Participants in the rollover may obtain equity in a company whose activity is the only activity covered or in a company through which the financial buyer holds shares in other business assets (a common result when the target entity is a larger acquisition or deployment transaction). While due diligence of potential participants in a buyer`s capitalization and financial structure is necessary, regardless of the buyer`s history and status, due diligence and buyer`s assurances and guarantees are especially important when the owners of the target business obtain equity in a diversified business. Rollover participants will want to ensure that there is a mandatory tax distribution and that there is no obligation to make additional capital contributions, guarantee debts or grant loans to the company. Fortunately, these “red flags” are not typical of stock-rollover transactions with financial buyers. Financial buyers often include private equity pools in their operations legal representation, disclosure and conflicts of interest in sale transactions with the use of deployable equity Many of the acquisitions of private equity platforms and some add-on deals that we see in the market characterize what is known as deployment equity. Deployment capital is generated when certain shareholders of the target company, including founders and senior members of the management team, transfer part of their ownership shares in the new equity structure introduced by the buying company instead of obtaining cash revenues. This type of agreement is attractive to PE investors because it reduces their cash expenses and also helps coordinate the objectives of the investor and the management team, as the latter will continue to “play an important role” after the acquisition. The deal is also attractive to those who roll up their equity, as it allows them to obtain partial liquidity for their investment while participating in further bullish moves. Rolling equity can also be attractive to sellers from a tax perspective. There are several potential tax issues related to the exchange of CRI § 351. If the plan provides for the rollover participants to hold 50% or more of the shares of the holding company (including constructive ownership under IRC § 318) in the context of the transaction to set up a holding company, the CRI Rules § 304 should be carefully reviewed, given that the scope of this provision would be that the cash shoe would be taxed at the usual dividend rates.
It is also possible that additional taxable income may be generated under Article 357 of the IRC, which regulates the assumption of debts by the newly created holding company. The key issues that are often negotiated by the parties under working capital agreements are highlighted below: there are a number of risks associated with the “purchase” of capital on wheels that should not be ignored by rollover participants or their representatives. A real risk lies in the fact that the value of the buyer`s business has been inflated for the purpose of exchanging target capital for buyer capital. . . .