1. Baker & McKenzie LLP is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm. © 2015 Baker & McKenzie LLP A Tax Professional’s Guide to Acquisition Agreements TEI – Carolinas Chapter Jonathan Stevens Charlotte, NC November 12, 2015

2. Agenda –Crafting Acquisition Agreements –Tax Representations and Due Diligence –FIRPTA –Tax Compliance and Tax Costs –Tax Treatment Indemnity Payments –Escrow Considerations –Transaction Expenses ©2015 Baker & McKenzie 2

3. ©2012 Baker & McKenzie 3 Crafting Acquisition Agreements

4. General items to consider - Seller –What type of process is the sale process? –Auction –Strategic disposition –Anti-trust –Is tax-free transaction available? –Stock sale v. asset sale? –Who is the Buyer? –Competitor –Private equity –Are we the target? ©2015 Baker & McKenzie 4

5. General items to consider - Buyer –What type of transaction is it? –Auction –Strategic disposition –Anti-trust –Stock sale v. asset sale –Who is the Seller? –Competitor –Private equity –Is the target a widely held company? –Impact of stock option expense deductions ©2015 Baker & McKenzie 5

6. Stock vs. Asset Transactions Taxable Asset Acquisition Buyer gets FMV tax basis in assets Target’s NOLs not available to Buyer No carryover of tax methods No transfer of historic liabilities to Buyer Increases structuring flexibility Usually a double level of tax for corporate Seller and its shareholders Generally Buyer’s preference Taxable Stock Acquisition Buyer gets carryover tax basis in assets Tax attributes (including NOLs) generally carryover, subject to limitations Usually single level of tax for Seller unless Target is a sub of consolidated group Historic liabilities of Target transfer to Buyer Generally an individual Seller’s preference (if transaction is not tax free) Section 338 Election: Step-up in basis of assets but NOLs not available (distributed to Seller under Section 381) ©2015 Baker & McKenzie 6

7. ©2012 Baker & McKenzie 7 Tax Representations and Due Diligence

8. Role of tax representations –Role of tax representations can vary depending on type of transaction –Generally 3 primary purposes –Due diligence –Indemnity –Walk away rights ©2015 Baker & McKenzie 8

9. Tax representations – Issues to consider –Survival periods –Disclosures for exceptions to representations –Stock sales v. assets sales –Public v. private transactions –Representations in other sections that could impact tax ©2015 Baker & McKenzie 9

10. Tax Due Diligence –Seller Due Diligence –Identify what will be sold –Quantify cost of sale –Confirm possible indemnification risks –Determine historic exposures remaining with Seller –Identify transfer tax costs of transaction ©2015 Baker & McKenzie 10

11. Tax Due Diligence –Buyer Due Diligence –Identify possible tax exposures that Buyer could be responsible for after closing. –Timing of due diligence –Pre-Signing v. Pre-Closing –Quantify the impact of possible limitations of post- closing use of attributes/incentives –Consider post-acquisition integration plan –Identify transfer tax costs of transaction –Confirm whether withholding applies to purchase ©2015 Baker & McKenzie 11

12. ©2012 Baker & McKenzie 12 FIRPTA

13. –Applies to all sales of real property located in the United States –Applies to the sale of a domestic corporation if the target owns a significant amount of U.S. real property, in terms of asset fair market values –Purchaser must withhold 10% of the consideration unless an exception applies, e.g., receipt of withholding certificates – Certificate of non-foreign status or non-USRPI Certificate ©2015 Baker & McKenzie 13

14. ©2012 Baker & McKenzie 14 Tax Compliance and Tax Costs

15. Tax Compliance –Tax return preparation –Direct taxes –Indirect taxes –Straddle period taxes –Tax audits –Amended tax returns ©2015 Baker & McKenzie 15

16. Tax Costs –Purchase price allocation –Covenants not to compete –Tax indemnification –Withholding taxes –Transfer taxes –Caps and deductibles –Purchaser tax acts –Current and deferred tax liabilities ©2015 Baker & McKenzie 16

17. ©2012 Baker & McKenzie 17 Tax Treatment of Indemnity Payments

18. –Applies to all indemnity payments, not just tax –Computational approaches –Purchase price adjustment –Gross-up for taxes –Tax-effected ©2015 Baker & McKenzie 18

19. ©2012 Baker & McKenzie 19 Escrow Considerations

20. Who Owns the Escrowed Property? –What is the contingency? –Separate tax escrow? –Which party is entitled to income earned on the escrowed proceeds? –Which entity is allocated the annual tax liability? –Installment sale implications ©2015 Baker & McKenzie 20

21. ©2012 Baker & McKenzie 21 Transaction Expenses

22. Buyer Expenses –Generally, costs incurred in a taxable acquisition are capitalized into the acquired stock or assets –capitalized costs include those paid on or after the earlier of: (1) delivery of LOI, offer letter or other similar proposal; or (2) board approval of the acquisition –expenses incurred before that time still must be capitalized if they are “inherently facilitative,” e.g., valuation of target, negotiations, or structuring –If the acquisition fails, the costs are recoverable ©2015 Baker & McKenzie 22

23. Seller Expenses –Does the expense create a benefit beyond one year or create a separate asset? –Costs to fend of hostile acquisitions should be deductible –Break-up fees should be deductible –Cash settlement of employee stock rights should be deductible as compensation –Constructive dividend to shareholders when paid as part of a stock acquisition? –70% deductibility safe harbor for success-based fees ©2015 Baker & McKenzie 23

24. Thank You Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference within the organization to a “partner” means a person who is a partner, or equivalent, in a member firm or its affiliate. Similarly, reference to an “office” means an office of any such law firm. ©2015 Baker & McKenzie 24