PRINT THIS PAGE Should you do the Delaware flip?19/07/2004. Source: SJ Berwin.
A significant number of European venture-backed businesses are currently considering using a Delaware corporation as a holding company for their operating group. But while for some there are good reasons to do so, for businesses without any existing direct connection with the US the logic is far from clear, according to SJ Berwin. Some European venture backed businesses have recently been thinking about
using a US (usually a Delaware) corporation as a holding company for their operating
group. For some, there are good commercial reasons to do so. Companies that
have an active business in the US, and an imminent intention to raise money
there, might well find that a US company is the most convenient structure. But
for businesses without any existing direct connection with the United States,
the logic is far from clear. For them, there is a significant risk that the
flip flops!
Of course, the US hosts the most attractive IPO market in the world for technology
companies, and there is some evidence to indicate that floating an "American-looking"
business on NASDAQ delivers greater liquidity and better valuations than a non-US
entity. For European companies going to the US public markets there may come
a point when it does make sense to put a Delaware holding company at the head
of the group (although it is perfectly possible to float a European company
on NASDAQ too).
But the question, even for those companies, remains: when to do the "flip"?
There may be some advantages to doing it early - tax charges may be lower when
the group has less value, for instance. But that cost issue has to be carefully
weighed against the downsides of using a Delaware corporation in a group which
has no other connection with the United States. The US is the most litigious
country in the world and establishing a connection with it (indeed, effectively
putting all your assets - shares in the underlying companies - there) earlier
than necessary for speculative future benefits is not a decision to be taken
lightly. There can also be securities law issues if the company ultimately chooses
to float on a non-US market, and those can add time and cost to the flotation
process. What's more, if the exit is a trade sale to a non-US buyer, who might
be against buying a US company, you may have to unravel the structure.
Delaware is a business friendly jurisdiction, and NASDAQ listings can argue
in favour of US structures. But the judgements are finely balanced, and the
issues should be carefully thought through. The downside risks are considerable,
and the upside benefits often speculative, at best.
SJ Berwin is a pan-European law firm with a particular
focus on private equity. It has offices in London, Frankfurt, Munich, Berlin,
Madrid, Paris and Brussels. If you would like further information on our services
to the private equity industry please contact Jonathan Blake or Simon Witney
in our London office 020 7533 2222 or visit our website at www.sjberwin.com
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