There a lot of matters to consider when a European company decides it wants to open operations in the U.S., and one common structure for doing so is anecdotally known as a “flip”—inserting a U.S. corporation above a European entity, often in order to attract U.S. investors. Many U.S. investors would rather invest in U.S. entities (typically Delaware C-corporations), so when a European company attracts the interest of a U.S. investor, it is often asked to do a “flip” in connection with the investment.
A “flip” is an exercise in corporate structuring when a European company creates a U.S. “topco” by having all European stockholders contribute the shares they hold in the European company to a newly-created Delaware C-corporation in exchange for shares of the topco, thereby becoming shareholders in the topco, and the European entity becomes a wholly-owned subsidiary of the topco. Therefore, a new U.S. corporation is added above the European company, moving everyone into that entity. Then, the U.S. investors invest into the newly-created Delaware topco alongside the legacy European stockholders that just “flipped up.”
Some topics to think about when considering a “flip”:
- Care should be taken so that the share exchange is done in the same proportion as the way in which shares are held in the European company; do not treat shareholders differently.
- The earlier in the company’s life, the easier the “flip” will be. In other words, the more shareholders in the European company, and the more time passed or value created, the more complicated the “flip.”
- It is essential to understand the tax laws of the European country where the company is incorporated. A “flip” could be seen by local tax authorities as a sale of the company and, as such, there may be taxes associated with the share exchange. Lawyers and advisors familiar with local tax laws is key.
- Every shareholder will be required to sign the share exchange agreement, so keeping shareholders well-informed will help ensure a smooth transaction (see also bullet #2 above; the earlier the better).
- Stock options and other incentive compensation schemes will also need special attention to be sure their tax and vesting provisions, among other things, remain intact, optimal and enforceable, if possible.
- If founders (or others) are receiving stock that is subject to forfeiture (restricted stock), discuss the applicability of filing an 83(b) election, even if the recipient is not subject to US taxation (yet).
- There is often a waiting period in European countries for the shares to be registered in the name of the U.S. topco, so be sure to build extra time into the schedule accounting for said waiting period.
In brief sum, a “flip” is a popular transaction utilized by European companies that are seeking U.S. investors, or that have already attracted U.S. investors, and are being asked to do a “flip” in connection with the investment. While it seems simple, it is actually a complicated transaction that must involve the advice and guidance of corporate and tax lawyers in both countries. Care must be taken to avoid potentially irreversible consequences down the road.