger must set forth the name and jurisdiction
of merging entities and the name of the surviving entity, that an agreement of merger or consolidation
has been executed, that it is on file at the place of business of the surviving entity and that it will be
furnished to any interested person. If no Delaware entity survives, the Certificate of Merger must also
include the surviving entity’s consent to process, an appointment of the Delaware Secretary of State as
agent and an address to which the Secretary of State may mail a copy of such process. The agreement of
merger or consolidation may effect any amendment to the governing instrument or adoption of a new
governing instrument if a statutory trust is the surviving entity. The 2004 Amendments added a new
31
paragraph (4) clarifying that a name change to the surviving trust due to a merger is effected by the
merger. §3815(b)(4). In addition, the 2004 Amendments provide that no further action is needed to
amend a certificate of trust when a certificate of merger sets forth any amendment in accordance with
the new §3815(b)(4). 12 Del. C. §3815(e).
2.
Conversions. The 2004 legislative amendments provide for a new §3821 that
sets forth the conversion process of a statutory trust to another business entity, Delaware or nonDelaware. The new legislation sets forth the filing process, and the rights, obligations and liabilities
associated with the conversion of the existing statutory trust.
J.
Legal Proceedings.
1.
Process and Jurisdiction. Common law business trusts are generally treated as
distinct legal entities for purposes of suit. See Great Bay Hotel & Casino, Inc. v. The City of Atlantic
City, 624 A.2d 102, 105 (N.J. Super. 1993). Under the Delaware Act, a statutory trust may sue and be
sued for debts, obligations or liabilities incurred by trustees or their agents, and for damages to persons
or property resulting from their negligence in performance of their respective duties under the governing
instrument of the trust. 12 Del. C. §3804(a). The Delaware Act also provides that the property of the
statutory trust is subject to attachment and execution as if it were a corporation. Id. Service of process
in Delaware on the trust can be effected by serving the Delaware resident trustee or, if the trust is a
registered investment company under the Investment Company Act of 1940 (the “1940 Act”), by
serving the trust’s registered agent in Delaware. 12 Del. C. §3804(b). A person shall not be deemed to
be doing business in Delaware solely by reason of being a beneficial owner or trustee of a domestic
statutory trust or a foreign statutory trust. 12 Del. C. § 3863(b). However, Section 3863, which also
identifies activities not constituting doing business in Delaware, does not apply to determining whether a
foreign statutory trust is subject to service of process. 12 Del. C. § 3683(c). Finally, a governing
instrument may subject a trustee to the non-exclusive jurisdiction of any state or the exclusive
jurisdiction of the courts of the State of Delaware.
2.
Derivative Actions. The beneficial owners have a right to bring an action in the
right of the statutory trust if trustees with authority to do so, refuse to bring the action or efforts to cause
the trustees to bring the action are unlikely to succeed. The Delaware Act imposes the requirement that
the plaintiff must be a beneficial owner at the time of bringing the action and the time of the transaction
of which he or she complains. 12 Del. C. §3816. The complaint must set forth the efforts taken to
compel the trustees to bring the action and or the reason for not taking such efforts. The requirements
are derived from Delaware statutory and case law respecting corporate shareholder derivative actions.
See 8 Del. C. §327. Unlike Delaware corporate law, however, the Delaware Act authorizes the
governing instrument to impose standards or restrictions on the bringing of a derivative action, such as
32
requiring that a minimum percentage of beneficial owners must join in bringing a derivative action. 12
Del. C. §3816(e).
The 2000 legislative amendments clarified that with respect to a statutory trust that is an
investment company under the 1940 Act, the determination of whether a trustee is independent and
disinterested will be made in accordance with the 1940 Act.
K.
Indemnification. The Delaware Act provides that, subject to any restrictions in the
governing instrument, the statutory trust may indemnify any trustee, beneficial owner or other person
from and against any and all claims and that the absence of an indemnity provision in the governing
instrument will not deprive any person of the right to indemnity otherwise available under Delaware
law. 12 Del. C. §3817. The Delaware Court of Chancery has held that the governing instrument of a
Delaware statutory trust may contain a mandatory or permissive advancement of expenses provision
notwithstanding the fact that Section 3817 refers only to indemnification and not advancement.
Nakahara v. The NS 1991 American Trust, Del. Ch., C.A. No. 15905, Chandler, C. (March 20, 1998)
slip op. at 26-27 (“[T]he language of the [Delaware Act’s] indemnification provision is broad and
flexible. Such a general authorization of indemnification compels a permissive interpretation with the
language intended to authorize as much as possible and exclude only that which is expressly
prohibited.”).
L.
Construction of Statutes. The Delaware Act provides that the rule that statutes in
derogation of the common law will be strictly construed does not apply to the Delaware Act. 12 Del. C.
§3825(a). The Delaware Act states also that it “is the policy of this chapter to give maximum effect to
the principles of freedom of contract and to the enforceability of governing instruments.” 12 Del. C.
§3825(b). These are the same provisions that are included in the Delaware Revised Uniform Limited
Partnership Act, 6 Del. C. §17-101, et seq., and the Delaware Limited Liability Company Act, 6 Del. C.
§18-101, et seq., and have been given effect by the Delaware courts. Nakahara, slip op. at 29 (“Clearly
the Legislature intended to provide Delaware business trusts and limited partnerships wide latitude in the
drafting of their governing instruments.”).
If you have any questions regarding this article, please contact The Delaware Counsel Group, LLP at (302) 576-9600. This
article is prepared for informational purposes only and should not be relied upon as or be considered legal advice. Copyright
© 2004, 2008, The Delaware Counsel Group, LLP.
33
A Comparison of the Law Governing
Delaware Statutory Trusts and Maryland Corporations
Operating as REITS
Delaware Statutory Trust (DST)
Governing
Documents
Certificate of Trust
• Filing Certificate of Trust with the
Delaware Secretary of State forms
DST.
• One page document, includes only
name of trust and name and address
of its Delaware trustee.
Maryland Corporation (MD Corp.)
Advantages of DST
Articles of Incorporation
• Filing Articles of Incorporation with
the State of Maryland required to
form MD Corp.
• In a DST, the freedom to
establish by contract the
rights and obligations of the
parties is subject to very
limited exceptions.
• DST requires no public
filings other than one page
Certificate of Trust notice
filing.
• Detailed information must be
included.
• Information filed is available to the
public.
Trust Agreement
• Parties relationship is governed by
contract -- Trust Agreement.
• Trust Agreement is private and is
not filed with the Delaware Secretary
of State.
• Shareholder approval (with limited
exceptions) and filing with the State
of Maryland required to amend
Articles of Incorporation.
• Trust Agreement can provide for
amendment without investor
approval, or public filing.
34
Delaware Statutory Trust (DST)
Maryland Corporation (MD Corp.)
Advantages of DST
• Business and affairs can be
managed by trustee(s) or
delegated to another person or
entity.
• Statute requires operations to be
governed by the board of directors in
accordance with statute and powers
set forth in Articles of Incorporation.
• In a DST, the parties to
Trust Agreement determine
delegation of trustee
powers without statutory
limitation.
• No limitation on trustee(s)
power to delegate management.
• Authority of board to delegate to
other parties is generally limited to
ordinary course of business decisions.
Duties of
Fiduciary
• Fiduciary duties of trustee(s)
and any managers can be
established and limited or
eliminated by Trust Agreement,
and are not set by statute.
• Fiduciary duties of the board of
directors are governed by statute and
by common law.
Trustee/Director
Liability
• Trust Agreement can restrict
liability, subject only to public
policy exceptions; i.e. implied
covenant of good faith and fair
dealing.
• Statute imposes on directors a
good-faith and reasonable person like
standard.
• No punitive damages in
Delaware Court of Chancery, a
court of equity.
• Can limit director liability for
monetary damages in Articles of
Incorporation – cannot limit liability
where director received an improper
benefit or conduct was actively and
deliberately dishonest.
Delegation of
Management
• In a DST, the parties to
the Trust Agreement
establish and thereby may
limit or eliminate by
contract the fiduciary duties
of the trustee(s) and any
trustee delegatees, thus
minimizing exposure to
liability.
• In a DST, the parties
establish the
limitation/extent of
Trustee(s) and management
liability to shareholders and
other parties.
• A DST can provide
Trustee(s) and management
more certainty and less
exposure to liability.
• Punitive damages could be awarded
in a Maryland court of law.
35
Delaware Statutory Trust (DST)
Maryland Corporation (MD Corp.)
Advantages of DST
• Unless otherwise provided in the
Trust Agreement, management may
establish new classes, groups or series
of shares or “beneficial interests” when
desired without shareholder approval.
• Shareholder approval is required to
change the terms of any existing
series or class or to create new series
or class -- can grant authority to board
of directors to increase or decrease
total authorized shares or shares of
any class without shareholder
approval.
• In a DST, management
can have the power to alter
capital structure without
shareholder vote or public
filing.
Series and
Classes of
Ownership
Interest
• Management may amend rights,
powers and authority of existing shares
without shareholder approval to the
extent provided in the agreement.
• Trust Agreement can limit liability
between series of shares
• No filing required with Delaware
Secretary of State to establish new
class, group or series or amend rights,
power and authority of existing shares.
• Shareholder approval required to
amend rights, powers and authority of
existing shares.
• Any change requiring amendment
to Articles of Incorporation must be
filed with State of Maryland.
36
Delaware Statutory Trust (DST)
Shareholder
Voting
Rights,
Meetings,
Quorum,
Record
Dates and
Proxies 1
• Trust Agreement establishes trustee
and shareholder voting rights, if any,
including with respect to Trust
Agreement amendments, mergers and
sales of assets.
Maryland Corporation (MD Corp.)
• Statute mandates voting rights for
shareholders.
Advantages of DST
• DST can restrict or even
eliminate the right of
investors to vote on any
and all issues.
• DST has no mandated
shareholder meetings.
• No requirement to have an annual
meeting.
• DST statute imposes no rules with
respect to notice of meetings, quorum
requirements, record dates, or proxies.
• Statute mandates that significant
actions such as amendments to
Articles of Incorporation, mergers and
sales of assets require two-thirds
shareholder vote unless Articles of
Incorporation requires otherwise.
• Statute mandates annual shareholder
meetings
• Statute mandates shareholder
meeting notice and record date
requirements.
• Generally, statute requires a
majority of shareholders to establish
quorum.
Statute establishes rules and
restrictions on proxies, their duration
and exercise.
1
New York Stock Exchange or NASDAQ rules may impose requirements for shareholder voting and other matters beyond
the requirements of Delaware or Maryland law.
37
Removal of
Trustees/
Directors
Shareholder or
Investor Liability
Indemnification
Delaware Statutory Trust (DST)
Maryland Corporation (MD Corp.)
Advantages of DST
• Trust Agreement can prescribe
any requirements for removal of
trustee(s).
• Statute mandates that director(s)
can be removed with or without cause
by a majority vote unless otherwise
provided in the Articles of
Incorporation.
• In a DST, the parties are
free to establish in the Trust
Agreement how the trustee
removal process will
operate.
• Limited to investment.
• Liability limited to
investment in both DST and
MD Corp.
• In a DST, the flexibility
to establish broader
indemnification makes it
easier to attract quality
trustees/directors and
management.
•There must be at least one
Delaware based trustee at all
times unless trust is registered
under the 1940 Act.
• Limited to investment.
• Trust Agreement may provide
indemnification for any trustee,
director, officer, employee,
shareholder or other person from
and against any and all claims.
• Statute allows indemnification for
directors, officers, employees and
agents for expenses in defending
against a proceeding, for settlements,
judgments, penalties and fines.
• No indemnification allowed when
found liable in derivative suit unless
ordered by Court, or where person:
(i)
found to have acted in
bad faith/active and
deliberate dishonesty
(ii)
received an improper
benefit
or,
(iii)
believed he/she was
acting unlawfully.
38
Delaware Statutory Trust (DST)
Shareholder
Right of
Inspection of
Business
Records
• Trust Agreement may limit or
eliminate the shareholders statutory
right to inspect business records.
Development • Common law well developed by
of Business
Delaware Court of Chancery
Laws
Courts
• Delaware Courts, including wellknown Court of Chancery, ranked #1
by U.S. Chamber of Commerce
study.
Maryland Corporation (MD Corp.)
Advantages of DST
• Shareholder (including a group of
shareholders) holding 5% for six
months has a statutory right to inspect
the books and records, including the
shareholder list.
• In a DST, restrictions
against right to inspect is
permitted, including
eliminating access to
shareholder list.
• Any shareholder may inspect bylaws, shareholder meeting minutes,
annual statements of affairs and
voting trust agreements.
• Business related common law and
statutory interpretation not fully
developed.
• Delaware business law is
the most developed in the
United States.
• Maryland Courts ranked #29.
• Universal demand requirement in
derivative cases.
• Delaware Courts ranked
#1
• DST can establish
requirements for derivative
cases.
• Trust Agreement prescribes rules
regarding derivative cases, including
demand requirements.
Legislature/ • Delaware lawyers work with
Government legislature to continually update
business laws as needed to reflect
changing business environment.
• Easy access to and extensive
experience of Delaware Secretary of
State Division of Corporations.
• Delaware Legislature
very responsive to business
needs and accustomed to
changes and innovation in
business laws.
• Delaware has very
accessible and experienced
Secretary of State
corporation office.
This chart is prepared for information purposes only and should not be relied upon as or be considered legal advice. Please
contact us if you have specific questions regarding the application of this information. Copyright © 2004, 2008, The
Delaware Counsel Group, LLP.
39
OVERVIEW OF SIGNIFICANT 2007 AMENDMENTS TO THE DELAWARE
LLCA, DRULPA, DRUPA AND THE DGCL 1
I.
LLCA/DRULPA/DRUPA. 2
A.
Definitions. Amended §18-101 of the LLCA and §17-101 of DRULPA
to, among other matters:
•
B.
Include in the definition of limited liability company (“LLC”)
agreement and limited partnership (“LP”) agreement, implied
agreements.
Registered Agent and Registered Office. Amended §18-104 of the
LLCA, §17-104 of DRULPA and §15-111 of DRUPA to, among other
matters:
•
Confirm that the business office of a partnership’s or LLC’s
registered agent shall be identical to such entity’s registered office.
Also amended §18-904 of the LLCA and §17-904 of DRULPA to:
•
1
Conform such sections to § 18-104 of the LLCA and § 17-104
of DRULPA regarding the entities that may serve as registered
agents for foreign LLCs and LPs, and to confirm that a foreign
LLC’s or LP’s registered agent’s business office shall be identical to
the registered office of such foreign LLC or foreign LP.
These amendments were effective August 1, 2007.
2
“LLCA” refers to the Delaware Limited Liability Company Act (6 Del. C. § 18-101, et seq.),
“DRULPA” refers to the Delaware Revised Uniform Limited Partnership Act (6 Del. C. § 17-101, et seq.)
and “DRUPA” refers to the Delaware Revised Uniform Partnership Act (6 Del. C. § 15-101, et seq.).
Copyright © 2007 The Delaware Counsel Group, LLP.
40
C.
D.
E.
Formation and Cancellation. Amended §18-201 and §18-203 of the
LLCA, §17-201 and §17-203 of DRULPA, and §15-105 of DRUPA to,
among other matters:
•
Confirm that a LLC agreement (written, oral or implied) is required
to form a LLC under the LLCA.
•
Add a new subsection to §17-201 of DRULPA to conform it to the
structure of the LLCA and provide that a LP agreement can be
entered into or exist before, after or at the time of the filing of a
certificate of limited partnership and be made effective as of the
formation of the LP or at such other time as provided in or reflected
by the LP agreement.
•
Provide that the Delaware Secretary of State shall not issue good
standing certificates for an LLC, LP or partnership if the certificate
of formation, certificate of limited partnership or statement of
partnership existence is cancelled.
Merger, Conversion, Domestication or Transfer. Amended §18-209,
§18-213 and §18-216 of the LLCA, §17-211, §17-216 and §17-219 of
DRULPA, and §15-902, §15-903 and §15-905 of DRUPA to, among other
matters, provide that:
•
A LLC agreement, LP agreement or partnership agreement may
provide, as the case may be, that a LLC, LP or partnership shall not
have the power to merge or consolidate, transfer, domesticate or
continue, or convert.
•
Confirm that a merger or consolidation of a LLC, LP or partnership
does not constitute dissolution of such entity.
Series. Amended §18-215 of the LLCA and §17-218 of DRULPA to,
among other matters, provide that:
•
An LLC agreement or LP agreement may establish series of assets.
•
Clarify the manner in which assets of a series must be accounted for.
•
Add a new subsection to confirm the broad purposes and powers of a
series, including that a series shall have the power to, in its own
name, contract, hold title to assets, grant liens and security interests,
and sue or be sued.
41
F.
Certificates of Interest. Amended §18-702 of the LLCA, §17-702 of
DRULPA, and §15-503 of DRUPA to provide that an LLC, LP or
partnership shall not have the power to issue a certificate of LLC interest,
or partnership interest, as the case may be, in bearer form.
42
II.
DGCL. 3
A.
Board of Directors. Amended § 141 of the DGCL to clarify that when a
certificate of incorporation confers upon a director greater voting power,
such voting power applies to such director’s vote in a committee or
subcommittee of the board, unless otherwise specified in the certificate of
incorporation.
B.
Election of Directors. Amended § 216(4) of the DGCL to clarify that,
unless set forth in the certificate of incorporation, where a class or series is
granted a separate vote in the election of directors, such directors are
elected by a plurality of the applicable votes.
C.
Appraisal Rights. Amended §262 of the DGCL to, among other matters:
D.
3
•
Provide that beneficial holders of stock held in street name or in a
voting trust may file petitions for appraisal in their own name and
demand a statement of shares as to which appraisal demands were
received.
•
Clarify that stockholders who have not filed a petition for appraisal
or joined an existing appraisal action, may withdraw their appraisal
demands and receive the merger consideration.
•
Establish a presumption, which may be overcome for good causes,
that interest on the value of the shares be awarded from the effective
date of the merger until the payment of judgment compounded
quarterly at the rate of 5% over the Federal Reserve discount rate.
Merger. Amended §§ 251(c), 251(g) and 255 of the DGCL to provide
that merger agreements do not need to certify as to the stockholder or nonstock member vote if a certificate of merger or consolidation is filed in
lieu of filing the merger agreement.
The “DGCL” refers to the General Corporation Law of the State of Delaware (8 Del. C. § 101, et
seq.).
This overview is for informational purposes only and should not be relied upon as or be
considered legal advice. Copyright © 2007, The Delaware Counsel Group, LLP.
43
LLC’s, LLP’s, DST’s, LP’s: Why and how are alternative entities used in cross
border transactions?
1.
Introduction
Thank you for inviting me to the ABA Global Business conference to speak on
this topic. My name is Robin Johnson. I am a corporate partner at Eversheds
LLP, with over 20 years’ experience specialising in M&A, private equity,
fundraising and joint venture work in the UK and across Europe. Joining me will
be Ian Molyneux, the European General Counsel of Parker Hannifin, who will
be talking about how Parker Hannifin organise their European structures in
practice.
My session will focus on the different business structures and entities that can be
established in Europe, such as different types of company structure,
partnerships, limited liability partnerships and incorporated branch offices of
overseas parents.
I will examine the advantages and disadvantages of alternative structures and
entities in comparison with the traditional parent company/subsidiary limited
company structure. I will review the key considerations that must be taken into
account and although we will not be able to cover the whole of Europe in the
time allowed, provide some basic analysis on a few countries, such as England,
Germany, France and Italy, as well as the tax reasons for doing business in
Switzerland, for example, so that I can flag the issues for you when you are
embarking on an international acquisition.
I will also provide a case study on why and how a specific European structure
was set out the way it was and the lessons to be learnt.
2.
Key Considerations
Before a company sets up various entities across Europe it is very important to
have given forethought to the key considerations and reasons why it is
establishing a presence in Europe. Key considerations include what the tax
44
treatment of the entity will be as well as the wider implications for the parent
and the international group.
You need to think about the corporate governance and administrative burden of
particular entities and particular countries. This includes registration and filing
requirements of the country’s company registry, accounting requirements and
standards and compliance with company and regulatory legislation, whether this
is an act of parliament, a civil code or both.
You should also consider the corporate control of the entity and decision making
in practice. Chains of command need to be established and the balance of power
between officers in different countries considered. Management consent issues
are paramount and there needs to be the flexibility and adaptability to make
decisions on the ground without bureaucratic decision making structures that
cause unnecessary delays in a group’s home country.
It is also necessary to consider the fiduciary duties and employee rights of
directors, managers and officers that come with a particular company or a
particular structure.
You should check the company’s liability for debts and contractual obligations,
as well the directors’ and managers’ potential exposure, civil and criminal
liability and the governing law provisions of each country, whether this is EU
law, national or local law. The court system and the enforceability of
judgements in a country should be examined. It is useful to establish whether a
country has an arbitration treaty with a parent’s country, as well as a double
taxation agreement (DTA).
Finally there are also reputational and public relations issues. It is necessary to
consider how the new entity will be conceived by employees, customers, clients,
business partners as well as national and local government. Will partners in a
country prefer the perceived prestige of working with a company rather than a
branch office?
3.
Tax
I do not want to speak ‘chapter and verse’ to you on particular aspects of
particular tax systems in Europe but to give you a flavour of the kind of tax rules
45
that must be taken account, I have put up a screen shot of a table Eversheds has
prepared comparing the tax aspects of different holding companies in different
European countries. At a glance, this includes factors such as what, if any
capital duty is payable on increasing share capital, rules on acquisition finance,
thin capitalisation, withholding tax on payments to foreign parents, tax on
dividends received, capital gains tax on shares and subsidiaries and tax on
capital distributions on the liquidation of a holding company. It is crucial to
consider these issues when deciding upon setting up a company in a particular
territory.
4.
Directors Law of Europe
In addition to tax considerations you must consider the different rules each
country has for the company itself as well as directors, managers and officers in
each European state. Eversheds has produced a product that allows you to
search through different countries’ regulations that affect the directors. This is
called “Directors Law of Europe” and I will now run a quick demonstration to
show you how to search for the questions that you may find yourselves having to
answer in crucial situations.
5.
Structures in England
In England, alternatives to a limited company or public limited company (plc)
include branch offices of the overseas parent, partnerships and limited liability
companies.
5.1
Branch or subsidiary?
To give you an idea of the issues, I will now talk about the decision as to
whether to set up a branch office compared to a subsidiary company in England.
A company incorporated in England, whether or not a subsidiary of an overseas
company has a distinct legal personality so it can own and deal with the property
and can sue or be sued in its own name. This has advantages and disadvantages.
A branch for an overseas company has no legal personality distinct from the
overseas company. A subsidiary is liable for its own debt but its parent is not.
However, an overseas company with a branch in England is liable for the debts
and obligations contracted through the branch in its home country. Despite this
46
there may be enforcement issues about going against the overseas company’s
assets outside of England. It should also be noted that there is a general
international rule that one country does not collect the taxes of another, though
Sovereign Wealth Funds are causing interesting issues here, so it is unlikely HM
Revenue and Customs in the UK would be able to enforce a UK tax liability
against an overseas company’s non-UK assets.
It is necessary to consider the territory of the head office of your company and
the effect of any relative double taxation agreement the UK has with that
country when considering which vehicle to use.
A branch in the UK may not attract any UK tax if its activities do not constitute
trading. This could be if you only want to set up a representative office in the
UK that, for example, channels enquiries to overseas head office and just
purchases materials for the business overseas. This representative office status
is only obtained when these ancillary services are provided solely or mainly for
the benefit of the overseas company in question. Nevertheless, if a subsidiary
company is carrying on similar peripheral activities, it is usually possible to
negotiate with HM Revenue and Customs for tax to be assessed on a fixed basis
on a deemed profit of 10% of overhead expenses or a percentage of turnover.
Rate of UK Corporation Tax
The full rate of corporation tax payable by a UK resident company changed
from 30% to 28% with effect from 1 April 2008. There are further benefits
potentially available - if a company has no associated companies and if its
taxable profits in any year are less than £300,000, then a small companies rate of
21% tax will apply. There is also marginal relief available to companies whose
profits are between £300,000 and £1.5m. Once profits exceed £1.5m the 28%
rate applies to the total profits and not just for the excess over £1.5m.
Conversely, profits of a branch office are taxed at the full 28% except where
there is a double taxation agreement (DTA) that provides for non-discrimination
against an overseas company operating in the UK.
47
Dividends
There is no withholding tax on dividends. Therefore, subsidiaries of foreign
companies can remit profits without further charges to tax. However, although a
dividend carries a tax credit of 10%, generally a repayment cannot be obtained
in relation to this. Some repayments may be obtainable in relation to certain
DTA’s but these are likely to be immaterial unless in relation to extremely large
dividends.
Transfer Pricing and Thin Capitalisation
It is difficult to minimise taxable UK profits by a UK branch or subsidiary
dealing with its head office or parents on disadvantageous terms, as there are
provisions in UK legislation and DTA’s is to counteract this. HM Revenue and
Customs can adjust profits to what they should have been under an arm’s-length
transaction. Interest payments on loans to finance UK operations may be
disallowed for tax purposes if the UK company is thinly capitalised. If the debt
to equity ratio for the UK business is greater than 1:1 then capitalisation rules
have to be considered. This also occurs if subsidiaries or branches’ borrowings
are guaranteed by parents.
Utilisation of Trading Losses
Losses of a UK branch may be available to set against the worldwide profits of
the overseas company which established the branch and against future taxable
profits of the branch for UK purposes.
In contrast, in the case of a UK subsidiary with trading losses, in the absence of
a US ‘check to box’ rule procedure which allows transparency for foreign tax
purposes, losses can normally only be carried forward to set against future
profits of the UK subsidiary.
Therefore it may be beneficial in the early years of trading in the UK to do so
through a branch to take advantage of this double loss relief. Once profitable the
UK business may be advised to carry on through a subsidiary to obtain the lower
rate of corporation tax. There may also be other UK companies in the UK tax
group to set group relief off against. Tax considerations also need to be thought
about in terms of the current or future sale of businesses or shares.
48
Company law requirements
Company law requirements are more onerous on subsidiaries than branch
offices. There are more Companies House requirements for accounts to be
audited, more filing deadlines as well as, for example, the regulation of director
service contracts, loans and issues such as substantial property transactions with
directors. There are even more administrative requirements for public limited
companies as regulations such as the listing rules and takeover code apply on
offers of shares to the public.
Liability
In theory, branch offices of overseas parents carry more liability than
subsidiaries, as creditors can go against the overseas parent of a branch, although
as discussed there are enforceability issues. Creditors of a subsidiary can only
go against that separate legal entity, unless of course the parent has provided
guarantees. Generally borrowing is easier for a subsidiary in the UK than a
branch, although power of the parent may influence this as well.
In terms of directors’ liability, it is unusual but possible to pierce the corporate
veil in England and directors can have both civil and criminal liability. The
Companies Act 2006 codifies many of the duties of directors and directors now
must promote the success of the company for the benefit of the members in
various ways. Criminal liability may attach to directors if the company commits
an offence and it is due to the consent, connivance or neglect of the directors.
There can also be criminal liability in relation to various health and safety
offences, financial markets abuses such as fraudulent trading and deception in
insolvency situations.
Control
In relation to the control of an entity in another country, the parent needs to be
careful that the directors have enough power to effectively manage the day to
day operation of the company but not too many powers whereby they can make
decisions that disadvantage the parent. Having said that, it would be
inconvenient for all key decisions of the branch to have to be made overseas,
especially if flexibility is required and speed at the coalface.
49
Reputation
Reputationally in England there may be more prestige and comfort working for
or dealing with a company subsidiary actually incorporated in England, rather
than a branch office whereby it is apparent that all decisions are made overseas.
5.2
Partnerships
The advantages of partnerships compared to a company are that they have a
flexible structure and much greater freedom of how they are financed and
managed. There is also a favourable tax regime for partnerships as there is no
employee’s national insurance payable on partner profit shares.
However, the big drawback of the partnerships is that there is joint several
liability and potential unlimited liability to third parties for the partners. It is
also difficult to accommodate partners with different interests, different
exposure and different roles within the structure.
5.3
Limited partnerships
Limited partnerships are a form of partnership in the UK regulated by the
Limited Partnerships Act 1907. These LP’s are not legal separate entities. As
well as one or more general partners with the task of managing the business,
some partners can register an election not to take an active role in managing the
business in exchange for getting limited liability. There must be at least one
partner with unlimited liability anyhow. There is currently a Law Commission
review underway in the UK as to whether there should be an option to form a
partnership as a legal separate entity that will assist in limiting liability.
5.4
Limited Liability Partnerships
Limited Liability Partnerships have become an extremely popular vehicle for
professional firms such as lawyers and accountants to organise themselves.
They combine certain aspects of companies with other aspects of partnerships.
Similarities LLPs share with companies include:
•
A LLP is a body corporate - its own legal entity with the ability to enter
contracts, own property and incur liabilities. The body corporate is
50
separate from the members. As the LLP owns the assets of the
business, it is liable for its own debt.
•
Members have limited liability because they are separate from the LLP.
Members bind the LLP, but not themselves personally, when the LLP
enters a contract, just like directors bind a company. This is in contrast
to partners, who are jointly liable for contracts entered into by the
partnership. The members of an LLP are agents whose liability is
limited to the contributions they have made.
•
Nevertheless, as with directors, members can be held liable for
negligence for breaching a duty of care that they have assumed. In
some instances, banks can ask for personal guarantees from them as
well.
•
LLPs have very similar incorporation, accounting and filing
requirements to companies. Such documents must be filed at
Companies House and a significant number of the provisions of the
Companies Act and Insolvency Act apply to LLPs.
•
LLPs can create floating charges like a company.
•
Members of LLPs may be individuals or corporate bodies and there is
no limit on the maximum number of members. There must be two
appointed members, but (unlike a partnership) the LLP will continue
for a certain period if one member leaves. However, this cannot be
indefinite and Insolvency Act winding up provisions may apply.
Similarities LLPs share with partnerships include:
•
LLPs have the tax transparency of partnerships so members are taxed
on their share of the profits. They also benefit from various reliefs and
favourable national insurance treatment.
•
The members are governed by a Limited Liability Partnership
agreement that is private and versatile. Members can agree different
profit shares, management responsibilities and procedures for making
decisions, as they see fit.
51
•
LLPs have no share capital and thus no rules on maintaining this
capital.
Therefore, the advantages of LLP’s are that they have the flexibility and tax
treatment of partnerships in addition to the limited liability of members and a
corporate body with a separate legal personality. LLPs also have less formal
decision making and administration than companies and the advantage of a
confidential LLP agreement.
5.5
Limited Liability Company
Having discussed these alternative entities, it should be remembered that a
limited liability company has several advantages such as a separate legal entity
in which shareholders’ liability is limited to the contributions to the company’s
share capital, established law and practice and the flexibility of equity and debt
finance. There are also the employee incentives such as share options. People
may see disadvantages of a limited liability company as having a complicated
and formal administrative burden and complicated tax rules in terms of liability
for CGT various rules on transfer duty credits and the ability to off-set losses.
6.
Structures in the rest of Europe
Obviously I would need to bring in my colleagues in Eversheds’ other offices
across Europe to fully brief you on how to organise entities in their respective
countries, but I thought it would be useful just to give you a flavour of the
different entities that exists in France, Italy and Germany in order for you to gain
appreciation of why different structures should be considered. Please appreciate
that there are many different corporate vehicles in a country and these have
characteristics and differences that may assist or burden you.
France
In France there are various different forms of company. These include an SA
which is a corporation, an SARL, which is a limited liability company, an SAS,
which is a simplified joint stock company and there are also partnerships as with
the UK.
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An SA corporation is common investment vehicle if you want your subsidiary to
list on the stock market or do an initial public offering (IPO) of its shares. This
has a lot of administrative and regulatory requirements
An SARL is a traditional limited liability company that can be transformed into
an SA before an initial public offering.
An SAS is a simplified joint stock company and is similar to a limited company
in the UK in that it has some registration formalities, a minimum share capital of
approximately $50,000. Its parent company will be separate from the subsidiary
so is unlikely to be liable for the actions of the subsidiary.
Tax issues to be considered for any of these companies are thin capitalisation
rules, restrictions on loans from foreign affiliates and controlled foreign
company tax rules. There are also double taxation agreements for example with
the US, whereby if there is any discrimination against a US subsidiary, the
company may be able to use a DTA to its advantage.
In France, as outlined in our Directors Law of Europe product, directors can be
held liable for civil breaches of duty in terms of non-compliance with company
rules or wrongful managerial acts and criminally, such as for breaches whilst
performing their directorial duties, breaches of employment law and if
employees under their control are fraudulent, negligent or put people’s lives in
danger.
Partnerships
As with the UK, partnerships in France are tax transparent. Profits and losses
are directly attributable to partners unless the partnership elects to apply
corporation tax. When considering a partnership it is necessary to consider the
French legislation -the administrative guidelines and the translucency approach,
as well as concerns over limitation of liability.
6.1
Italy
In Italy companies are incorporated as either an SPA, a share company or an
SRL, a limited liability company.
The main differences between an SPA and an SRL are the following:
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•
Mimimum share capital requirements: SPA: € 120,000; SRL:€ 10,000;
•
The ownership of an SPA is represented by shares. Shares certificates
are tradable in accordance with the ordinary rules applicable in respect
of negotiable instruments. On the other hand, the ownership of an SRL
is represented by so-called "quotas", which are not embodied in
negotiable instruments, but are equally freely transferable by way of
notary deed.
•
SRL companies, as opposed to SPA companies, cannot be listed in the
stock market.
•
Directors in an SRL type of company may be appointed for an
indefinite period of time (i.e. until revocation), while the term of office
of Directors in an SPA cannot exceed three years, but Directors may
be re-elected.
•
It is mandatory for an SPA to have three permanent and two alternate
members for the Board of Statutory Auditors (“Sindaci” in Italian i.e.
external advisors with duties of control over the Directors’ activities
and the company’s accounts). This requirement only exists for an SRL
if it has a share capital in excess of Euro 120,000 or if in the course of
its business for two consecutive years, two of the following thresholds
are met/exceeded: the total assets are over 3,250,000 Euro; revenues
are over 6,750,000 Euro; and/or the average number of employees per
year is fifty (50).
SRL companies are, in general, more flexible and less costly vehicles than SPA
companies, but SRLs are not permitted to issue bonds and marketable securities
(for example shares, as with a SPA). Therefore, the ability of a SRL to raise
capital from the public is limited.
Directors of Italian companies can be held liable towards the company for
failing to fulfil their duties, towards creditors for failing to preserve the
company’s assets or shareholders or third parties for fraud or gross negligence.
SPA, SRLs and branches are subject to Italian corporate tax (IRES) levied on
profits at 27.5%. Branches limit this taxable income to the local income, while
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SPA and SRLs are taxed on their worldwide income. IRAP (regional tax) is also
levied at 3.9 % on a different tax basis, i.e. without deducting financial interest
and cost of employees.
Tax returns must be filed annually. An annual tax return in respect of
withholding income tax to be paid on the employees' salaries also needs to be
filed with the local competent tax authorities.
Partnerships do not have a legal personality and therefore there is unlimited
personal liability for at least some of the partners. Profits and losses accrue
directly to partners. However the benefits of double taxation treaties do not
generally apply to partnerships.
6.2
Structure in Germany
The most common form of entity in Germany is a private limited liability
company - a GmbH. A GmbH in principle has no restrictions on foreign control
or the residency of directors. There are registration formalities, i.e. the GmbH
needs to be registered with the commercial register of the local court located at
the company’s corporate seat, in order for the GmbH to become a legal entity as
such. The minimum share capital of a GmbH currently amounts to EUR 25,000
(but there are legislative ambitions to reform the law pertaining to private
limited liability companies and, in the course of such reform discussions, it is
being considered that the minimum share capital requirements will be
decreased). The parent company is generally not liable for the debts of the
subsidiary unless, for example, it has given a guarantee or is contractually liable
to make up the subsidiary’s loss. As in other countries there are various
reporting and filing requirements and from a tax perspective, different rules on,
for instance, corporate income tax, trade tax, VAT, dividends, interest barrier
rules on loans and similar financial instruments and control foreign company
rules.
Other structures in Germany include the AG - a stock corporation. This is the
only German entity that can have shares quoted on the stock exchange, and it
requires the fulfilment of various – and, compared to other legal forms of
organisation, stricter – formalities. The AG likewise needs to be registered with
the commercial register of the local court located at the entity’s corporate seat,
and the minimum nominal value of its share capital amounts to EUR 50,000.
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A director of a German GmbH or an AG cannot usually be held liable if the
company is the contractual party. The managing director of a GmbH is,
however, liable vis-à-vis the company in cases of breach of duty, i.e. if he/she
has not applied the due care of a prudent businessman in relation to the affairs of
the company. The members of the management board of an AG are subject to
similar provisions under the German stock corporation law, but are generally –
unlike the managing directors of a GmbH – not bound by the instructions of the
shareholders’ meetings. In addition, criminal negligence could arise for
negligence, for example, in relation to tax liability or certain misrepresentations.
The GmbH can (and in some specific cases must) and the AG must have a
supervisory board whose primary function is the supervision of the management
board; its members likewise can be subject to civil and criminal liability in cases
of violation of their duties.
In Germany a partnership based on civil law is called a GbR and is often used
for smaller real estate transactions or joint ventures. However, partners are
jointly and severally liable without limitation. GbRs are not registered with the
commercial registers.
A general partnership in Germany is known as an “OHG” which is used for
commercial trade under a joint business name. The OHG needs to be registered
with the commercial register. The personal liability of each of its partners is
unlimited. Therefore, often the form of a limited partnership, a so-called KG, is
chosen for the operation of a commercial enterprise in Germany. Liability of
some of the partners is limited to the amount of their respective capital
investment. However at least one other partner must be subject to unlimited
liability. A GmbH can fulfil this unlimited liability rule and this type of entity is
called a “GmbH & Co KG”. Therefore as the GmbH is only liable to the value
of its assets, the liability of a “GmbH & Co. KG” in fact becomes limited, but in
general also subject to the registration and filing rules which govern
corporations such as the GmbH and the AG. The “GmbH & Co. KG” is
nevertheless quite popular as it allows, within a certain framework, the
combination of the advantages of a partnership and a limited liability company.
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6.3
International Structuring
As you will have seen there are many different types of vehicle available in the
major jurisdictions in Europe which can be treated very differently for tax
purposes.
The objectives in structuring cross border transactions is normally to ensure that
tax is paid wherever possible in a low tax jurisdiction and double taxation of the
same profits is avoided.
There is a network of double taxation treaties designed to eliminate double
taxation to facilitate international trade and such treaties together with a
combination of different tax rates in different jurisdictions and the choice of
entities available can enable international groups to structure their operation so
that profits are realised in the lower tax jurisdictions.
It is also important to ensure whatever group structure is put in place repatriation
of funds to the parent can take place in a tax efficient way. Tax withholdings
can apply in relation to payments of dividend or interest in certain jurisdictions
and group structures can avoid such withholdings for example by structuring
dividend and interest payments through countries which have double taxation
treaties which reduce applicable withholdings to a nil or nominal amount.
The use of intermediate holding companies in tax favoured jurisdictions can also
minimise tax if proceeds are not remitted to the parent jurisdiction. Such
structures can also increase the tax efficiency of financing arrangements for
example by locating finance companies in jurisdictions which have no or
minimal transfer pricing or thin capitalisation rules or taking advantage of the
different tax treatment of entities in different countries to secure tax deductions
for interest to reduce the overall economic cost of borrowing (so called double
dip structures).
In particular an Irish finance company can be attractive because of no thin
capitalisation and minimal transfer pricing rules in Ireland and its global
network of double taxation treaties.
Switzerland can also be attractive because of the low corporation tax which can
apply particularly for certain companies which are tax privileged, for example
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where a company’s revenues are exclusively or primarily derived from
commercial activities outside Switzerland or if the activities in Switzerland are
administration activities carried out in Switzerland on behalf of companies in the
group. If so corporation tax rates of as low as 10% may apply.
Holland and Belgium in particular can also be attractive countries because of
their extensive double taxation treaties and relatively low tax rates, particularly
if proceeds are not repatriated and in relation to financing arrangements.
It is not possible to give a hard and fast rule as to what jurisdictions may be
appropriate for European operations without a full understanding of the nature of
the business, financing requirements and how profits are repatriated within the
group.
The Eversheds tax group have extensive experience of structuring cross border
transactions to minimise tax in the jurisdictions where permanent establishments
are created, to minimise tax on repatriation of funds through dividends and
interest payments and advising on the most appropriate jurisdiction for a
headquarter company or finance company.
6.4
Worked example of an organisation change across Europe
Now that we have given you a flavour of the different structures that you can
apply throughout various countries in Europe and some of the reasons for doing
so, we will now show you a worked case study, on a no-names basis, of how one
of our clients organised itself throughout Europe and the lessons it learnt from
this.
The original structure (as shown on the slide) involved an American holding
company, a Dutch subsidiary, followed by a Dutch BV holding company and
then various European subsidiaries. In order to benefit from US ‘double dip’
taxation and streamline burdensome regulatory requirements throughout Europe,
the group structure was changed to keep the top three companies in place but
add a Belgian BVBA holding company level above the other European
subsidiaries.
In addition to this, based on some of the considerations I have discussed, the
French subsidiary was changed from a SA to a SAS, a Belgian subsidiary was
58
changed from a NV to a BVBA and a Spanish subsidiary was changed from a
SA to a SL. This streamlined the administration considerably but to do these
conversions, please remember there are practical issues to be dealt with such as
bank consents in relation to the security over assets, auditors signing off the
change and company law and employee rights issues such as the Works Council
in France.
While the transaction was slightly unusual, it did highlight a number of
interesting issues. In this particular case, and I think Ian will be talking about
what he does in a little while, we had two parties that were prepared to cooperate
with each other to get the most optimal structure. Advisors often say they will
but in this case, they really did. The transaction involved both cash and stock as
part of the consideration and that stock element helped there to be a mutuality of
interest in terms of minimising tax leakage. In order to achieve this, the
purchaser came up with steps they required the seller to take pre closing (there
was a split exchange and completion so these were steps to be taken after
exchange and post closing). Then there were other steps that were to take place
at post closing but with the help of both parties.
Something that we do come across quite often in European deals is the fact that
by taking a business out of a larger group, it may well be that some of the key
internal functions of the target group are actually held in a different place within
the sellers group so the first step that took place pre closing was to actually set
up a Principal BVBA in Belgium and an Establishment Secondment in France to
host the management personnel coming over as part of the deal.
Again, pre deal, the seller set up a Dutch holding company and transferred the
shares of the target Opcos into the Dutch company for an intergroup loan.
As there was a stock element to this deal, the purchaser issued some of its shares
to its own Dutch holding company in exchange for shares ie did a share for share
exchange and to meet the rest of the consideration the new Dutch holding
company of the purchaser also entered into a non recourse banking facility with
a bank so that the Dutch holding company now held shares in its parent and had
a facility from a bank.
This allowed at close for the shares in the parent company of the purchaser to be
transferred plus cash to the seller who sold its Dutch holding company to the
59
purchaser’s holding company. In addition, in this particular case there was an
assumption of certain liabilities and the Purchaser also bought certain
indebtedness from the seller which was of the target’s group, primarily the
internal cash management systems.
The next step was for the purchaser’s holding company to capitalise up further
the original seller’s holding company which is now the intermediate holding
company of the target companies. This was done by way of a cash contribution
and allowed the intermediate Dutch holding company to then have a treasury
function with the target co’s.
The structure post closing looked like this. Seller owning a percentage of shares
in US holding company which owned its own Dutch subsidiary, the Dutch
subsidiary having a bank loan from a third party and that Dutch subsidiary
owning the original target holding company with Opcos in a number of
territories below.
However, because the main assets and the main operation of the business was
going to be in Belgium, this wasn’t the end of the story. Post deal, the
intermediate Dutch holding company transferred the shares of the target Opcos
into the BVBA in exchange for a hybrid instrument. This hybrid instrument was
treated as debt for Belgium purposes but equity for Dutch purposes.
The intention being that they would enter into a principal and toll management
arrangement whereby in effect the income and operations of the group would be
in Belgium and the target companies in each target Opcos would simply act as
an agent or toll manufacturer for the Belgium company.
7.
Conclusion
I hope my speech has been informative on different structures across Europe. If
nothing else I hope it has enabled you to appreciate that when setting up
entities/structures across Europe it is vitally important to consider the different
options available in each country, what you are seeking to get out of your
presence in that country, what your priorities are, whether it be tax
considerations, liability issues or public relations implications and, on timing,
that it saves a lot of time and effort in the long run if these issues are considered
before you start operating in these European countries.
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I will now hand over to Ian Molyneux who will give further practical advice on
how Parker Hannifin has structured itself in Europe.
Ian Molyneux
Thank you very much, Robin.
Following what Robin said in terms of the recent example that he has been
involved with, as an International General Counsel in charge of both their
European and Asian divisions of Parker Hannifin, you can imagine that my team
and I spend a considerable amount of time dealing with reorganisations and
implementations following acquisitions and divestments that we make.
Before I go into detail, perhaps I can just tell you a little bit more about Parker
Hannifin.
Parker Hannifin is a $10 billion revenue conglomerate in the industrial and
technical products area. We have five divisions, all of which are very
internationally focussed. Each of those five divisions at any one time could be
looking at a number of opportunities and as we operate down individual business
lines with Group General Counsel for each of the divisions, as well as the
overall international structure, we are having to review on a constant basis our
corporate structure.
Notwithstanding the fact that Parker is such a multinational business, I am very
keen on keeping as lean a corporate structure in Europe as possible. Having said
that, we do have over 150 corporate entities in Europe alone.
By keeping the corporate structure as lean as possible, we ensure as few people
as possible have personal liability as directors. It is vital the business works
efficiently from a tax and treasury perspective so that cash management is kept
to a maximum and we are able to repatriate funds and keep our tax cost base as
low as possible.
As you can imagine, we do this on literally a daily basis and we are constantly
reviewing our structures to ensure that we are creating the most efficient
structure for Parker within Europe which then links back into its operations in
the States.
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We have a very active acquisition program and if we don’t keep our corporate
structure and our treasury and tax and repatriation objectives in line, we can
easily come up with a very unwieldy structure and lose complete control so
consequently one of the things we do on any acquisition is, even during the
acquisition process, we are already planning and considering the best way in
which we can integrate a business into our corporate structure. Consequently, it
is important to us to give us as much flexibility in the acquisition documentation
as possible to do substantial reorganisations post deal.
We have our own implementation team and each acquisition has its own
implementation manager. That manager is not only going to be dealing in
conjunction with legal on ensuring good compliance programmes are
immediately put in place, that the target understands really the culture of Parker
but also that implementation manager concentrates on getting the corporate
structure right, the treasury functions right, the tax right so that it fits within the
overall Parker arrangements.
We have substantial debt and assets below the holding company level and we
are regularly talking to the tax authorities about matters on an international
basis, for example thin capitalisation, interest deductions and withholding taxes.
It is essential to us that we are able to operate in Europe to the extent we can on
an independent treasury management basis and therefore management of cash is
extremely important to us whether it be looking through a cash pooling
arrangement or whether it be looking at the ways in which dividends can be
moved around the group or interest payments can be made on loans.
In terms of personal liabilities, we do try to keep our operational people away
from board structures as much as possible. However, we do recognise that it is
necessary in certain jurisdictions to have local/resident directors and in fact
Directors Law of Europe which Robin showcased earlier has been an extremely
useful tool for us in this regard where we do need to have local management on
boards.
However, we do in our structure try to ensure that those boards whose local
directors are present are operational only and do not get them involved in our
corporate planning. For example, you may well find that we have holding
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companies in Europe where our treasury manager and I are both on the board but
we don’t have an operational person.
Below that we may have operational boards where I may not be on the board.
This allows the managers to concentrate on running the business, increasing its
margin and meeting our target figures whereas it allows corporate people like
myself to structure the business efficiently without having to explain in vast
details to people who don’t really need to understand exactly what we are trying
to do from a treasury, corporate compliance and tax basis.
I do however spend a lot of time training our people with compliance
programmes such as export control, FCPA, anti trust, environmental, Health &
Safety and directors duties is key to us and our people do understand the
responsibilities they have and do understand the need to come and talk to us if
they get into trouble which we obviously hope is kept to a minimum.
Within our corporate structure, we have had for some time a number of entities
that exist and have been put in place for tax purposes over the years, mainly
looking at things like withholding tax issues, double taxation treaties, the way in
which we can move debt around and so to that end, higher up the level in our
group we not only have a US holding company but a US investment company, a
Bermuda company, Gibraltar companies and Luxembourg entities and we have a
number of limited liability partnerships around the group and we also use to
some degree the ability to do debt issues through the Channel Islands.
However, what I would like to talk about today is to just give you an example of
exactly how our restructuring works in practice and the example I have is a
pretty simple acquisition. Remember, one of our key aims is to reduce the
number of corporate entities we have. If we don’t, we will become unwieldy, it
will become very expensive in terms of audit and compliance fees,
(notwithstanding the fact that Eversheds do a great job looking after a lot of our
company secretarial work). We need to move cash around, we can’t leave cash
in one particular entity. We can’t have that being managed on a dysfunctional
basis. There would be a lot of leakage which we can’t afford to happen.
I am just going to take you through what would be a pretty simple deal but just
to show you the acquisition integration planning which has to take place. I am
not going to mention the name of the company though it is on record what deals
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we have done. This involved the acquisition of a UK company for one of our
divisions and in this particular case, this company had assets in the Netherlands,
France, Spain and a number of operations in Asia. However, I won’t for the
purposes of today talk about the Asian operations.
As was mentioned earlier, for the purposes of US tax, a number of our
companies could be branches, they could be corporations for the purpose of
local tax, some will be treated as corporations in the States, some will be treated
as partnerships in local jurisdictions and some will be treated as partnerships in
the States but used as corporations in the local territory and in some cases, we
actually have dual resident companies.
Our tax team are constantly looking at this and I don’t propose again to go into
detail but what I am trying to make clear is that we do look at different
structures.
This was not one of our larger deals, the consideration was less than $100
million but notwithstanding that, in terms of how you would fund the acquisition
and then how you would do the restructuring, there were a number of steps that
we had to take. The first was where do we get $100 million? Well, typically we
fund through Canada and Bermuda but in order, as I said before, to manage cash
on a standalone basis, we had done a recent deal where we had cash on the
balance sheet in a Luxembourg entity which was an intergroup loan note account
and so we started by transferring that money out of that entity into a
Luxembourg acquisition vehicle. We normally use Luxembourg acquisition
vehicle as vehicles to acquire businesses. Next our tax team looked at whether
or not there were any 338 elections we needed to make either within the States
or outside the States. During that, we are looking at NOLs, non operating losses,
carry overs. The next thing we do is whether we should check the box for all the
operations we had just bought in the UK, the Netherlands and France so that
they are treated as being disregarded for US tax purposes.
The first thing we did in order to fund the acquisition of the Dutch part of the
deal is that our Belgian operation which sits underneath our Dutch operation
paid a dividend to the Dutch operation which allowed the Dutch operation to
then purchase from the acquisition vehicle the operations of the Dutch group.
When doing that, we are again looking at the tax implications of doing that, we
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look at the US implications to see whether or not there is any income on the
dividends though normally there isn’t due to look through rules. We look to see
whether any UK treasury consents are needed. They aren’t if you transfer
companies between companies resident in the EU though the treasury does need
to be notified but only within six months of it happening. We look at cash
repatriation issues, whether dividend or loan is the right structure. We have to
look at the Dutch tax implications to see whether or not there is any tax
deductibility for interest costs, any elections for fiscal unity and we have to look
at the Belgian tax considerations determining whether or not we have sufficient
distributable reserves and the availability of the funds to actually pay the
dividend.
Now we have the structure whereby the Dutch businesses have now moved
across and we have a Luxembourg owner of a UK, French and Spanish
operations and cash has moved from the Parker Netherlands to the Target
Holding company.
The next step is now to move the UK operations from the Luxembourg
operation to under our UK entity and we do that in exchange for the cash. This
cash has come via our treasury in the US via Canada and involves issuing LP
participation units into an LLP in the UK. However, because the Luxembourg
entity has only held the operations for less than 12 months, there is a potential
gain on the Luxembourg entity which we have to take account of but because we
want to move the operations, that is part of the risk we have to take.
So the business structure is now like this. The Luxembourg acquisition vehicle
has retrieved a lot of its original outlay.
The next step would be to move the French entities so they are owned by the
Parker Hannifin existing French entity from the UK acquisition vehicle into
Parker Hannifin France. Again, taking these steps which would be an intergroup
transfer, we again would be looking at taxation issues, what is the capital gains
position in France? Do we need treasury consent? How do we deal with
repatriation when moving the monies between France and the acquisition
vehicle? Is that a dividend? Should it be an upstream loan? Of course the
intention would be ultimately for these companies that are existing acquisitions
to be liquidated. What registration duties are payable? Do we need works
65
council approval? Are there any thin capitalisation issues? For example, in
France we realise that we have to make contributions of equity in exchange for
new shares. By this stage in the process, we have got rid of the French entity,
we have moved the Dutch entity and we are now left with a Spanish branch and
a UK entity and cash has moved from France to the UK.
Well, again, repeating our theme we don’t like to have unnecessary entities
within the UK so what we would do there is we would do a hive up of the assets
except for the Spanish branch, up to the UK and we would probably leave that
on an intergroup basis, so we would do a simple hive up on an intergroup basis.
To clear out the monies that might be sitting in that company, we would then do
a dividend up to the existing top company of the acquisition vehicle and
remember all these companies have done a check in the box exercise so any tax
will be disregarded for the purposes of US tax purposes. We would also do
another dividend of the original holding company back up to one of the Parker
Hannifin holding companies of any cash that has been received and the dividend
note.
That then just leaves us with solely the Spanish branch and in that particular
case, what we did here was because we had other activities that we were doing
in Spain, we set up a Newco which purchased the shares of the remaining UK
vehicle in exchange for cash or a loan note. There were no stamp duty
implications, there was a substantial shareholders exemption in the UK and
because it was a share deal, there was no real estate tax or VAT. So we have
this Newco and we have the UK company, we have still got the branch so what
we do next is we contribute the assets of the branch to the Spanish vehicle which
was set up in exchange for shares and then we distribute those shares up to the
holding company and enter into a liquidation of the UK entity. The process is
completed. We now have done this acquisition but the whole of the original
target group has now been put into the various bits within Parker Hannifin.
What have we achieved? Well, we have achieved a number of steps. We have
kept down our corporate structure to a minimum, absolutely key. We have
moved the assets of various entities into the way that Parker Hannifin works on a
divisionalised basis so we don’t need to now worry about this acquisition be
separate to the rest of the group. From a tax and treasury perspective in doing
all this exercise, we have checked what situation is with tax and treasury and we
have now just included it within the ongoing operations of the group so we don’t
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need to worry about those. Obviously we had to look at the SPA to ensure that
what we were doing did not lose us the benefit of reps and warranties, that is
very important to us but we have gone back to keeping that structure as simple
as possible.
While cash has moved around the group, the only outlay is the original
acquisition cost. A single deal - yes - but ones that took over 50 steps to advise.
Any questions?
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LLCs, LLPs, DSTs, LPs: Why and How are
Alternative Entities Used in Cross Border
Transactions?
Different structures across Europe
Robin Johnson, Eversheds LLP and
Ian Molyneux, Parker Hannifin Limited
Thursday 29 May 2008
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1
Different Structures across Europe
Introduction
• Different entities
• Advantages and disadvantages of alternative
entities and structures
• Key considerations
• Tax overview
• Some country examples
• Case study
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Key Considerations
•
•
•
•
Tax and DTAs
Corporate Governance and Administration
Corporate control
Liability – the company, the shareholders and
the directors
• Court system/Arbitration
• Reputation and PR
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Tax Overview
71
Directors Law of Europe
• Key issues affecting directors across Europe
• Duties, Disclosures, Disqualifications, Disasters
• Resource tool
• Demonstration : www.eversheds.com/dledemo
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Structures in England
• Branch or Subsidiary
• Partnerships
• Limited Liability Partnerships (LLPs)
• Limited Liability Company
73
Entities in France
• SA – corporation
• SARL – limited liability company
• SAS – simplified joint stock company
• Partnerships
74
Entities in Italy
• SpA – share company
• SrL – limited liability company
• Partnerships
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Entities in Germany
• GmbH – private limited company
• AG – stock corporation
• Partnerships – civil law (GbR), general
partnership (OHD), limited partnership (KG)
• “GmbH and KG” – limiting liability
76
Tax Structuring
• Minimising the overall tax burden
• Using double taxation treaties
• Avoiding tax withholdings on interest and
dividends
• Financing structures
• Ireland
• Switzerland
• Netherlands/Belgium
77
Case Study – Organisation Change Across
Europe
Original Structure
Seller
Opcos (in 5 jurisdictions)
78
Case Study – Organisation Change Across
Europe
Pre-Deal
Seller
Dutch BV
BVBA
Opcos
79
Case Study – Organisation Change Across
Europe
Share for Share Exchange
US Parent
US
Shares
Newco
Shares
Dutch Newco
Bank
financing
80
Case Study – Organisation Change Across
Europe
Structure Post Closing
Other Shareholders
Seller
US Parent
Dutch Newco
Bank debt
Seller Dutch Newco
Opcos
BVBA
81
Case Study – Organisation Change Across
Europe
Post Deal transfer
Parent
Dutch Newco
Bank
Seller Dutch Co
Hybrid
Instrument
BVBA
Opcos
Opcos
82
Summary
• Consider the different options across Europe and
in each country
• Consider the issues:
– Tax
– Governance
– Administration
– Liability
– Reputation
• Forward planning!
83
Parker Hannifin – Restructuring example
Target Holdco
Target Intermediate Holdco
Netherlands
Netherlands
Netherlands
French
Spanish Branch
Netherlands
84
Parker Hannifin – Restructuring example
Lux Co
Target Holdco
Target Intermediate Holdco
Netherlands
Netherlands
Netherlands
French
Spanish Branch
Netherlands
85
Parker Hannifin – Restructuring example
Lux Co
Target Holdco
Target Intermediate Holdco
French
Spanish Branch
Cash moved from Parker NL to Intermediate Holdco
86
Parker Hannifin – Restructuring example
Parker UK
Target Holdco
Target Intermediate Holdco
French
Spanish Branch
Cash moved from Parker UK to Luxco
87
Parker Hannifin – Restructuring example
Parker UK
Target Holdco
Target Intermediate Holdco
Spanish Branch
Cash moved from Parker France to Intermediate Co.
Parker France funded by recapitalisation through NL
88
Parker Hannifin – Restructuring example
Parker UK
Dividend
Target Holdco
Target Intermediate Holdco
Spanish Branch
89
Parker Hannifin – Restructuring example
Spanish Cash/Note to Target
Parker UK
Spanish Newco
Target Holdco
Target Intermediate Holdco
Target Co + Intermediate Co - Liquidated
90
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© EVERSHEDS LLP 2008. Eversheds LLP is a limited liability partnership.
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