19. december 2020

Up-C Exchange Agreement

Before the IPO, investors usually enter into two agreements before the IPO: in the Up-C structure, the company forms a C company and takes capital on the public market through an IPO. The C-Gesellschaft, on the other hand, inserts the capital generated by the IPO into the capital of the existing partnership (corporate partnership) in exchange for participations in the operational partnership. Company C (public company) serves as a listed vehicle and invests in the operational partnership. The company is a holding company, as it participates in the operational partnership, in addition to the former partners, before the IPO. As part of the structure, the limited company usually becomes the executive member of the operational partnership. 6The date of these trading transactions may be subject to the necessary “lock-up” periods during which no exchange may take place until a certain time after the IPO. Prior to the IPO, the company`s business was managed through the Flow through unit, which is a pass-through structure and does not pay taxes at the corporate level. Through the implementation of the Up-C structure, Passes Through remains intact and PubCo pays the original partners the value of PubCo`s tax attributes, as these tax attributes are used after the IPO. Whenever an original partner exchanges flow units across entity entities for PubCo shares, PubCo receives a “step” in the tax base of its assets. This taxable base is allocated to PubCo`s share of the historical entity`s assets (based on its fair value) and the potential surplus is allocated to intangible assets (i.e. goodwill) that can be depreciated on a 15-year linear basis (“section 197 intangible assets”).

To implement up-C, PubCo, the original partners and the flow entity must enter into different agreements, such as. A tax collection agreement (TRA), an exchange agreement and a registration fee agreement. The former partners, who continue to have an interest in a partnership, will benefit from the fluidity of revenue processing and avoid the double taxation charges that typically apply to companies and their shareholders. In addition, by maintaining debit processing and increasing their external tax base in their operational partnership units, former partners will avoid double taxation each year in the final implementation of their operating partnership units, in order to avoid their share of the operating company`s taxable income. The former partners will also benefit, through an exchange rate mechanism, from the liquidity of a public market that will allow them to exchange their partnership shares for public shares, as described below. Under the LLC Enterprise Agreement or a separate exchange agreement, fund investors and other investors have the opportunity to induce AB Up-C Inc. to acquire their AB LLC shares, either for cash or for shares of AB Up-C Inc. through the exchange mechanism. Therefore, when fund investors and other investors exchange their AB LLC shares in 20X2, they will each record a taxable profit of $5,000. If fund investors sell their residual shares in 20X3, they will record an additional taxable profit of $5,000.