acquiring less than 100% of the target entity`s equity. In the simplest rollover transaction structure, the owners of the target entity sell less than 100% of the target`s equity to the buyer. From a tax perspective, the entity may be a business, a partnership (usually an LLC) or a non-accounted business. The use of a partial participation structure allows the parties to choose who will be a rollover participant. The main managers of target companies often have to identify all or a significant percentage of their total target capital. What drives the popularity of stock rollovers in sales transactions? Counsel, which has the negotiation and structuring of rollover or co-investment terms in the context of a M-A transaction, is often decisive for a successful agreement result. Linden Law Partners` lawyers have extensive technical experience advising buyers and sellers on the various thinking and implementation of M-A transactions with rollover or co-investment elements. Please contact us here or call us at (303) 731-0007 to discuss ways to help. One pitfall to avoid is that rollover capital is subordinated to „vesting“ related to post-closing employment. In these cases, the retained capital can be considered as clearing funds and fall under the IRC capital contribution rights regime. When rollover equity is treated as a matter of CRI 83, it would be necessary to select CRI 83 (b) to avoid all proceeds from the sale of future rollover capital sales being considered compensation. The problem with the choice of CRI 83 (b) is that the issuance of working capital could result in significant taxable compensation or trigger an alleged sale of capital crushed during the transaction. A possible alternative to the avoidance of rollover equity would be an adjustment in purchase prices (which could include falling shares or buybacks) if certain triggering events occur.
If favourable tax treatment is desired, a forfeiture scheme related to the termination of the employment relationship should be avoided. Some financial buyers will give rollover participants the opportunity to participate in the investment A study has shown that incentive stock pools have on average about 17% of the company`s capital for small and medium-sized enterprises and 15% for large companies, but can be between 5% and 20% of the company`s capital.