carve-out best practices and how reorganizations can help

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© 2020 Eversheds Sutherland (US) LLP Carve-out best practices and how reorganizations can help Carving out the best deal October 28, 2020 Chelse Ferrero Senior Legal Counsel, Cisco Marc Rawls Partner, Eversheds Sutherland Antony Walsh Partner, Eversheds Sutherland

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© 2020 Eversheds Sutherland (US) LLP

Carve-out best practices and how reorganizations can help

Carving out the best deal

October 28, 2020

Chelse FerreroSenior Legal Counsel, Cisco

Marc RawlsPartner, Eversheds Sutherland

Antony WalshPartner, Eversheds Sutherland

Eversheds Sutherland

Panelists

Chelse FerreroSenior Legal CounselCisco

Marc RawlsPartnerEversheds Sutherland

Antony WalshPartnerEversheds Sutherland

Eversheds Sutherland

Agenda

3

What is a ‘Spin’?

Why ‘Spin’? Preparing to ‘Spin’:

common issues and

considerations

Delivering a ‘Spin’:

practicalities

Questions

Eversheds Sutherland

What is a ‘Spin’?

Eversheds Sutherland

“In a “spin-off,” a parent company distributes shares of a subsidiary to the parent company’s shareholders so that the subsidiary becomes a separate, independent company.”

U.S. Securities and Exchange Commission

Defining a ‘Spin’

“A spin-off occurs when a parent corporation separates part of its business into a second publicly-traded entity and distributes shares of the new entity to its current shareholders.”

Corporate Finance Institute

5

“Shareholders of the parent company receive equivalent shares in the new company in order to compensate for the loss of equity in the original stocks.”

Wikipedia

Eversheds Sutherland

DowDuPontReal life examples

6

Splitting into three new firms:

Dow, DuPont and Corteva

Before

Shareholders

DowDuPont, Inc.(NYSE)

Agricultural Subsidiaries (Corteva)

Materials science Subsidiaries

(Dow)

Specialty Products Subsidiaries

(DuPont)

100%

Eversheds Sutherland

DowDuPontReal life examples

7

Splitting into three new firms:

Dow, DuPont and Corteva

After

Shareholders

Agricultural Subsidiaries (Corteva)

Materials science Subsidiaries

(Dow)

Specialty Products Subsidiaries

(DuPont)

100%

SpinCo 1,I c. (NYSE)

100%

100%

SpinCo 2,I c. (NYSE)

Shareholders

100%

Shareholders

SpinCo 3,I c. (NYSE)

100%

100%

Eversheds Sutherland

Tenneco / Federal-MogulReal life examples

8

Spinning off Tenneco’s ride performance and Federal-Mogul’s motorparts businesses

Before

Shareholders

Tenneco, Ii c. (NYSE)

Ride Performance Subsidiaries(Tenneco)

Clean Air Subsidiaries(Tenneco)

MotorpartsSubsidiaries

(Federal-Mogul)

100%

Powertrain Subsidiaries

(Federal-Mogul)

Eversheds Sutherland

Tenneco / Federal-MogulReal life examples

9

Spinning off Tenneco’s ride performance and Federal-Mogul’s motorparts businesses

After

Shareholders

Tenneco, Inc.(NYSE)

Clean Air Subsidiaries(Tenneco)

Powertrain Subsidiaries

(Federal-Mogul)

100%

100% 100%

Shareholders

SpinCo, Inc.(NYSE)

MotorpartsSubsidiaries

(Federal-Mogul)

Ride Performance Subsidiaries(Tenneco)

100%

100% 100%

Eversheds Sutherland

Autoliv / VeoneerReal life examples

10

Splitting off Autoliv’s electronics segment

Before

Shareholders

Autoliv, Inc. (Stock on NYSE) (SDR’s* on Nasdaq Stockholm)

Electronics Subsidies(Veoneer)

Passive Safety subsidiaries

(Autoliv)

100%

100% 100%

Eversheds Sutherland

Autoliv / VeoneerReal life examples

11

Spinning off Autoliv’s electronics segment

After

Passive Safety subsidiaries(Autoliv)

100%

Autoliv, Inc. (Stock on NYSE) (SDR*’s on Nasdaq Stockholm)

Shareholders

100%

100%

100%

Shareholders

Veoneer, Inc. (Stock on NYSE) (SDR’s on Nasdaq Stockholm)

Electronics Subsidiaries(Veoneer)

Eversheds Sutherland

“Smiths Group to spin off and float medical devices division –Analysts say value of demerged unit would be roughly £2bn.”

Ft.com, 22 March 2019

In the news

“Prudential says ‘good progress’ made on UK spin-off – Insurer has reorganized UK and Hong Kong businesses ahead of M&G Prudential demerger.”

FT.com, 13 March 2019

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“Metals group Arconicto spin off one of its two main divisions – Break-up decision follows collapse of Apollo buyout plans.”

FT.com, 8 February 2019

Eversheds Sutherland

Why ‘Spin’?

Eversheds Sutherland

Some companies want to get rid of a weak or low-margin division that is detracting attention from the parent

Why Spin?

Some companies seeking buyers for parts of their business are not getting good offers from other firms, or from private equity, and so choose to Spin (i.e. Foster’s Group spinoff of Treasury Wine Estates)

14

Shareholder activism and the concept of the “Conglomerate discount” (the Economist) – “stock markets value a diversified group at less than the sum of its parts.”

The theory

Eversheds Sutherland

Since 2003, the Bloomberg Spin-Off Index has generated a total return of 1,030%, versus 194% for the S&P 500 Index

Why Spin?

For the 10-year period, the Bloomberg Spin-Off Index has appreciated 342% (versus 154% for the S&P 500 Index)

15

Over the three years to 2018 the spin index is up 60% versus 35% for the S&P 500

The facts

Eversheds Sutherland

Why Spin?

16

The facts

Eversheds Sutherland

Preparing to ‘Spin’: common issues and considerations

Eversheds Sutherland

Common issues

• Initial Scoping• Structuring a Spin-off

• Transaction structures• Historic liabilities• Valuations

• Gathering the underlying information

• Incorporating the skeleton structure

18

Eversheds Sutherland

Common issues

• Progressing to ‘Spin and the ‘curveball’’ • Third party consents

1. Landlords2. Regulatory (i.e. permits, operating licenses) 3. Lenders4. Customers/suppliers5. Employee representatives and labor authorities

• Global and shared agreements, interdependencies and shared assets

• Employee consultations and benefits• Value, consideration and “distributable profits” • Treasury and finance issues • IT issues• IP issues

19

Eversheds Sutherland

Common issues

• Delivering• Project management• Data volume• Execution issues

• Logistics• Powers of attorney• Notaries/apostil• Electronic execution

20

Eversheds Sutherland

Transaction structuresInitial scoping

“[x] transfers the stock of [y] to [z] in exchange for shares.”

21

X100%

Y Z

Eversheds Sutherland

Transaction structuresInitial scoping

• Transfer• Shares • Assets

• Distribution • Requirement for available

profits

• Contribution to capital • Not a legal concept in all

jurisdictions

• Contribution in kind • Not a legal concept in all

jurisdictions

• Share for share exchange• Tax clearances often required

• Statutory demerger• Not available in all

jurisdictions

• Gift• Often not tax efficient

22

Eversheds Sutherland

Be clear and aligned on how these are being treated

Initial scoping

May impact tax analysis if not all historic liabilities transfer

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Also affects any market value calculations required

Historic liabilities and valuations

Eversheds Sutherland

Do not wait until the steps plan is near-final to commence information gathering

Initial scoping

Have a clear, uniform request list in to which key stakeholders have input, and which is used globally and is clearly managed by identified points of contact / project managers with clear responsibility

24

Have lawyers and accountants work together so as to avoid duplication of requests / multiple pieces of paper

Gathering the underlying information

Eversheds Sutherland

Incorporating the skeleton structureInitial scoping

• Consider the ‘right’ jurisdiction for each Newco

• Jurisdictions must be balanced with ‘real seat’ requirements

• Time to open bank accounts, for Newcos to pay/receive consideration

• Tax registrations prior to the transactions taking place

• Incorporation formalities in some jurisdictions require physical attendance or other formalities

• New entities will need to have capital payments physically paid in to their accounts, may have certain minimum levels of capitalization

• Plus, consider governance issues

25

Eversheds Sutherland

EmployeesInitial scoping

• Key consideration – both practically and legally –how do you ensure the right people are employed by the right business?

• Employee and Employee Representative information and consultation requirements will be defined by the global and local transaction steps Time to open bank accounts, for Newcos to pay/receive consideration

• Key to understand employee numbers by entity and representative structures at an early stage – both locally and at a European level to gain an indication of likely steps and timeframe for consultation processes

• Timing and messaging

• Identify and cross jurisdictional employee transfers

26

Eversheds Sutherland

Third party consentsProgressing to ‘Spin’ and the ‘curveball’

What approach will you take to these issues?

27

• Customers/suppliers

• Landlords

• Regulatory (i.e. permits, operating licenses, public grants)

• Lenders

Eversheds Sutherland

Approaches to third party consentsProgressing to ‘Spin’ and the ‘curveball’

28

• Obtain consent (either explicit or informal)

• ‘Non-objection’ letters

• No notification

• Approach part-informed by the nature of transaction? For example: • Statutory demergers• Share/stock transfers• Asset transfers• Jurisdiction involved

• The ultimate Spin (or wider elements of it) could itself be a ‘change of control’

Eversheds Sutherland

Global and shared agreements, interdependencies and shared assets

Progressing to ‘Spin’ and the ‘curveball’

29

• Shared property

• Global suppliers/customers

• IT services (shared servers, etc.)

• Payroll and HR systems

Eversheds Sutherland

Employee consultations and benefitsProgressing to ‘Spin’ and the ‘curveball’

30

• Share/stock transfer: less of a concern• Consider: Works councils/unions

• Asset transfer• TUPE• Consider: Works councils/unions

• Information gathering—start early!

• Re-deployment where no TUPE transfer• Consider: Works councils/unions

• Redundancies• Consider: Works councils/unions

• Pensions/benefits

Eversheds Sutherland

Transfers at less than market value, or distributions/dividends, are likely to require distributable profits

Progressing to ‘Spin’ and the ‘curveball’

Transactions undertaken without distributable profits may be unlawful

31

Distributable profits may be created in some circumstances

Value, consideration and “distributable profits”

Eversheds Sutherland

Treasury and finance issuesProgressing to ‘Spin’ and the ‘curveball’

32

• Bank consents

• Cash pools

• Third party financing

• Intra-group financing• Repayment• Waiver (noting potential tax downsides

to the same) • Capitalizing • Assigning/transferring the receivable

Eversheds Sutherland

It and IP issuesProgressing to ‘Spin’ and the ‘curveball’

33

• IT issues most likely to arise in the context of interdependencies

• Intellectual property licenses may require termination

• Registered intellectual property rights may require transferring

• New intellectual property rights (for SpinCo) may require registration

• Ensuring that any new SpinCo name/branding is not already used or protected by other third parties (often worldwide)

Eversheds Sutherland

EHS permits and approvals can be easily overlooked, but can add significant amounts of time and formality to your transfer process

Progressing to ‘Spin’ and the ‘curveball’

Be aware of historic environmental contamination issues –these issues can impact the Spin-out group regardless of your documentation!

34

Environmental issues

Eversheds Sutherland

Delivering a ‘Spin’: practicalities

Eversheds Sutherland

Getting to ‘Spin’Delivering

• Delivering• Project management• Data volume• Execution issues

• Logistics• Powers of attorney• Notaries/apostil• Electronic execution

36

Eversheds Sutherland

• Do not underestimate the time that a Spin transaction can take. The more time you can give yourself (and advisors) the better

• Prior planning and establishment of systems can be the differentiator between a well-managed Spin and timetable extensions

• Validate and interrogate the steps plan from every angle

• Collate information in a uniform, coordinated manner

• Be alive to employee consultation and people dynamics

• Curve-balls will arise, but can typically be dealt with provided they are identified with sufficient time

Conclusion

37

Eversheds Sutherland 38

eversheds-sutherland.com© 2020 Eversheds Sutherland (US) LLPAll rights reserved.

Marc RawlsPartnerEversheds Sutherland - [email protected] +1 404 853 8058

Antony WalshPartnerEversheds Sutherland – [email protected] +44 20 7919 4848