Challenge:
A potential new client was interested in monetizing a stake in his company to diversify the family wealth – but was worried that a process in his unique industry could damage the business, where prospective buyers would simply garner confidential information but ultimately not consummate a transaction. The owner was considering a dividend recapitalization – but wanted to explore bases for minimizing taxes on the capital extraction. Further, he sought to reduce the potential rights of the new lender, seeking to have a structure that was closer to a non-recourse financing. The challenge, then, was to explore a tax efficient capital raise for redeployment, while reducing lender influence on the family’s diversification effort.
Actions:
Wall & Main developed a structure that addressed the various needs of the client. The framework involved capitalizing a new subsidiary to create a special purpose diversification vehicle. The equity subscription would not be taxable and any gains on the capital deployment would be realized upon the disposition of the new company. As the loan was made to the parent company, the plan was to avoid providing the lender with a security interest in the shares of the new subsidiary and to otherwise limit its potential control over the business. In this vein, the existing shareholders were to be granted a special “golden share” in the new company to provide maximum control – and then no dividends were contemplated until the holding company had retired the debt, ensuring all the value creation was a step removed from the parent.
Results:
The result of the creative structuring was the client had the option to explore a tax-efficient basis for shifting capital out of an existing business – and the company would generally avoid the purview of the lender, subject only to the bankruptcy of the holding company. The client appreciated the novel construct as he evaluated a range of options, from a sale to a conventional dividend recapitalization. As Wall & Main is exploring recaps with other prospective clients, the structure can be used for other unique circumstances. In sum, it represented a creative approach that met multiple client objectives in a bespoke transaction.