Verizon

Report
Tax Planning for Domestic & Foreign
Partnerships, LLCs, Joint Ventures &
Other Strategic Alliances 2014
Interesting Partnership Transactions of the
Past Year
Practising Law Institute
Chicago: April 29 – May 1, 2014
New York: May 20-22, 2014
San Francisco: June 10-12, 2014
Panelists:
Linda E. Carlisle, Miller & Chevalier Chartered
Philip B. Wright, Bryan Cave LLP
R. David Wheat, Thompson & Knight, LLP
David B. Strong, Morrison & Foerster LLP
1
Table of Contents
I.
Premier IPO
II. Extended Stay Stapled Stock IPO
III. Plains GP IPO – Up-C Structure
IV. Verizon’s Purchase of Vodaphone’s Interest In
Verizon Wireless
Interesting Partnership Transactions of the
Past Year
2
I. Premier IPO – Initial Structure
Premier is a healthcare performance
improvement alliance of
approximately 2,900 U.S. community
hospitals and 100,000 alternative
sites providing supply chain services
and performance services. The
supply chain services segment
includes one of the largest healthcare
group purchasing organizations in the
U.S. , specialty pharmacy, and direct
sourcing activities. The performance
services segment includes one of the
largest informatics and advisory
services business in the U.S. focused
on healthcare providers.
Member
Owners
Premier
Healthcare
Solutions Inc.
“PHSI”
100%
Premier
Plans, LLC
99%
1%
Premier
Purchasing
Partners, LP
“Premier LP”
100%
Premier Supply
Chain
Improvements,
Inc. “PSCI”
Interesting Partnership Transactions of the
Past Year
3
I. Premier IPO – Reorganization/IPO
100%
Member
Owners
Public
Contribute PHSI
to Premier LP
PHSI
IPO $$$
Merge
Form Premier Inc.
and Premier GP
Premier,
Inc.
100%
IPO $$$
IPO $$$
Premier
Plans, LLC
99%
Premier Services,
LLP
“Premier GP”
Premier LP Units
1%
IPO $$$
Premier LP
100%
PSCI
Interesting Partnership Transactions of the
Past Year
4
I. Premier IPO – Resulting Structure
Member
Owners
Public
Voting
Trust
Class B Common
80% Voting Power
0% Economics
Class A Common
20% Voting Power
100% Economic
Premier,
Inc.
100%
Premier
GP
80% (Class B Unit Holders)
20% (Class A Unit Holders)
Premier
LP
PSCT
PHSI
Interesting Partnership Transactions of the
Past Year
5
I. Premier IPO – Structuring Considerations
A. Structuring Features
1.
LLC Agreement
Distributions 20% to Class A Units – 80% to Class B Units proportional to Units.
Class B Units divided into two Tranches – Class A Tranche – Participation
Percentage / Tranche B – Residual – Proportional.
2.
GPO Participation Agreement
Members have entered into five year GPO participation agreements where each
member owner will receive revenue share from Premier LP 30% of all gross
administrative fees collected by the Premier LP based upon purchasing by such
member owner’s member facilities through Premier LP GPO supplier contracts.
3.
Exchange Agreement
Class B Units – Class B Member may sell each year 1/7 of its Class B Units (vested
units) to corporation for Common Stock. Unvested shares are subject to purchase
at lower of fair market value or capital account in certain circumstances - e.g.
member fails to maintain participation agreements.
4.
Tax Receivables Agreement
Members receive 85% of the federal and state income tax savings actually
realized as a result of the basis increase from the exchange of units. Payments
made over the period of the step-up.
Payments may be accelerated or
terminated in certain cases.
Interesting Partnership Transactions of the
Past Year
6
I. Premier IPO – Tax Issues
B. Tax Issues
1. LLC Agreement
a) Tranche A Distributions to Class B Members based on Participation
Section 707(a)(2)(A), Rev. Rul. 81-300, 1981-2 CB 143, Rev. Rul. 81-301,
1981-2 CB 144

b) Section 704(b) Allocations – Targeted Allocations
c) Tranche B Allocations to Tax-Exempt Holders – UBIT Exposure
d) Unvested Shares – purchase at lower of capital account or fair market
value
Capital shift on purchase of Unvested Units

e) Dividend Distributions to Premier LP
Section 243 Dividend Received Deduction (80% versus 70%)

2. Section 754 Election and Tax Receivables Agreement
3. Exchange Agreement

Tax Characterization
4. GPO Participation Agreement

Tax Characterization
Interesting Partnership Transactions of the
Past Year
7
II. Extended Stay Stapled Stock IPO
Paulson
Blackstone
Centerbridge
ESH
Hospitality
Holdings, LLC
100% CUs
100
SHs
100% PUs
ESH REIT LLC
HVM LLC
Operating
Lessees
(TRS’s)
Lease
Property
Owning
Entities
A. Pre-IPO Structure
1. ESH REIT LLC was a “private REIT” engaged in the extended stay hotel business.
2. In a typical structure for hotel REITs, ESH REIT formed “taxable REIT subsidiaries”
(TRS’s) to operate the hotels.
3. The TRS’s enter into a management agreement with HVM LLC (an eligible independent
contractor).
Interesting Partnership Transactions of the
Past Year
8
II. Extended Stay Stapled Stock IPO
Sponsors
100%
100%
ESH REIT, INC.
IPO Corp
HVM LLC
Operating
Lessees
(TRS’s)
Property
Owning
Entities
New
Operating
Lessee
New
HVM
Assets
Assets
B. Pre-IPO Restructuring
1. Sponsors form IPO Corp (to be the operating company).
2. ESH REIT, LLC converts to ESH REIT, Inc with two classes of stock: Class A and Class B.
3. IPO Corp forms New Operating Lessee to acquire all of the assets of the Operating Lessees.
4. IPO Corp forms New HVM to acquire all of the assets of HVM LLC.
Interesting Partnership Transactions of the
Past Year
9
II. Extended Stay Stapled Stock IPO
Sponsors
Public
$
$
Class B
Stock
Class A
Stock
IPO Corp
Stock
IPO Corp
ESH REIT, INC.
C. Closing of IPO
1. Sponsors transfer 100% of Class A stock of ESH REIT to IPO Corp for IPO Corp common stock
(approx. 55% of the value of ESH REIT).
2. IPO Corp issues common stock to the Public and ESH REIT issues Class B shares to the Public
for a total of $566 million; these two shares are stapled and trade as a unit.
Interesting Partnership Transactions of the
Past Year
10
II. Extended Stay Stapled Stock IPO
Public
Sponsors
Class B
Stock
Class B
Stock
IPO Corp
Class A
Stock
New
Operating
Lessee
ESH REIT, INC.
New
HMV
Lease
Property
Owning
Entities
D. Post-IPO Structure
1. Property Owning Entities lease properties to New Operating Lessees.
2. New HMV manages the properties.
Interesting Partnership Transactions of the
Past Year
11
II. Extended Stay Stapled Stock IPO
E. Tax Issues
1.
Generally Section 269B treats “stapled entities” as a single entity.
a)
This would mean testing REIT status on a combined basis.
b) Counsel opines that shares “should” not be treated as stapled, provided
the Class B REIT shares represent less than 50% of value of all of the
stock of ESH REIT.
2.
REIT shares must be freely transferable.
3.
Lease from Property Owning Entities to New Operating Lessee must be a
true lease.
4.
Lease must not result in rent from a related party under Section 856(d).
a)
REIT cannot own 10% or more of the lessee (by vote or value).
b) REIT is not treated as owning stock of IPO Corp. Rev. Rul. 74-605.
Interesting Partnership Transactions of the
Past Year
12
III. Plains GP IPO – Up-C Structure
A. Pre-IPO Structure
Existing Owners
1. PAA is a publicly traded MLP that is
engaged in the transportation,
storage, terminalling and marketing
Manageof crude oil and refined products, as
ment, L.P.
well as the processing,
transportation, fractionation, storage
LP
and marketing of natural gas liquids.
(92.2%)
AAP Management
2. PAA GP is a disregarded entity
Owners
GP LLC
owned by AAP, a limited partnership
GP (1%)
LP (6.8%)
controlled by the Existing Owners,
AAP
which are the various entities and
100%
individuals that had LP interests in
AAP prior to the IPO.
Incentive
Distribution
PAA
GP
3. AAP has Incentive Distribution Rights
Rights
(IDRs) which go to the benefit of the
(IDRs)
PAA Public
GP
(2%)
Existing Owners and AAP
Investors
LP (95%)
Management Unit Owners.
4. Some Existing Owners that are
LP (3%)
PAA
either current or former members of
PAA’s senior management own their
interests in AAP through
Management, L.P.
Interesting Partnership Transactions of the
Past Year
13
III. Plains GP IPO – Up-C Structure
Existing Owners
B. Formation of IPOCo and the
General Partner
1. Management, L.P. formed General
Partner and received all member
interests in the General Partner.
2. General Partner and Management,
L.P. formed IPOCo and received a
controlling, non-economic GP
interest and LP interests
representing 100% of the
economics in IPOCo, respectively.
3. IPOCo elected to be treated as a
corporation for tax purposes.
Management, L.P.
LP
(92.2%)
GP LLC
GP
(1%)
LP
(100%)
GP (0%)
Plains GP
Holdings, LP
(“IPOCo”)
AAP Management
Unit Owners
LP
(6.8%)
General
Partner
AAP
100%
PAA GP
PAA Public
Investors
Interesting Partnership Transactions of the
Past Year
LP
(3%)
LP
(95%)
Incentive
Distribution
Rights
(IDRs)
GP
(2%)
PAA
14
III. Plains GP IPO – Up-C Structure
Existing Owners
C. Conversion and Distribution of
AAP Units
1. GP LLC’s 1% GP interest in AAP is
converted into (i) a non-economic
GP interest and (ii) AAP LP units
representing a 1% limited
partnership interest in AAP.
2. GP LLC distributed its AAP LP units
pro rata to the Existing Owners. GP
LLC retains a non-economic GP
interest in AAP.
3. The conversion and distribution
described above is treated as a
distribution under section 731.
Distribution of
1% LP interest in
AAP
Management, L.P.
LP
(92.2%)
GP LLC
GP
(1%)
LP
(100%)
GP (0%)
Plains GP
Holdings, LP
(“IPOCo”)
AAP Management
Unit Owners
LP
(6.8%)
General
Partner
AAP
100%
PAA GP
PAA Public
Investors
Interesting Partnership Transactions of the
Past Year
LP
(95%)
LP
(3%)
Incentive
Distribution
Rights
(IDRs)
GP
(2%)
PAA
15
III. Plains GP IPO – Up-C Structure
Existing Owners
D. Existing Owners
Contributed GP LLC Interests
to General Partner
1. Existing Owners contributed all
their interests in GP LLC to the
General Partner in exchange for
(1) 100% of the member
interests in General Partner and
(2) all of the Class B shares in
IPOCo (obtained by General
Partner in step #2 below).
2. General Partner then contributed
all membership interests in GP
LLC to IPOCo in exchange for all
the Class B shares in IPOCo.
General Partner continued its
non-economic GP interest in
IPOCo.
3. Management, L.P.’s interest in
the General Partner was
cancelled.
Contributions
of all
interests in
GP LLC
Management, L.P.
LP
(93.2%)
GP LLC
GP
(0%)
Plains GP
Holdings, LP
(“IPOCo”)
AAP Management
Unit Owners
LP
(6.8%)
General
Partner
AAP
100%
PAA GP
PAA Public
Investors
Interesting Partnership Transactions of the
Past Year
LP
(95%)
LP
(3%)
Incentive
Distribution
Rights
(IDRs)
GP
(2%)
PAA
16
III. Plains GP IPO – Up-C Structure
Existing Owners
E. The IPO
1. On October 15, 2013, IPOCo
sold 128 million Class A shares
to the public for $22 each
($2.82 billion total).
2. In a taxable sale, some Existing
Owners sold 128,000,000 AAP
LP units and an equal number of
General Partner units to IPOCo
in exchange for the right to
receive all the proceeds from
the IPO. As a result of the sale
of the 128,000,000 AAP LP
units, the Existing Owners’ preIPO 93.2% LP interest in AAP
was reduced to a 73.5% LP
interest in AAP.
General
Partner
Class B
(0%)
GP (0%)
Plains GP
Holdings, LP
(“IPOCo”)
GP LLC
Class A (100%)
LP
(19.7%)
AAP Management
Unit Owners
GP
(0%)
LP
(73.5%)
Public
IPOCo
Investors
AAP
LP
(6.8%)
100%
PAA GP
PAA Public
Investors
LP
(3%)
Interesting Partnership Transactions of the
Past Year
LP
(95%)
Incentive
Distribution
Rights
(IDRs)
GP
(2%)
PAA
17
III. Plains GP IPO – Up-C Structure
F. Post- IPO Structure and Exchange
Rights
1. Each Existing Owner has an
“Exchange Right” entitling it to
exchange (1) its AAP LP Units (along
with a like number of Class B shares
in IPOCo and units in the General
Partner) for (2) Class A shares in
IPOCo on a one-for-one basis. The
Exchange Right of the Existing
Owners provides for future sales of
AAP units to IPOCo with a
corresponding basis step up because
AAP and PAA have made section 754
elections. The Existing Owners
capture the value of the tax benefits
on exchange through a one-to-one
exchange ratio because an IPOCo
share represents a larger economic
interest than an AAP unit by
approximately 7%.
2. If IPOCo remains publicly traded in
December 2015, AAP Management
Unit Owners will obtain a right to
exchange AAP Management Units for
Class B shares in IPOCo with an
approximately 0.9-to-1 ratio.
Existing Owners
General
Partner
Class B
(0%)
GP (0%)
Plains GP
Holdings, LP
(“IPOCo”)
GP LLC
Class A (100%)
LP
(19.7%)
AAP Management
Unit Owners
GP
(0%)
LP
(73.5%)
Public
IPOCo
Investors
AAP
LP
(6.8%)
100%
PAA GP
PAA Public
Investors
Interesting Partnership Transactions of the
Past Year
LP
(95%)
LP
(3%)
Incentive
Distribution
Rights
(IDRs)
GP
(2%)
PAA
18
III. Plains GP IPO – Up-C Structure
G. Benefits of the UP-C Structure
1.
2.
3.
4.
Existing Owners monetized their economic interest in the
PAA IDRs.
Structure allows public investors to obtain the benefit of
the PAA IDRs through a C corporation.
Potential for substantial tax benefits to IPOCo and its Class
A shareholders through basis step up (and increased
depreciation) if Existing Owners exchange their AAP units
for Class A shares in IPOCo.
AAP LP units could be sold by IPOCo or the Existing
Owners resulting in a valuable basis step up for the buyer.
Interesting Partnership Transactions of the
Past Year
19
IV. Verizon’s Purchase of Vodaphone’s
Interest In Verizon Wireless
• Transaction involves Verizon’s $130 billion purchase of
Vodaphone’s interest in Verizon Wireless (a U.S. partnership).
• One of the largest deals in corporate history.
• Widely reported as though Vodaphone will “pay no tax” and
that “tax strategy was key to the deal.”
• So what happened?
Interesting Partnership Transactions of the
Past Year
20
IV. Verizon’s Purchase of Vodaphone’s Interest In
Verizon Wireless
A.
Overview
1. On September 2, 2013, Verizon Communications Inc. (“Verizon”), Vodafone
Group Plc (“Vodaphone”) and Vodafone 4 Limited, a wholly owned subsidiary
of Vodafone (“Seller”), entered into a stock purchase agreement pursuant to
which Verizon agreed to acquire Vodafone’s indirect 45% interest in Cellco
Partnership d/b/a “Verizon Wireless” in exchange for transaction
consideration totaling approximately $130 billion, consisting of the following:
a)
b)
c)
d)
e)
Approximately $58.9 billion in cash (subject to a cash election and requirement to pay
additional cash if the transaction closes after May 1, 2014);
That number of shares of Verizon common stock, par value $0.10 per share, calculated
pursuant to the stock purchase agreement by dividing $60.15 billion by the average
trading price, and subject to a stock consideration collar mechanism and cash election;
Senior unsecured Verizon notes in an aggregate principal amount of $5.0 billion;
Verizon’s indirect 23.1% interest in Vodafone Omnitel N.V., valued at $3.5 billion; and
Other consideration valued at approximately $2.5 billion.
2. The acquisition was structured as the acquisition by Verizon of 100% of the
stock of Vodafone’s U.S. holding entity, Vodaphone Americas Finance 1, Inc.
(“Holdco”) that indirectly held Vodafone’s 45% interest in Verizon Wireless.
Interesting Partnership Transactions of the
Past Year
21
IV. Verizon’s Purchase of Vodaphone’s Interest In
Verizon Wireless
Verizon
Shareholders
B. The Parties structured the
transaction as Verizon’s
purchase of Holdco for:
Verizon
Vodaphone
Shareholders
23.1%
interest
Vodaphone
(Non-U.S. – British plc)
(U.S. Corporation)
Omnitel NV
(Non-U.S.)
1.
2.
3.
4.
Cash ($58.9B);
Verizon stock ($60.15B);
Verizon notes ($5.0B);
Verizon’s Omnitel stake
($3.5B); and
5. Other consideration
($2.5B).
Seller
(Non-U.S.)
(Luxembourg?)
Holdco
(U.S. Corporation)
45%
Partnership
Interest
55%
Partnership
Interest
Verizon
Wireless
Unwanted
Assets
(Non-U.S. Subs)
(U.S. Partnership)
Interesting Partnership Transactions of the
Past Year
22
IV. Verizon’s Purchase of Vodaphone’s Interest In
Verizon Wireless
Verizon
Vodaphone
Shareholders
C. To effect the transaction, the
Parties undertook the following
general steps:
1. A “Reorganization”
(whereby Holdco disposed
of certain non-U.S.
subsidiaries that Verizon
did not want) and related
exchange of notes.
2. The “Omnitel Transaction”
(whereby Verizon
effectively sold its indirect
23.1% interest in Omnitel
to Vodaphone).
3. A UK “Scheme of
Arrangement” at
Vodaphone (whereby
Vodaphone recapitalizes /
consolidates its share
capital and distributes
Class B and Class C shares
to its shareholders).
Verizon
Shareholders
23.1%
interest
Vodaphone
(Non-U.S. – British plc)
(U.S. Corporation)
Omnitel NV
(Non-U.S.)
Seller
(Non-U.S.)
(Luxembourg?)
Holdco
(U.S. Corporation)
45%
Partnership
Interest
55%
Partnership
Interest
Verizon
Wireless
Unwanted
Assets
(Non-U.S. Subs)
(U.S. Partnership)
Interesting Partnership Transactions of the
Past Year
23
IV. Verizon’s Purchase of Vodaphone’s Interest In
Verizon Wireless
$
and
Verizon
Shareholders
1.
29%-31%
interest
69%-71%
interest
D. Final Structure
As a result of the
transaction, the following
results occurred:
Vodaphone
Shareholders
Verizon
Vodaphone
(U.S. Corporation)
(Non-U.S. – British plc)
100%
a) Verizon effectively owns
interest
100% of the interests in
55%
Verizon Wireless.
Partnership
b) Vodaphone owns 100% of Interest
Holdco
(U.S. Corporation)
Omnitel NV (which
checked-the-box to
convert from a corporation
45%
to a partnership).
Partnership
c) Vodaphone paid no U.S.
Interest
tax and little (or no?) UK
tax.
d) Vodaphone shareholders
Verizon
received cash and Verizon
shares.
Wireless
100%
interests
Omnitel NV
(Non-U.S.)
Seller
(Non-U.S.)
(Luxembourg?)
(U.S. Partnership)
Interesting Partnership Transactions of the
Past Year
24
IV. Verizon’s Purchase of Vodaphone’s Interest In
Verizon Wireless
$
and
Verizon
Shareholders
D. Final Structure (continued)
2. In addition, the following
contractual provisions are of
note:
Vodaphone
Shareholders
29%-31%
interest
69%-71%
interest
Verizon
Vodaphone
(U.S. Corporation)
The parties expressly agreed to
treat as a taxable exchange (and
100%
not as possibly a reorganization
interest
under Section 368 or as an
exchange under Section 351).
55%
b) Verizon cannot merge Holdco for 2
Partnership
years.
Interest
c) Holdco must make an election
(U.S. Corporation)
under Section 904(f)(1) to treat
any income realized on sale of
unwanted assets as U.S. source
income so as to reduce, to the
45%
greatest extent possible, any
Partnership
“overall foreign loss” (“OFL”).
Interest
d) If the Omnitel transaction /
liquidation was not completed, and
if Verizon was not satisfied that the
OFL had been reduced to a de
minimis amount, it appears as
though Verizon was entitled to
receive an indemnity payment of
$300mm.
(U.S. Partnership)
e) Final payment by Verizon to
Vodaphone in respect of tax
distributions to be made by Verizon
Interesting Partnership Transactions of the
Wireless.
(Non-U.S. – British plc)
a)
Holdco
100%
interests
Omnitel NV
(Non-U.S.)
Seller
(Non-U.S.)
(Luxembourg?)
Verizon
Wireless
Past Year
25
IV. Verizon’s Purchase of Vodaphone’s Interest In
Verizon Wireless
$
and
Verizon
Shareholders
E. Tax Issues / Observations:
1.
2.
3.
4.
5.
6.
7.
8.
Vodaphone
Shareholders
29%-31%
interest
69%-71%
interest
Was there any practical way to do
this deal so that Verizon could have
Verizon
obtained a tax basis step-up?
(U.S.
Corporation)
What is Verizon going to do with
Holdco and Verizon Wireless (a
partnership that it cannot consolidate
100%
with its operations)?
interest
Tax treatment of “Reorganization”
55%
transactions (taxable sales by Holdco)
and related exchange of notes.
Partnership
Interesting tax planning with Omnitel
Interest
liquidation and the Section 901(f)(1)
(U.S. Corporation)
election by Holdco (presumably,
Verizon had a large loss in its Omnitel
interest?).
45%
If Verizon merged Holdco out of
Partnership
existence, presumably it will lose
$130B of tax basis (so how best to
Interest
eliminate the partnership)?
Was it ever possible that the
transactions could have been a good
Section 368 reorganization or a
Section 351 exchange? (no, as fixed
$ share consideration?)
(U.S. Partnership)
FIRPTA issues for Verizon? (see
acquisition agreement)
Backlash in UK against Vodaphone?
Interesting Partnership Transactions of the
Past Year
Holdco
Vodaphone
(Non-U.S. – British plc)
100%
interests
Omnitel NV
(Non-U.S.)
Seller
(Non-U.S.)
(Luxembourg?)
Verizon
Wireless
26

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