Social media presents new challenges for life sciences companies. Companies that post about their products on space-constrained social media platforms such as Twitter or Facebook don’t have the luxury of a full page or a long voiceover listing risks or side effects. And it’s unclear how to respond to misleading information about products posted online by third parties. In June, the Food and Drug Administration produced two much-anticipated draft documents that provide some guidance in each case. Continue Reading
For technology and other startups, going public can be doubly taxing—literally.
“Traditionally, a pre-IPO company is structured as a C corporation, which is legally subject to two tax layers, the first assessed on income earned by the entity, and then on shareholders when selling stock or receiving dividends,” says Morrison & Foerster tax partner Remmelt Reigersman. “Setting up initially as a limited liability company or other entity treated as a partnership for tax purposes keeps it to one layer—as a pass-through, the entity is not taxed—except that when it comes time to go public, the partnership is generally treated as a corporation and taxed accordingly.”
While this may appear unavoidable, an innovative technique known as “Up-C” leverages the LLC advantage to help pre-IPO companies achieve significant tax savings and favorable deal economics while preserving control for the founding partners.
“Named after UPREIT, an umbrella structure originated by real estate investment trusts, Up-C establishes a new corporation above the historic partnership, which retains all the business assets— and the LLC tax advantage—as its subsidiary,” says Anna Pinedo, a Morrison & Foerster securities partner. “The new entity is used for the IPO, downstreaming the proceeds to the LLC.”
As Pinedo explains, Up-C provides upside for everyone. “To maintain control of the business, historic partners must control the PubCo, which is achieved by dual-stock issuance,” she says. “Sold to public investors, Class A shares generate the cash and look after the economic side of the deal, while Class B shares give voting rights to the founding partners.”
The deal includes an “Income Tax Receivable Agreement” between the partners and PubCo. “PubCo purchases partnership units from the founders using proceeds from the IPO,” Pinedo explains. “Differing from a traditional stock purchase, this method creates a step-up in the tax basis, which permits the partners and PubCo to take significant depreciation and amortization deductions over time. PubCo then pays the founders the majority, typically 85 percent, of the federal and state tax benefits it has gained.”
“Sold to public investors, Class A shares generate the cash and look after the economic side of the deal, while Class B shares give voting rights to founding partners.”
Complicated, yes, but this translates into some very attractive economics. “Say the tax basis step-up is valued at $300 million, with an annual amortization of $20 million over 15 years,” says Reigersman. “Assuming a combined federal and state tax rate of 40 percent, that saves PubCo $8 million a year while paying the historic partners $6.8 million annually—$ 102 million over time.”
Up-C is not for everyone. “From an administrative and compliance perspective, this structure is far more involved than going public via the traditional route,” Reigersman says. “But for larger companies, it can be very effective.”
When Amazon paid nearly $1 billion for video game streaming site Twitch in late August, it hinted at the tremendous potential for sites that live stream games, concerts, sports, and more. But operators of sites in this nascent segment put themselves at risk of copyright infringement violations. For example, Twitch videos uploaded by game players could contain copyrighted sound recordings performed without the permission of the respective copyright owners. “Real-time streaming services don’t fall squarely within the ‘safe harbor’ provisions contained in the Digital Millennium Copyright Act that protect website operators from copyright suits,” notes Rusty Weiss, chair of the Entertainment, Media, and Technology Group in the Los Angeles office of Morrison & Foerster. Until the law is settled, live-streaming site owners will need to tread carefully. For example, notes Weiss, the Section 512(c) safe harbor provides that a website operator is not liable for monetary relief for copyright infringement claims merely because it stores material “at the direction of a user.” If a live-streaming site owner wants to increase its chance of qualifying for the Section 512(c) safe harbor, it should consider only streaming videos that the user has requested to be stored on the site’s servers for the duration of the streaming.
Agricultural espionage: it’s not exactly the stuff of John le Carré novels. But recently a Chinese woman was charged in a plot to steal U.S. corn technology. Among her alleged techniques: smuggling bioengineered corn seed in boxes of microwave popcorn packed in luggage to Beijing, and conspiring with insiders to steal genetic sequencing for the seeds.
While this case involves seeds developed by agri-giants DuPont Pioneer and Monsanto, plant breeders of all sizes are increasingly at risk in today’s global economy. It’s not just theft—it’s the risk of losing the benefit of the huge research investment that goes into many agricultural products. Continue Reading
“Japanese investors have traditionally taken a low-key, under-the-radar approach with Israel, typically conducting ‘silent investments’ to keep deals from their competitors’ knowledge,” says Tokyo-based Morrison & Foerster partner Randy Steven Laxer, co-chair of the firm’s Global Corporate Department. “The trend now, however, is toward a more open and enthusiastic approach.” Continue Reading