Tuesday, October 17, 2017
Gladriel Shobe (BYU), Supercharged IPOs and the Up-C, 88 U. Colo. L. Rev. 913 (2017):
The “supercharged IPO”, a new and increasingly popular financial transaction, has fundamentally changed the nature of IPOs for many companies. Traditionally, an IPO was a tax nonevent for the company and the owners, meaning it created no tax liability for either. Through creative and questionable tax planning, companies have found a way to do better than this by effectively generating a negative tax liability for the company and its owners. These transactions have received substantial attention from practicing lawyers, investment bankers, journalists, and even briefly caught the attention of Congress. Yet these transactions have attracted surprisingly little scrutiny from scholars, and the attention they have received has failed to consider the different types of supercharged IPOs, which is necessary for understanding why these transactions exist, why they have increased in popularity, and whether they are justified legally and normatively. This Article examines the costs and benefits of the different types of supercharged IPOs to show that some of these transactions have greater tax benefits than scholars have realized. It places a particular emphasis on the Up-C, a structure with the greatest tax benefits, which scholars have overlooked even though it is by far the most common, and increasingly popular, form of supercharged IPO. A closer examination of the Up-C, separate from other supercharged IPOs, reveals that this structure produces tax benefits that are not justified by the regulations that supposedly allow them.
An important part of a supercharged IPO is a separate agreement that requires the public company to pay pre-IPO owners for the tax assets created in the IPO. These payments for tax assets have been described as “bizarre” and “underhanded”. This Article examines payments for tax assets within the larger landscape of financial transactions, showing that the way these payments are made in supercharged IPOs deviates from similar private transactions in ways that harm public shareholders. This Article proposes ways that payments for tax assets should be modified so that they are fairer to the public and more in line with similar financial transactions.