Restructuring a Multinational Corporation to Optimize Profitability and Efficiency - A Case Study

Restructuring a Multinational Corporation to Optimize Profitability and Efficiency A Case Study By Owen D. Kurtin Kurtin PLLC, New York, NY 2022 Revised Edition T:212.554.3373|E: [email protected] | W:kurtinlaw.com 2 The TO Project A few years ago, I was asked to serve as lead outside legal counsel to a U.S.-basedpublic corporationinanindustrialbusiness sector withoperations in over thirty countries in the reorganization of its global corporate structure and operations. The object ofthe restructuring was to align the corporate structure with a recent reorganization of the companyalong regional andbusinessunitlines. Throughthis realignment, the company expected to derive substantial business benefit through greater transparency in reporting lines,improvedoversightaswell as increased operational efficiencies. We called this significant global project “territorial optimization,” or the “TO Project.” The TO Project was structured to use the so-called “Swiss principal” or “principal” model, one of several restructuring models then possible. It is important to state at the outset that under pressure from the Organization for Economic Cooperation and Development (“OECD”), the Swiss Federal Tax Administration (“SFTA”) as of January 1, 2019 sunset the availability of new special local Swiss Cantonal tax rulings that made the Swiss principal model particularly attractive, with existing (previously granted) tax rulings sunset as of January 1, 2020. However, although those Swiss tax incentive aspects of the Swiss principal or principal model are no longer available, many of the techniques and lessons learned in the TO Project remain relevant to 3 multinational companies seeking to optimize their profitability and efficiency, and will be covered here. In a principal structure, the corporate group’s local buy/sell companies, usually subsidiaries or unincorporated divisions, but theoretically also unaffiliated distributors, are replaced by one principal Switzerland- or other country-based company facing third party customers and vendors. It should be noted that a principal structure could be established in jurisdictions other than Switzerland that met some or all of Switzerland’s attributes, such as a businessfriendly environment, advanced body of commercial law that provides certainty in strategic planning, financial services center status, low tax rates, and strategic regional location. In fact, our project established not only a Swiss principal, but a U.S. principal to face the U.S. market and made provision for a future “Asian principal” in Singapore for Asia-facing operations. The corporation that decided to undertake the TO Project was a mature companyinits corebusinesses,butwasalsoengagedinatransitionfrom an industrial manufacturing to ahigh technology enterprise. Like many other public companies with global operations and multi-billion dollar market capitalizations and revenues,the company had grown substantially without always optimizing its own corporate structure, although it had operated internationally for many years. The company had grown through acquisitions over the years, caching its acquisitions in various places in the corporate structure that 4 made sense at the time but which had grown unwieldy. For example, all procurement from upstream vendors was handled out of the United States, even when the vendors were in the EMEA (EuropeMiddle East-Africa) region and their products, once shipped to the U.S., were combined into finished products to be sold back into the EMEA region. The client determined that it could no longer efficiently conduct its business with a formal corporate structure that was so disjointed from the structure it had chosen to optimize its business operations. The parent corporation (“Parent”), a Delaware corporation and the registrant under the Securities Exchange Act of 1934, had a set of direct subsidiaries under it, including a U.S. operating sales corporation that also held a number of operating subsidiaries, both domestic and foreign (“U.S. Sales Co.”); a U.S. corporation to handle procurement; a U.S. corporation that served as a holding company for non-U.S. operating subsidiaries (“U.S. Foreign Holdco”); and a Swiss corporation that held other non-U.S. holding and operating subsidiaries (“Swiss Holdco”). Some ofthe operating subsidiaries in a second,third or fourth tier below Parent had a second, minority shareholder in the corporate group as a result of local laws requiring at least two shareholders. TheTO Project’sultimate task was to rationalize this structure through the creation of two holding company subsidiaries of Parent, one a direct subsidiary that would face the U.S. market (“U.S. Principal”), and the other an indirect subsidiary under Swiss Holdco, that would also be based in Switzerland and face the non-U.S. market (“Swiss Principal”). Both 5 U.S.Principal andSwissPrincipalwouldbe convertedfromcorporations to the U.S. and Swiss equivalents of U.S. limited liability companies (“LLCs”), which, under Internal Revenue Code (“IRC”) “check-the-box” rules, would become disregarded entities not subject to U.S. taxation at their ownlevel, but able to “pass through” their profits and losses to their owners in the same way as partnerships. Figure 1 Simplified Diagram of Corporate Structure at Beginning of TO Project Parent U.S. Foreign Holdco Business Outside of TO Project Swiss Holdco Buy-Sell Co. Europe U.S. Sales Co. (will become U.S. Principal) U.S. Procurement Co. Buy-Sell Co. Europe Buy-Sell Co. Europe Buy-Sell Co. Asia Buy-Sell Co. Switzerland (will become Swiss Principal) Xtech Holding Co. Xtech Investment LLC Buy-Sell Co. Europe Buy-Sell Co. Asia Buy-Sell Co. Europe Buy-Sell Co. Europe Manufacturing Co. Research Co. Buy-Sell Co. Americas Buy-Sell Co. Asia Buy-Sell Co. Europe Buy-Sell Co. Europe Buy-Sell Co. Europe Buy-Sell Co. Asia Buy-Sell Co. Australia - New Zealand Buy-Sell Co. Africa Buy-Sell Co. Europe Buy-Sell Co. Asia Global buy-sell companies are scattered through corporate structure, subsidiary to U.S. Foreign Holdco, Swiss Holdco, U.S. Sales Co. and even Parent. 6 Under U.S. Principal and Swiss Principal would be the local operating companies, called “country distributors,” or “CDs.” To the extent the CDs were already subsidiaries of Swiss Holdco, they would be contributed downstream to Swiss Principal. Tothe extent any CDs were not subsidiaries of Swiss Holdco, they would have their shares contributed to Swiss Principal in a two-step process separated by months, from Parent, U.S. Principal or U.S. Foreign Holdco to Swiss Holdco, and then from Swiss HoldcodowntoSwissPrincipal.Insome cases, athree-stepprocess,first distributing the CD up to U.S. Sales Co., U.S. Foreign Holdco or even Parent before contributing the CD to Swiss Holdco and then down to Swiss Principal, was necessary because of where that operating company had been lodged in the pre-existing corporate group structure. The CDs in each jurisdiction would also be converted to LLC equivalents under the local law under which each was formed, allowing them to be treated as pass-through entities for U.S. tax purposes. Again, the purpose of the shifting of ownership of the CDs was to create a formal corporate organizationthatmatchedupwiththemanner inwhichthebusinesswas being operated and while the changes may seem complicated, with good planning and coordination all of the transfers were completed on time and under budget. The Team Given that the TO Project was among the company’s major strategic 7 initiatives, it required buy-in and support at the company’s highest levels. This buy-in required assessment of the business case for the restructuring, for example, the efficiencies in procurement, manufacturing and distribution cost, time and work flow to be gained by procuring locally from upstream vendors in the EMEA region products that were to be processedandresoldinthesameregionbytheinsertionofSwissPrincipal into the center oftheprocess. Acareful review alsowashadonthe impact of the reorganization on customer-facing activities as well aspossible registration changes in licenses, importers-of-record and intellectual property. Asignificantintra-company educationeffort wasundertaken, explaining to local managers what the TO Project would mean for their operations, how it would improve efficiencies and profitability as well as streamline logistics for them. A working group, led by a senior European manager, was assembled from internal resources and included representatives from the company’s informationtechnologies group, controller’soffice, representatives from thebusinessunits,the legal and tax team, aswell as systems, regulatory and compliance specialists. On the legal and tax team, the General Counsel, the Director of Tax, and the directors of international and domestic tax were key players. Also on the team were the controllers or managers of each local subsidiary, as well as local counsel in each jurisdiction in which the company’s affiliates operated. I was engaged as lead outside counselto run the legal aspects ofthe project worldwide, reporting to 8 the General Counsel, working in tandem with the Director of Tax and the international and domestic tax directors, interfacing with the local controllers and supervising local counsel on six continents, which included engagingnewlocalcounselwhereapre-existingrelationshipdidnotexist or was thought to be unsuitable. Supporting the project were a team of outside international accountants and a team of consultants, responsible for a number of activities, including the design of the supply chain and ensuring the final structure met accounting and fiscal requirements. Communication was obviously key in so complex a project and so large a team.Avirtual “deal room”was setup, collaborativeprojectmanagement software was employed and weekly conference calls were scheduled. Key customers and vendors were consulted early in the process, to assure themthattheprocesswouldnotaffectthe company’s relationswiththem and,insome cases,toobtaintheirprospective consentto theassignment of a contract to a new counter-party. Handled in this way, customer and vendor relations were rarely a sticking point. The design of the TO Project was a highly creative process. The team created, and frequently revised, a large PowerPoint slide deck encompassing three years of staged legaltransactions that diagrammed eachstepoftheTOProjectonaseparate slide,showingeachtransaction’s process and resulting structure. Because of the imperative to enhance operational efficiency,carewastakentoincludeintherestructuringonly those companies involved in buy-sell operations on a regional basis, as 9 the disconnect in current versus desired structure was greatest there. Some companies involved in non-core businesses, for example, some research and development facilities, were not included. In addition, an intellectual property and regulatory review was undertaken for all included companies tomake sure that any required assignment ormodification of patents, trademarks or licenses, whether for manufacture, importation, exportation, or otherwise, were front-loaded so as to be in place or ready when needed further on in the project.In one or two cases, regulatory hurdles appeared sufficiently risky thatthe company involved was excluded from the TO Project, atleastfor the time being.Inothers, resolution of the intellectual property or regulatory issues appeared so time-consuming and/or expensive that the involved companies were excluded from the project for that reason. This review was a key to the ultimate success of the reorganization and planning, both in terms of resources and budget andprovedtobe criticalinkeeping the totalprojectontime andwithin budget. Structuring U.S. Principal The first step in the project was to structure U.S. Principal. U.S. Sales Co. was chosen as the vehicle for U.S. Principal as it was already an operating company that also held many of the assets that U.S. Principal was intended to hold. Before U.S. Principal could be formed, and as part of the organizational rationalization mission of the project, U.S. Sales Co. had to spin off some U.S. and non-U.S. subsidiaries which were not 10 core to its eventual mission as U.S. Principal. Whenever one embarks on the restructuring of a global corporate organization, one of the key challenges is to address possible tax consequences arising out of the various transfers required to reach the desired end result. The tax codes in most countries recognize reorganizations that are based on sound business reasons, such as the one atissuehere, andprovide mechanisms which, if properly structured and implemented, will enable the reorganization to be carried out with minimal tax- related impact. Careful planning and close consultation with consultants is essentialto develop both a structure and implementation plan that satisfies tax policy in the jurisdictions at issue. My first task was to distribute the equity of a few subsidiaries from U.S. SalesCo.uptoit. Oneseries oftransactions is illustrative.U.S.SalesCo., which was incorporated in a western state, had a group of technologyspecializedcompaniesunder it,deriving fromanotheracquisition.Inthe structure, U.S. Sales Co. held the equity of one limited liability company called “Xtech Investment LLC” and one corporation called “Xtech Holding Co.” The two companies were formed in a second western state. In turn, Xtech Investment LLC held 95% and Xtech Holding Co. held 5% of the partnership interests of a limited partnership (“Xtech LP”) that was formed in yet a third western state, which was the operating entity of the Xtech group. 11 ent LLC Xtech LP In order to achieve a “tax-free” “liquidation” of the Xtech group under IRC §332, which allows the complete liquidation of subsidiaries without gain or loss being recognized (for Xtech Holding Co.) and §708, permitting termination of a partnership (for Xtech LP; Xtech Investment LLC was already a disregarded entity), a number of requirements had to be met, notthe least of which was following a careful order of operations. First, Xtech Holding Co. was liquidated and dissolved pursuant to a “plan of liquidation” as provided by §332; its 5% interest in Xtech LP was distributed to its parent, U.S. Sales Co. Second, the same operation was performed with Xtech Investment LLC; its 95% interest in Xtech LP was Figure 2 Simplified Diagram of Xtech Group Transactions Parent U.S. Sales Co. (will become U.S. Principal) Xtech Investm Xtech Co. 95% 5% Holding 12 distributed to U.S. Sales Co. At that point, U.S. Sales Co. held 100% of Xtech LP’s partnership interests, meaning,thatfor purposes of §708, XtechLP wasno longer apartnership, since ithadonlyoneowner.Third,andfinally,XtechLP wasdissolvedanditsassetsdistributeduptoitsparent,U.S.SalesCo.No taxable gain or loss on Xtech LP’s dissolution and distribution of assets was realized by its partners, per IRC §731. These operations required coordination of all three western states’ company laws for mergers, dissolutions and windings-up, in one case of a corporation, in another of a limited liability company and in another of a limited partnership. As a practice pointer, we opted to conduct the three operations on three successive days, because not all the jurisdictions’ secretaries ofstate offered time stamping as well as date stamping andwe wanted to leave no doubtthat we had conducted the operations in the requisite order. With the Xtech group and several other divestitures and group simplifications complete, our next step was to create a Delaware corporation (“U.S. Principal Delaware Mergerco”), wholly owned by Parent, into which U.S. Sales Co., incorporated in a state other than Delaware, would merge. To comply with IRC requirements, another “plan of liquidation” had to be drafted for U.S. Sales Co. Because U.S. Sales Co.’s state of incorporation’s merger statute didnot permit a shortform merger with a Delaware corporation, a full plan of merger had to be adopted. Once the certificate of merger in Delaware was issued, 13 we converted U.S. Principal Delaware Mergerco to an LLC under the Delaware corporation and limited liability company statutes, a twoday, two-step process resulting in U.S. Principal’s creation in the form of a Delaware LLC, holding the assets of U.S. Sales Co. U.S. Principal was then renamed and an LLC operating agreement, directors and officers put in place. Finally, U.S.-facing subsidiaries under U.S. Principal were converted to LLC equivalents so as to be disregarded entities. The series of operations to create U.S. Principal met the requirements of an “upstream C” reorganization under the IRC. Section 368(a)(1) of the IRC provides seven methods for structuring “tax-free” business combinations or divestitures. The forms are known by the letters A - G of the subsectionpertaining to them. Generally, §368(a)(1)tax treatmentis only available if the business combination provides a continuity of interest of the target’s and purchaser’s shareholders in the combined company, meaning in practice that at least a majority of the acquisition consideration mustbe instock;acontinuationpost-acquisitionofthetarget’sbusiness enterprise and a valid business purpose to the transaction (not mere tax avoidance). As mentioned earlier, the TO Project was conceived, developed andimplemented for thepurpose ofimproving control over and results ofthe business ofthe company by realigning the formal legal structurewiththatofhowthebusinesswastobemanagedgoingforward. Asmentionedearlier,thereweremany specificbusinessbenefits,among them the supply chainefficiencies, bothonthe “upstream” procurement 14 side and on the “downstream” sales side, which also fully supported the business case for each transaction comprising the TO Project and the project as a whole. Each subsection’s special requirements must also be followed. The “C” reorganization is functionally an asset purchase; to qualify, the purchaser, using only its voting stock, must acquire “substantially all” of the target’s assets. Purchaser can use an 80% or more directly owned subsidiary to acquire target’s assets inexchange for purchaser voting stock. The “C” reorganization amounts to a de facto mergeroftargetintopurchaser orpurchaser’s subsidiary.Under §368(a) (1)(A), “tax-free” reorganizationtreatmentisalsoavailable forastatutory merger or consolidation under any state’s merger statute. Once again, careful planning to ensure compliance with both tax codes and policy was instrumental in effecting the reorganization. Creation of Swiss Principal Because Swiss Principal was to be a wholly owned subsidiary of Swiss Holdco, an existing Swiss Holdco subsidiary was selected for the role. The subsidiary’s assets were contributed to sister companies and it was renamed and converted to a “Gesellschaft mit beschränkter Haftung,” commonly abbreviated as “GmbH,” the Swiss/German equivalent of an LLC, so as to be adisregarded entity for U.S.tax purposes. Withthis step, both U.S. Principal andSwiss Principal were fully formed and organized. A new Swiss company was formed subsidiary to Swiss Principal to function 15 as a CD for the Swiss market. Contribution and Conversion of non-U.S. Subsidiaries The heart ofthe project was the conveyance ofthe non-U.S. subsidiaries to Swiss Principal, in most cases in a two-step process, first to Swiss Holdco, then to Swiss Principal and then the conversion of the CDs into disregarded entities for U.S. tax purposes. These transactions were intended to qualify as IRC §368(a)(1)(C) triangular reorganizations. In almost all cases, the non-U.S. subsidiaries were held by U.S. Foreign Holdco, in a few others by U.S. Principal and in two cases by Parent itself. A few non-U.S. subsidiaries were already held by Swiss Holdco; only a late stage, one-step procedure would be necessary to contribute those subsidiaries down toSwiss Principal. The first step in the two-step process was therefore a share contribution by one ofthe U.S. companies (“Contributor”) to Swiss Holdco, a Swiss company (“Recipient”) of its shares in the non-U.S. subsidiary (“Target”) in exchange for shares of Recipient that would be authorized and issued to Contributor. A feature of Swiss corporate law prevented the authorization of shares before their issuance and required that only shares with a fair market value equal to their pro rata proportion to Swiss Holdco’s assets could be authorized and issued. Therefore, each contributed Target had to be valued within a short period in advance of the transaction to determine how many shares of Swiss Holdco (“Consideration Shares”) should be 16 issued to Contributor in exchange for its contribution to Swiss Holdco of Target’s shares. Every time Recipient was to issue shares to Contributor, it had to conduct a “capital increase” reflecting the increase in its value occasioned by the contribution of Target’s shares. Because of the quasi in rem nature of company shares, in many cases the share contributions had to be conducted under the corporate law of Target’s jurisdiction. Swiss lawis agnostic onthe choice of law, so inthe cases inwhichTarget’s jurisdictiondidnothave tobe the governing law,theU.S.lawjurisdiction of Contributor was chosen. The peculiarities of the various CDs, acquired over the years and formally held in a corporate structure more for convenience than by design, can require a significant amount of creativity if one hopes to effect transfers that reduce cost yet still comply with tax law and policy. In our reorganization, we made use of triangular “C” reorganizations under IRC §368(a)(1); “D” reorganizations, a rarely used format in which a corporation acquires “all or a part” of another corporation’s assets and, immediately following the transfer of assets, the transferor or one or more of its shareholders controls the transferee corporation; “B” reorganizations, in which a corporation acquires, solely for it or its parent’s voting stock, 80% or more of the target’s voting stock and the target becomes the purchaser’s subsidiary; and “E” reorganizations, which permits recapitalizations in the form of stock-for-stock or debt-fordebt exchanges without recognition of taxable gain or loss, to facilitate 17 use ofSwiss Principal stock as Consideration Shares for some ofthe CDs with comparatively lower valuations. In addition to the U.S. tax considerations, legal and tax advisors in each of the subject jurisdictions were consulted to ensure that the transactions comported with local tax law and policy in a manner that enabled the company to minimize unintended consequences. Since economies of scale on fees and other costs came into play on every Swiss capital increase and share issuance, there was a significant interest in coordinating and grouping the various Target share contributions into a few “waves,” so that each Swiss capital raise would be for several simultaneous contributions ofTargets.Wedevelopedashort-form share contribution agreement template, lacking many of the representations, warranties and covenants that would ordinarily be in a similar document. Nevertheless, the disparities between the different country corporate statutes, regulatory burdens and speed of processing documents at their respective commercial registries and analogous bodies made coordination of the efforts of local counsel and comptrollers difficult but critical. Finally, amajor consideration was coordinating Target countries’ stamp duty relief application procedures, in certain jurisdictions available for inter-company group transfers. Depending on the size and number of transactions involved, stamp duty savings can be considerable, so once again, planning is essential. In some jurisdictions, the stamp duty relief application had to be made before the share contributiontransaction 18 (Singapore); in some countries after the transaction (U.K., Ireland), with official approval never on a precise schedule, further complicating the coordination of share contribution transactions for purposes of simultaneous Swiss capital raises and issuances of Consideration Shares. In China, an application for “Special Tax Treatment,” or “STT,” drove the timing of the transaction because of the different government offices through which the paperwork had to flow. The second step of the Target contributions was simpler, being SwissFigure 3 Simplified Diagram of Luxembourg-Canada Transactions Parent Luxembourg and Canada structure prior to transactions Parent Netherlands Co. Swiss Principal Swiss Principal Netherlands Co. Lux Holdco Luxembourg Co. Lux Holdco Canada Co. Canada Co. (converts to ULC and becomes a CD) Luxembourg and Canada structure subsequent to transactions Swiss Holdco Swiss Holdco Luxembourg Co. 19 Swiss transactions (Swiss Holdco as Contributor, Swiss Principal as Recipient). Swiss law itself does not require the issuance of Consideration Shares, so that in this stage of the TO Project, the issuance of Recipient Consideration Shares to Contributor, in this case those of Swiss Principal to Swiss Holdco, was mainly driven by the requirements of Target’s jurisdiction, which in some cases required the issuance and in others, not. One case in this part of the TO Project was illustrative. In the case of the Canadian CD, atthis pointheld bySwiss Holdco, it was decided to convertthe company, hitherto a corporation organizedunder the federal Canada Business Corporations Act, to a Nova Scotia unlimited liability company (“ULC”), because Nova Scotia ULCs, while holding out the possibility ofunlimited liability inliquidation, as thename suggests, are eligible for check-the-box election as disregarded entities for U.S.tax purposes. However, there was concern at placing an unlimited liability entity directly below Swiss Principal and exposing Swiss Principal to contingent and future liabilities arising from the Canadian company. We developed a plan to use a Luxembourg company formed at an earlier point and earlier conception of the TO Project to hold the Canadian CD. In a staged mini-group set of transactions, the Luxembourg company (“Lux Holdco”) was contributed from the parent Luxembourg company to Swiss Holdco. Then, Swiss Holdco contributed the Canadian subsidiary to Lux Holdco in exchange for Lux Holdco ConsiderationShares. Finally, 20 Lux Holdco was contributed by Swiss Holdco to Swiss Principal and the Canadian company converted from a Canada corporation to a Nova ScotiaULC, resulting inachainof ownershipfrom Parent-Swiss HoldcoSwiss Principal-Lux Holdco-Canada ULC. The only other use of the ULC form, for similar reasons, was for the group’s New Zealand subsidiary, which was held by the Australian subsidiary, which had been contributed by U.S. Foreign Holdco to Swiss Holdco. Finally,theCDsnotalreadyinLLCequivalentformswereconvertedtoLLC equivalents intheir local jurisdictions forU.S. “check-the-box” treatment as disregarded entities. Although the attributes of the LLC equivalents vary from jurisdiction to jurisdiction, and the conversion process itself varied from the simple to the byzantine, ineach case it wasultimately possible to converttheCDtoalocallawformthatwouldbeadisregardedentity for U.S. tax purposes and would more readily suit the business purposes for which the entire project was undertaken. Again, it was necessary to consult local advisors to make sure that the selected approach was consistent with localtax law and policy, and thatthe correct procedure was followed to ensure that the process was a true conversion, with no cessation of the CD’s existence. Inseveral cases, itwas necessary for the CD to capitalize a loan with another member of the corporate group prior to converting. In several transactions, the requirements of local law required that the CD, as converted to an LLC equivalent, maintain a second equity holder, making the goal of having each non-U.S. CD wholly-owned by Swiss Principal 21 impossible.Inthose cases,aminority equitypositionwas giventoanother CD(interestingly,innocasedidthetwo-equityholderrequirementprevent Swiss Principal from being the indirect owner ofthe minority stake. In other cases, local law required a certain level of capitalization for the CD andSwiss Holdco capitalizedthe company to the extentnecessary. Weencountered aparticular level ofdifficulty withone ofthe group’s South American subsidiaries. That South American jurisdiction requires registration by its commercial registrar of all non-domestic shareholders ofdomesticcompaniesandrequirestwoshareholders.Ourplanrequired the registration of both Swiss Principal and the group’s Swedish subsidiary. This took a great deal of time at the government registry level, and because the two shareholders could not vote on anything pertaining to the South American company until they were registered, it also delayed the conversionofthe company to the local LLC equivalent. 22 Figure 4 Simplified Diagram of Corporate Structure at End of TO Project Parent Business outside of TO Project U.S. Procurement Co. CD CD CD CD Swiss CD Asian CD Research Co. Manufacturing Co. European CD European CD Singapore CD Australia - New Zealand CD At the end of TO Project, corporate structure is rationalized, with U.S.-facing CDs subsidiary to U.S Principal and non-U.S. facing CDs subsidiary to Swiss Principal. Mopping Up Procedures With the corporate restructuring largely complete, it remained to put in place several intercompany commercial agreements that would allow sharing, consignment and distribution of inventory, as well as the use of warehouse space and other assets among U.S. Principal, Swiss Principal and CDs in both the U.S. and non-U.S. markets. A feature of these commercial arrangements was to house all non-U.S. procured products in Swiss Principal, allowing conveyances by “flash title.” The Swiss Principal U.S. Principal Swiss Holdco 23 main concern with these commercial arrangements was that they not do violence to the Swiss Principal model and not cause the CDs to be viewed as “permanent establishments” of the group for taxation purposes. These agreements therefore provided that Swiss Principal took title to procured goods and to company products to be sold into the non-U.S.-facing market, and that the CDs did not at any time have title, serving fundamentally a marketing and distribution function. Similar agreements were executed for U.S. Principal for the U.S.-facing market. Other features of the agreements existed because of the need to treat the intercompany agreements as arms’ length transactions. Conclusion The buy/sell companies in multiple countries became CDs of the Swiss Principal.The CDs could sellthe group’sproducts intheir ownname, but on behalf of Swiss Principal and at Swiss Principal’s risk. Title to the goods sold would pass directly from Swiss Principal to the third party customer without vesting in the CD in between. The Swiss Principal would centralize accounts receivable risk, currency risk, supply chain risk and inventory risk and is able to coordinate the procurement and pricing of its suppliers. In doing so, it could spread, amortize and reduce those risks among all the regions covered by the CDs. Swiss Principal could also harmonize pricing across the group’s distribution zones, reducing transfer pricing issues and enabling the realization of supply chain and tax efficiencies. However, the CDs would remain the contractual counterparties to the group’s customers, able to operate 24 locally, leverage customer contacts and local conditions and in general focus on their core competency, marketing and distribution. Also, the CDs would remain subject to most local regulatory constraints. U.S. Principal would function in the same way for the U.S.-facing market. By harmonizing its operational structure with its formal legal organization, the company group expected to achieve savings of millions of dollars per year, translatable to Parent’s share price and easily justifying its investment in the TO Project. Any U.S. corporation with multinational operations and an unoptimized corporate structure that would benefit from reorganization of its operations along regional lines and responsibilities should consider whether a principal or other efficiency and profitability promoting restructuringmightachieve similarbenefits for it. Owen D. Kurtin Kurtin PLLC is a New York City-based law firm focused on corporate, commercial and regulatory representation in the Biotechnology & Life Sciences, Communications & Media, Information Technologies & Internet, Satellites & Space and Venture Capital & Private Equity Funds sectors. For further information, please visit our website at https://kurtinlaw.com and contact [email protected]. The materials contained in this advisory have been prepared for general informational purposes only and should not be construed or relied upon as legal advice or a legal opinion on any specific facts and circumstances. 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