Whether you’re acquiring a new entity or considering a carve-out of your own, you need to make sure the carved-out company can operate as a stand-alone entity. What will happen when the Transitional Service Agreements (TSAs) come to an end? Will you be able to legally trade, or will you fall out of compliance?
Claudia Poernig, Managing Director of DLA Piper’s International Corporate Reorganization practice, has worked on multiple, multinational carve-outs and has seen just about every obstacle and pitfall that can befall a company.
“Even when dealing with real estate as a transferable asset - do you need an expert? Any given country could have a particular way of moving real estate, and you need to make sure you cover that. Carve-outs are truly a multidisciplinary undertaking.”
Claudia says your major obligations for a carve-out fall into the same areas as compliant trading: accounting and tax, HR and payroll, structuring, and regulation and compliance.
Accounting and tax
First and foremost, even before the deal is struck, you’ll need to carve out your balance sheet. Prospective buyers will want to see a separate balance sheet that only deals with the business unit in question so they can get a good understanding of what’s on offer.
That balance sheet will need to not only have a profit and loss account, but also include details of any assets you think need to go with that business unit in order to separate.
Says Claudia: “There might be some particular assets that are important for that business unit, and you want to make sure they are being sold to the buyer. It’s what the buyer is looking for as well - what exactly are they buying?
“And then obviously from a seller’s perspective you want to sell and separate that business unit in the most tax-efficient way. You want to make sure that you don’t trigger any tax, or if you have to that you keep it to a minimum.”
The tax question will need to be dealt with at both ends of the deal - both from your own HQ, and from the country involved in the deal.
HR and payroll
It’s a very rare carve-out that doesn’t involve employees in some way. Those employees will need to be transferred to the new entity and company, and that transfer can be done in multiple ways.
You need to consider both the actual transfer of employees - TUPE, fire and rehire, and so on - as well as any benefits they have accrued while working for the original company. Claudia gives the example of pensions in Europe: your employees won’t be too happy if they lose their accrued pension interest, and buyers won’t be too happy if they need to pay for pensions of long-retired employees.
She also gives a word of warning: “In some countries when you fire and rehire, it doesn’t matter that you’re rehiring the employee - they’ll have the right to refuse to transfer, and you’ll be subject to an open negotiation for settlement. You need to be aware of what the local risks are in HR.”
This is the nitty-gritty detail of the deal: how do you separate? Are you selling entities? Do you want to include assets and liabilities? Do you need to form new entities in a different country so you can consolidate business units ready for sale?
“The ideal corporate scenario is you have one holding company and underneath you have new carved out subsidiaries that you can just transfer the holding company to the buyer - that’s the easiest way,” says Claudia.
“But from a corporate perspective you have to look at your timeline. If you have a carve-out in China and you first have to incorporate a new entity in China, that will take you some time because it’s so regulated. You need to keep these things in mind when setting your deadlines.”
Regulation and compliance
We’re not just talking about the usual compliance needs here; there are certain industries where licenses will need to be in check before you can trade.
“For example, says Claudia, “if you want to carve out a pharma business, you want to make sure that your carve-out has all the licenses that it needs or that you transfer the licenses that it needs. If you have an insurance business, it’s also regulated, so you want to make sure you bring in people who can help you with that.”
Look after the details
Claudia’s advice for carve-outs is simple:
- Have a timeline in mind and focus on it
- Be aware of your obstacles and prioritise correctly
- Be ready for anything
“Unfortunately the devil always lies in the detail, and sometimes things come up that maybe you didn’t consider from the beginning. You need to be ready for that. You need to anticipate things because in my experience something unexpected always comes up.”