LLC’s, LLP’s, DST’s, LP’s: Why And How Are Alternative...

LLC’s, LLP’s, DST’s, LP’s: Why And How Are Alternative Entities

Used In Cross Border Transactions

Ellisa Opstbaum Habbart Partner

The Delaware Counsel Group, LLP Program Chair

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TABLE OF CONTENTS

Document Page DOING BUSINESS IN DELAWARE: THE CORPORATE STATE 3 A GENERAL OVERVIEW OF DELAWARE LLCS 6 DELAWARE LLCS AND DELAWARE CORPORATIONS: A COMPARISON 9 DELAWARE SERIES LLC 14 THE DELAWARE STATUTORY TRUST: FLEXIBILITY AND BENEFITS

FOR INVESTORS 16 DELAWARE STATUTORY TRUSTS 20 A COMPARISON OF THE LAWS GOVERNING DELAWARE STATUTORY

TRUSTS AND MARYLAND CORPORATIONS OPERATING AS REITS 34

OVERVIEW OF SIGNIFICANT 2007 AMENDMENTS TO THE DELAWARE LLCA, DRULPA, DRUPA AND THE DGCL 40

PRESENTATION OF ROBIN JOHNSON AND IAN MOLYNEUX 44 DIFFERENT STRUCTURES ACROSS EUROPE 68 HOLDING COMPANY IN EUROPE-COMPARATIVE TAX ASPECTS AS AT OCTOBER 1, 2007 92

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Doing Business in Delaware: The Corporate State

Why Delaware? Half of the Fortune 500 companies are incorporated in Delaware. Businesses of all types and sizes

benefit from Delaware law. Ease in formation of entities, quickly closed deals and expedited resolutions

to corporate disputes are just a few of the advantages Delaware offers.

Expedited Resolutions Unmatched in any other jurisdiction, the Delaware Court of Chancery is known worldwide for its well-

reasoned and well-developed body of corporate law. With over 100 years of corporate law

jurisprudence, businesses have taken comfort in this Court’s ability to resolve business disputes quickly

and fairly.

Cutting Edge Corporate and Business Law Legislation The Delaware Bar has a unique relationship with the Delaware Legislature in that each draws from the

other’s expertise and knowledge. Delaware corporate lawyers review and comment on proposed

legislation and address issues in current laws. This collaborative relationship ensures that the Delaware

law governing corporations and alternative business entities remains on the cutting edge in addressing

legal issues.

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Immediate Access The Division of Corporations of the Office of the Secretary of State uses state-of-the-art technology that

provides immediate access to filings, certificates of good standing and general corporate and alternative

entity information.

The Delaware Entity Advantage Corporations

-limited liability for shareholders

-well-developed corporate governance law

Limited Liability Companies

-contractual flexibility

-limited liability for members and managers

Statutory Trusts


-advantages over common law trusts for business purposes

Limited Partnerships


-limited liability for limited partners

TOP TEN REASONS TO DO BUSINESS IN DELAWARE 10. Half of the Fortune 500 companies are incorporated in Delaware 9. Well-developed corporate governance law 8. Contractual flexibility 7. Expedited resolutions

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6. Ease in formation 5. Cutting edge corporate and business law legislation 4. Collaborative relationship between Delaware Bar and Delaware Legislature 3. Immediate access to the Division of Corporations of the Office of the Secretary of State with

state-of-the-art technology 2. Delaware Court of Chancery - over 100 years of corporate law jurisprudence 1. Delaware rated #1 overall in US Chamber of Commerce Study This document is prepared for information purposes only and should not be relied upon as or be considered legal advice. Please contact us if you have specific questions regarding this information. Copyright © 2004, 2008, The Delaware Counsel Group, LLP.

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A General Overview of Delaware LLCs Statutory Framework

In Delaware, limited liability companies (“LLCs”) are created and governed by Chapter 18 of

Title 6 of the Delaware Code Annotated, the Delaware Limited Liability Company Act (the “Act”). 6

Del . C. §§ 18-101 et seq. An unincorporated form of business organization, LLCs allow for pass-

through taxation of a partnership with limited liability of all parties involved.

Formation – Filing Certificate of Formation

A Delaware LLC is formed by filing a Certificate of Formation with the Delaware Secretary of

State, together with the appropriate fee. The required provisions include: (i) name of LLC; (ii) the

name and address of the LLC’s registered agent; (iii) and any other provisions determined by the

members. The Certificate of Formation must be executed by one or more authorized persons.

The Operating Agreement

After the Certificate of Formation, the parties must draft and execute the limited liability

company agreement. The agreement will provide the detailed provisions for the operation of the LLC.

If the agreement does not address a certain issue, then by default, the Act supplies the terms. The

agreement will address:

• Capital Contributions

• Allocation and Distribution Provisions

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• Management

• Transfer and Buyer-Sell Provisions

• Dissolution

Capitalization

The Act provides general guidance as to the form of contribution. The agreement should contain

provisions which address initial capital contributions.

Allocation and Distribution

Consulting with qualified tax experts is crucial when determining the allocation and distribution

provisions.

Management

An LLC may be managed by a designated manager or the equivalent of a corporate Board of

Directors or by the equity owners of the LLC themselves (the “Members”). The former is called a

“Manager Managed LLC” and the latter is called a “Member Managed LLC”.

In a Manager Managed LLC, the manager may have sole and absolute control over the LLC or

may have more limited ability to take action without the consent of the Members. In a Member

Managed LLC, no management team is put into place and no power is delegated to a Manager, Board of

Managers or Board of Directors. Rather, the Members themselves make all decisions with respect to the

LLC. The extent of control granted to a Manager and the manner in which Members make decisions

depends upon the provisions set forth in the LLC Agreement as agreed upon by the parties.

Transfer and Buy-Sell Provisions

The agreement should address transfers and define a “transfer” and what is being transferred. It

is necessary to distinguish between a member’s “investment” in an LLC and the sum total of a

member’s rights in an LLC, including any right to vote or consent to matters.

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Operation/Control

The parties will want to address many of the management issues, including replacement of

managers, meetings of members and actions by members without a meeting. All can be addressed in the

agreement and the Act provides great flexibility to the parties.

Fiduciary Duties of Members and Managers

The Act is silent with respect to the standard of care and degree of loyalty imposed upon

members and managers. The Act provides, however, to the extent there are duties, these duties can be

expanded, restricted or eliminated by the agreement. 6 Del. C. § 18-1101(c).

Once the structure of the LLC is determined, appropriate standards are then established to

determine the duties the parties owe to one another and the basis for any liability owed between the

parties and to the LLC. In contrast to the corporate structure, duties and liabilities that may otherwise

exist in law or in equity may be expanded, restricted or even eliminated in the LLC Agreement. If no

provisions on this issue are addressed in the LLC Agreement, a member or manager’s exposure is

limited to his or her investment; third parties cannot look to them personally to meet any financial

obligation. Third parties may look to the assets of the LLC only. Moreover, consistent with the concept

that the parties to the LLC determine what they expect from one another, the parties may provide for

indemnification that is compatible with such terms. Unlike the Delaware General Corporation Law, the

Act does not impose any standards for indemnification nor does it impose a set of mechanics that must

be followed to obtain it.

Dissolution

The Act provides events that will cause dissolution including (1) the time specified in the LLC

Agreement, if not specified, the LLC has perpetual existence; (2) upon the happening of events set forth

in the LLC Agreement; (3) the vote as specified in the LLC Agreement; or (4) judicial dissolution.

Excerpted from Delaware Limited Liability Company Forms & Practice Manual, Data Trace Legal Publications, Inc., by Ellisa Opstbaum Habbart and Wayne J. Carey.

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Delaware LLCs and Delaware Corporations: A Comparison

Delaware LLC (DE LLC) Delaware Corporation (DE Corp.)

Governing Documents Certificate of Formation •Filed with the Delaware Secretary of State.

Delaware Certificate of Incorporation •Filed with the Delaware Secretary of State.

•One page document available to the public that includes only name of LLC and name and address of its Delaware registered agent.

• Only document filed with the Delaware Secretary of State and available to the public other than annual franchise tax filing. Must include provisions relating to capitalization (classes and rights of shares), super majority voting rights, and certain governance provisions.

LLC Operating Agreement •A contract governing the parties’ relationship. The freedom to establish the rights and obligations of the parties by contract is subject to very limited exceptions. •LLC Operating Agreement is a private document, not filed with the Delaware Secretary of State. •Procedure or requirements for amendments to the LLC Operating Agreement can be set forth in the Operating Agreement, need no public filing.

•Shareholder approval is required to amend Certificate of Incorporation. The Certificate of Amendment is filed with the Delaware Secretary of State. By-Laws •By-laws set forth corporate governance guidelines; may be amended by board of directors if so provided.

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Delegation of Management

•Business and affairs can be managed by members, managers or delegated to another person or entity. •No limitation on power to delegate management.

•The board of directors, in accordance with the statute, by-laws and powers set forth in the Certificate of Incorporation, manages the affairs of a DE Corp. •The board of directors has the authority to delegate duties with respect to ordinary course of business decisions to officers.

Duties of Fiduciary •The parties to the LLC Operating Agreement establish and thereby may limit or eliminate by contract the fiduciary duties of the manager(s) and any manager delegatees.

•Fiduciary duties of the board of directors are governed by common law - - duty of care and loyalty; good faith.

Manager/Director Liability

•LLC Operating Agreement establishes liability of all parties to third parties and to each other; can restrict liability, subject only to public policy exceptions; i.e. implied covenant of good faith and fair dealing. •The parties establish the limitation/extent of management liability to members and other parties providing management and investors with more certainty, if drafted precisely. •No punitive damages in Delaware Court of Chancery, a court of equity.

•Can limit director liability to shareholders and corporation for monetary damages in Certificate of Incorporation – cannot limit liability where director received an improper benefit, conduct was not in good faith or breach of duty of loyalty. •DE Corp. can renounce certain corporate opportunities available to the corporation in its certificate of incorporation. •No punitive damages in Delaware Court of Chancery, a court of equity.

Series and Classes of Ownership Interest

•LLC Operating Agreement establishes classes, groups or series of shares or “membership interests.” •Management may amend rights, powers and authority of existing shares or interests to the extent provided in the agreement.

•May establish different classes or series of shares in Certificate of Incorporation and give directors the power to designate the rights, powers and preferences of preferred stock (“blank check preferred”).

•LLC Operating Agreement can limit liability between series of shares or interests. •No filing required with Delaware Secretary of State to establish a new

•Shareholder approval required to amend rights, powers and authority of existing shares.

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class, group or series or to amend rights, power and authority of existing shares, however, the Certificate of Formation must provide for series.

Sale of Interests / Shares

•LLC Operating Agreement addresses transfer and sale of interests. •May distinguish between transfer of economic interests and all rights of a member / investor.

•May restrict share sale or transfer by a shareholder agreement.

Shareholder / Member Voting Rights, Meetings, Quorum, Record Dates and Proxies 1

•LLC Operating Agreement establishes manager and member voting rights with respect to LLC Operating Agreement amendments, mergers and sales of assets. •No requirement to have an annual meeting. •LLC statute imposes no rules with respect to notice of meetings, quorum requirements, record dates, or proxies

•Statute establishes certain required voting rights for shareholders - - may require higher vote on matters in the Certificate of Incorporation. •Statute requires annual shareholder meetings including notice and record date. •Generally, statute requires a majority of shareholders to establish quorum for voting.

Removal of Managers/ Directors

•LLC Operating Agreement can prescribe any requirements and the process for removal of managers.

•Statute provides that directors can be removed with or without cause by a majority shareholder vote unless otherwise provided in the Certificate of Incorporation.

Shareholder or Investor Liability

•Limited to investment unless otherwise provided. •Capital contributions, as well as allocations and distributions, are set forth in the LLC Operating Agreement.

•Limited to investment.

Indemnification •LLC Operating Agreement may provide indemnification for any manager, director, officer, employee or other person from and against any and all claims, and provide for advancement of fees and expenses.

•Statute allows indemnification for directors, officers, employees and agents and for expenses in defending against a proceeding, for settlements, judgments, penalties and fines. Statute also allows for advancement of fees and expenses.

1 New York Stock Exchange or NASDAQ rules may impose requirements for shareholder voting and other matters beyond the requirements of Delaware law.

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•By-Laws or certificate may make indemnification mandatory and also provide for advancement of fees and expenses.

Shareholder / Member Right of Inspection of Business Records

•LLC Operating Agreement may limit or expand the members’ statutory right to inspect business records.

•Shareholder has a statutory right to inspect the books and records of a DE Corp., including the shareholder list, under certain circumstances.

Taxation •LLCs allow for pass-through taxation of a partnership.

•Corporate taxation

Development of Business Laws

•Common law well developed by Delaware Court of Chancery. •Delaware business law is the most developed in the United States and extends to LLCs as well as corporations.

•Common law well developed by Delaware Court of Chancery. •Delaware business law is the most developed in the United States and extends to LLCs as well as corporations.

Courts • Delaware Courts, including well-known Court of Chancery, ranked #1 by U.S. Chamber of Commerce study.

• Delaware Courts, including well-known Court of Chancery, ranked #1 by U.S. Chamber of Commerce study.

• LLC Operating Agreement may prescribe rules regarding derivative cases, including demand requirements.

Legislature/ Government

• Delaware lawyers work with legislature to continually update business laws as needed to reflect changing business environment. • Delaware Legislature very responsive to business needs and accustomed to changes and innovation in business laws.

• Delaware lawyers work with legislature to continually update business laws as needed to reflect changing business environment. • Delaware Legislature very responsive to business needs and accustomed to changes and innovation in business laws.

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• Easy access to and extensive experience of Delaware Secretary of State Division of Corporations.


A form of this chart was published in the Newsletter of the Committee on Partnerships and Unincorporated Business Organizations comparing Delaware Statutory Trusts to Maryland Corporations, July 2002, Volume XIX, No. 3 at 16. The chart was expanded as part of the April 2003 ABA Section of Business Law program on REITS and compared Delaware v. Maryland v. Virginia. This chart is prepared for information purposes only and should not be relied upon as or be considered legal advice. Copyright © 2005, 2008, The Delaware Counsel Group, LLP.

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Delaware Series LLC Certificate of Formation

• Series must be provided for in the certificate of formation filed with the Delaware Secretary of State.

• Language can be as simple as stating that a series has been provided for or will be provided for

in the LLC operating agreement.

• No requirement to identify any specific series.

• Notice of limitation of liabilities of a series. Limitation of Liability

• LLC maintains separate and distinct records for each series. • Assets of series are accounted for separately from other LLC or series assets. • LLC operating agreement so provides. • Notice of limitation of liability of the series is set forth in certificate of formation.

What is a Series?

- Each series can have:

• Different members;

• Different managers;

• Different LLC interests;

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• Different Assets; or

• Different business purpose or investment objective. What Issues Arise?

• How do you qualify a series with an LLC in a jurisdiction that does not recognize a series LLC? • What if the jurisdiction requires a listing of managers for Annual Reporting requirements? • California requirement that each series register do business as a foreign entity. • Do you list all the managers in the series as well?

This document is prepared for information purposes only and should not be relied upon or be considered legal advice. Please contact us if you have specific questions regarding this information. Copyright © 2004, 2008, The Delaware Counsel Group, LLP.

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THE DELAWARE STATUTORY TRUST: FLEXIBILITY AND

BENEFITS FOR INVESTORS

A statutory trust could be the vehicle of choice for many investors. Historically, business trusts, governed by the common law, originated as an alternative to corporations (that many states did not permit to invest in real estate). The Massachusetts Business Trust is probably the best known of such entities. Delaware is one of several states that have codified the common law principles regarding the existence and structure of statutory trusts. On October 1, 1988, it enacted the Delaware Statutory Trust Act (formerly known as the Delaware Business Trust Act), which is contained in 12 Del. C. Chapter 38. The Act has been amended almost bi-annually since its adoption to insure that it provides great flexibility, including the ability to limit the liability of all parties involved and to obtain the tax treatment desired: corporate, pass-through. A Delaware Statutory Trust is a statutory entity that is created by the execution of a governing instrument and the filing of a Certificate of Trust with the Delaware Secretary of State. The governing instrument is an agreement entered into between one or more trustees and one or more persons who are to own equity interests in the Delaware statutory trust. Only one trustee is required in order to create a statutory trust. The trustee, or, if there is more than one trustee at least one of the trustees, must be either (1) a natural person who is a resident of Delaware, or (2) an entity that has Delaware trust powers. There are a number of banks in Delaware that can provide the requisite Delaware Trustee services.2 Once created, the statutory business trust is recognized as a separate legal entity. 2 Although a Delaware banking institution is often used to meet the requirement of a Delaware trustee, in practice, the Delaware trustee is provided with nominal duties only. Its role is similar to that of a registered agent in a Delaware corporation. This is desirable given parties do not wish to have a trustee impose itself on the statutory trust’s activities.

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A Statutory Trust is Similar to but Different than a Corporation A Delaware statutory trust is similar to a corporation in that the beneficial owners of the trust have no greater liability than that of a stockholder in a corporation. That is, if the governing instrument does not provide to the contrary and if the beneficial owners comply with the formalities of the governing instrument, with few exceptions, their liability is limited to the amount of their required investment.

In contrast to a corporation, it is possible to structure the Delaware statutory trust so that it is taxed as a pass through entity, such as a partnership, for income tax purposes. Alternatively, the statutory trust may be structured to obtain grantor tax treatment or corporate tax treatment. All that is required is the inclusion of appropriate provisions in the governing instrument.

Similar to a corporation, the Act provides that once formed, a Delaware statutory trust has

perpetual existence and is not terminated by the death, incapacity, dissolution, termination or bankruptcy of a beneficial owner, or the transfer of a beneficial interest. However, it is important to note that all of the foregoing may be altered by the terms of the governing instrument.

A Statutory Trust is Similar to a Limited Partnership and

a Limited Liability Company A Delaware statutory trust is similar to a limited partnership and a limited liability company in that the Act leaves it to the parties to the governing instrument to craft many of the provisions regarding the governance of the trust. However, unlike the general partner of a limited partnership, no party to a Delaware statutory trust has unlimited liability. Unless the governing instrument provides to the contrary, the trustee, when acting in such capacity, is not personally liable to third parties for any act, omission or obligation of the trust. A statutory trust is further similar to a limited partnership and a limited liability company in that the Act prohibits creditors of the beneficial owners from obtaining possession of, or otherwise exercising legal or equitable remedies with respect to, the property of the trust. As a result, a beneficial owner’s creditor may receive only what the beneficial owner is entitled to according to the terms of the governing instrument. Moreover, since the trustee is liable only to the Delaware statutory trust and the beneficial owners for any act, omission or obligation of the trust or of another trustee (unless a different standard is provided for in the governing instrument), the recourse of creditors of the Delaware statutory trust (such like that of corporate creditors) is limited to the value of its assets. In contrast, the trustee’s liability to the Delaware statutory trust and to the beneficial owners is triggered if the trustee does not meet the requisite standard of care set forth in the governing instrument (subject to good faith and fair dealing limitations).

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Establishing the Standard of Care If no standard of care is provided in the governing instrument, the Act directs that the Delaware law applicable to trusts provide the standard. This triggers the standard applicable to fiduciaries generally, which requires the trustee to “act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use to attain the purposes of the account.”

Equity Owners May Direct Trustee

Although the Act begins with the premise that the business and affairs of the statutory trust are to be managed by or under the direction of the trustees, it permits the governing instrument to include provisions that give the beneficial owners the right to direct the trustee in the management of the trust’s business and affairs. This includes the ability to provide in the governing instrument that certain actions require the consent of a given percentage of the beneficial owners. Actions such as the sale of the trust’s assets, the purchase of trust assets, the dissolution of the trust, the merger of the trust, the appointment of new trustees and the creation of a new series of beneficial interest are just a few of the matters over which the beneficial owners may have a voice in the activities and success of the Delaware statutory trust. These rights and powers may be conveyed to and exercised by the beneficial owners without the risk of their subsequent characterization as trustees. As a result, to the extent the governing instrument so provides, beneficial owners are able to act without subjecting themselves to liability to the statutory trust, the other beneficial owners or third parties for their participation.

Other Persons May Direct Trustees

The Act also contemplates the use of persons or entities other than the beneficial owners to direct the trustee’s management over the trust’s affairs and business. The Delaware statutory trust has the option to engage persons or entities with particular expertise in activities conducted by the trust. Such persons, typically called managers or administrators, could be appointed by the trustee. Their appointments may also be made subject to the approval of the beneficial owners. These experts may be used in varying degrees and capacities depending in large part on the skills and experience of the trustee and the needs of the Delaware statutory trust. They could direct the trustee in managing the day-to-day affairs of the trust or direct the trustee faced with a major policy or business decision, or anything in between these two extremes. These experts are permitted to act in such capacities without being treated as trustees. As such, they are not subject to the liabilities of trustees.

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Trustees May Delegate Their Duties

In addition to the ability to structure the governing instrument so that the beneficial owners and other persons and entities direct the trustee in its management of the Delaware statutory trust, the Act explicitly provides that a trustee may delegate his duties as trustee. The only requirement is that the delegatee work under the trustee’s direction. As a result, experts may be used to provide services to the trust. However, the governing instrument should set forth a process by which the trustee reviews or has veto power over the expert’s actions.

One Entity May Include Different Equity Owners and Trustees

It is possible for the governing instrument to provide for different classes, groups or series of beneficial interests, beneficial owners and trustees. Therefore, the standard of care applicable to a trustee, the liability of a trustee and the rights, powers and duties of the trustee to manage the Delaware statutory trust can be varied. Similarly, a beneficial owner’s ability and the voting rights and other powers afforded to a beneficial owner can also be varied.

____________________________________________________________________________________ If you have any questions regarding this article, please contact The Delaware Counsel Group, LLP at (302) 576-9600. This article is prepared for informational purposes only and should not be relied upon as or be considered legal advice. Copyright © 2005, 2008, The Delaware Counsel Group, LLP.

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Delaware Statutory Trusts

I. Background Summary of the Delaware Statutory Trust

A. Introduction. A statutory trust (or often times referred to as a “business trust” and will be used interchangeably throughout this summary) is a form of voluntary business association created by a trust instrument pursuant to which property is conveyed to one or more trustees (or the trust itself) to hold and manage the property for the benefit of the beneficial owners. The modern business trust developed in Massachusetts to avoid a statutory provision prohibiting corporations from dealing in real estate. See Minkin v. Commissioner of Revenue, 425 Mass. 174, 680 N.E.2d 27, 30 (1997); Annot., 88 A.L.R.3d 704, 711 (1978). In State Street Trust Co. v. Hall, 31 Mass. 299, 41 N.E. 2d 30, 34 (1942) the Court stated that:

[Business trusts] have been recognized for many years as a common and lawful

method of transacting business in this Commonwealth. It has been said that this method of conducting a commercial enterprise originated in this Commonwealth as the result of the inability to secure chargers for acquiring and developing real estate without a special act of the Legislature. Accordingly, the usual purpose of these early organizations was to deal in real estate, but with passing years business trusts have greatly increased in number and have been used extensively in conducting nearly all kinds of industrial and commercial activities.

The statutory trust is structurally analogous to other business entities (corporations, limited partnerships, limited liability companies) where management and control is separated from equitable ownership. The use of the common law business trust as an alternative business entity has a long history in the United States. See J. Langbein, The Secret Life of the Trust; The Trust as an Instrument of Commerce, 107 Yale L.J. 165 (1997). Its use, however, has (and still does to an extent) present uncertainties and risks that are peculiar to trusts and trust law, including (1) the potential liability of trustees for torts and contracts of the trust; (2) common law trust principles restructuring the ability of trustees to delegate powers, act beyond the terms of the trust instrument, or engage in transactions with the trust; (3)

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possible non-recognition of limited liability of beneficial owners, including imposition of a “control test”; (4) potential non-recognition of the business trust as an entity entitled to transact business; (5) possible restriction on ability to protect trust property from creditors of beneficial owners; and (6) unfavorable tax treatment. However, those risks have been addressed by the statutory recognition of business trusts in a number of states, including Delaware.

B. Advantage of Business Trusts. Business trusts were used to avoid some of the

governance and procedural requirements imposed on corporations by the subject State corporation statute. Essentially, the law of the business trust is drafted into the trust instrument. See J. Langbein, The Secret Life of the Trust, 107 Yale L.J. at 184. “The flexibility to eliminate governance procedures that are obligated under the corporate form has been one great attraction of the trust form. For example, the trust instrument can be drafted to dispense with routine shareholder meetings.” (citations omitted). The business trust has also been used to avoid corporate taxation or to otherwise obtain advantageous tax treatment. See e.g., Crocker v. Malley, 249 U.S. 223 (1919). Finally, the business trust structure could shield its owner/shareholder from personal liability. See Williams v. Inhabitants of Milton, 215 Mass. 1, 8, 102 N.E. 355 (1913). The advantages which led to the proliferation of the business trust as a form of association have been discussed at length by numerous scholarly articles. See J. Langbein, The Secret Life of the Trust, supra; Bogert, Law of Trust and Trustees, §247; Jones, The Massachusetts Business Trust and Registered Investment Companies, 13 Del. J. Corp. L. 421 (1988); C. Magruder, The Position of Shareholders in Business Trusts, 23 Column. L. Rev. 423 (1923); Comment, Massachusetts Trusts, 37 Yale L.J. 1103 (1928); N. Issacs, Trusteeship in Modern Business, 42 Harv. L. Rev. 1048 (1929).

C. Risks of Using Non-Statutory/Common Law Business Trusts. Several jurisdictions

impose a “control test” to determine shareholder liability – i.e., personal liability is imposed (and the trust is disregarded) when shareholders exercise too much control in the management of the trust. Williams v. Inhabitants of Milton, 215 Mass. 1, 102 N.E. 355 (1913); Frost v. Thompson, 219 Mass. 260, 106 N.E. 1009 (1914). Where beneficial owners retain control over the trustees, the common law business trust fails and shareholders will not be entitled to limited liability. The First National Bank of New Bedford v. Chartier, 305 Mass. 316, 25 N.E.2d 733 (1940). There was also a risk that other jurisdictions would not recognize a common law business trust as a separate entity or enforce its terms, including the limited liability of shareholders. See Means v. Lumpia Royalties, 115 S.W. 2d 468 (Tex. App. 1938). Common law business trusts were also not always successful at obtaining the desired tax advantages. See Morrissey v. Commissioner, 296 U.S. 344, 80 L.Ed. 263, 56 S. Ct. 289 (1935) (common law business trusts which possessed corporate attributes were held taxable associations rather than as property held in trust).

D. Delaware Statutory Trust Legislation. Statutory business trust statutes have been enacted by several states, including Delaware, to eliminate many of the uncertainties associated with common law trusts. The Delaware Statutory Trust Act; 12 Del. C. §3801 et seq. (the “Delaware Act”), which was enacted in 1988, provides, among other things, that the business trust is a separate legal entity and that the personal liability of the beneficial owners are limited to the same extent as stockholders in a Delaware corporation. Under the Delaware Act, the rights, obligations and liabilities of the trustees and

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the beneficial owners of the trust can be varied to suit investors’ needs. The Delaware Act also allows the beneficial owners or even third parties to control the actions of the trustees or other persons authorized to manage the trust. The Delaware Act contains specific provisions that make it attractive for use by registered investment companies, including the authorization of separate series or portfolios. The Delaware Act also contains provisions that enhance the “bankruptcy remote” qualities of a business trust, including limitations on the ability of beneficial owners to trigger dissolution and limitations on the rights of creditors of beneficial owners. In 2002, the legislative amendments to the statute changed the title and all references to “business trusts” within the Delaware Act to “statutory trusts” to avoid any implication that a trust formed under the Delaware Act constitutes a “business trust” under Bankruptcy Code definitions. II. Common Current Uses of Statutory or Business Trusts.

A. Asset-Backed Securities Transactions. B. Collateralized Mortgage Obligations (CMOs and REMICs).

C. Real Estate Investment Trusts (REITS).

D. Leveraged Leasing Transactions.

E. Mutual Funds and Investment Companies.

F. Liquidating Trusts.

G. Private Investment Funds, Joint Ventures and Strategic Alliances.

H. Trust Preferred Securities Transactions.

III. Summary of Delaware Legislative Developments.

As mentioned above, the Delaware Act was enacted in 1988 to codify the organizational rules applicable to the “business trust” and to authorize a statutorily recognized flexible alternative business entity. The legislative synopsis to the 1988 statute provides:

This bill statutorily recognized common law trusts created for business purposes as the State of Massachusetts did many years ago. A business trust is the favored form of entity for money market mutual funds, and for real estate investment trusts, and other investment entities involved in the securitization of debt.

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Senate Bill No. 355, 66 Del. Laws Ch. 279 (1988); See Nakahara v. The NS 1991 American Trust, Del. Ch., C.A. No. 15905, Chandler, C. (March 20, 1998) slip. op. at 17-18 (“The principal purpose of the [Delaware Act] was to statutorily recognize the existence of the business trust in Delaware, a business form that was implicitly recognized by the statutory laws of the State [of Delaware]”).

The Delaware Act has been and continues to be periodically amended in order to accommodate

developments in common business practices. The Delaware Act has been amended in 1990, 1991, 1992, 1996, 1998, 2000, 2002, 2004 and 2006.

Prior to 1998, business trusts were generally recognized under Delaware law although the law

applicable to such entities was not entirely clear. Several statutes in the Delaware Code included the term “business trust” in definitions of “person” or “organization.” Two reported Delaware cases discussed, to some degree, the existence and operations of business trusts. In Saminsky v. Abbott, Del. Ch., 185 A.2d 765 (1961) shareholders of an investment company governed by the Investment Company Act and organized as a common law business trust sued the trustees for excessive recurrent charges and management fees. The court, finding that business trusts are more analogous to corporations than personal trusts, held that the corporate law doctrine prohibiting payment of compensation amounting to waste was applicable to common law business trusts. In Commonwealth Trust Co. v. Capital Retirement Plan, Del. Ch., 54 A.2d 739 (1947), the Court held that a trustee (who, under the trust indenture, had sole authority to manage the trust) was not entitled to receive monthly payments required under the trust indenture where the trustee failed to participate in management of the trust or to provide the required services. The 1988 senate bill expressly provided that the Delaware Act would have no effect on the existence or validity of common law business trusts created before or after the effective date of the statute and that common law business trusts could elect to be governed by the Delaware Act by filing a certificate of trust. 66 Del. Laws Ch. 279, §2 (1988).

IV. General Statutory Provisions Governing Statutory Trusts.

A. Definitions.

1. Statutory Trust. The statutory definition of “Statutory Trust” generally incorporates the common law concept and the modern requirements of a written instrument and the filing of a document with the secretary of state. The Delaware Act, for example, provides at §3801(a):

“Statutory trust” means an unincorporated association which: (1) Is created by a governing instrument under which property is or will be held, managed, administered, controlled, invested, reinvested and/or operated, or business or professional activities for profit are carried on or will be carried on, by a trustee or trustees or as otherwise provided in the governing instrument for the benefit of such person or persons as are or may become beneficial owners or as otherwise provided in the governing instrument, including but not limited to a trust of the type known at common law as a "business trust," or "Massachusetts trust," or a trust qualifying as a real estate investment trust

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under § 856 et seq. of the United States Internal Revenue Code of 1986 [26 U.S.C. § 856 et seq.|, as amended, or under any successor provision, or a trust qualifying as a real estate mortgage investment conduit under § 860D of the United States Internal Revenue Code of 1986 ›26 U.S.C. § 860D], as amended, or under any successor provision; and (2) Files a certificate of trust pursuant to § 3810 of this title. Any such association heretofore or hereafter organized shall be a statutory trust and a separate legal entity. The term "statutory trust" shall be deemed to include each trust formed under this chapter prior to September 1, 2002, as a "business trust" (as such term was then defined in this subsection). A statutory trust may be organized to carry on any lawful business or activity, whether or not conducted for profit, and/or for any of the purposes referred to in paragraph (a)(1) of this section (including, without limitation, for the purpose of holding or otherwise taking title to property, whether in an active or custodial capacity). Neither use of the designation "business trust" nor a statement in a certificate of trust or governing instrument executed prior to September 1, 2002, to the effect that the trust formed thereby is or will qualify as a Delaware business trust within the meaning of or pursuant to this chapter, shall create a presumption or an inference that the trust so formed is a "business trust" for purposes of Title 11 of the United States Code.

The 2006 legislative amendments to the Delaware Act clarified that a statutory trust “shall be a separate legal entity, the existence of which as a separate legal entity shall continue until cancellation of the statutory trust’s certificate of trust.” 12 Del. C. § 3810(a).

2. Governing Instrument. Under the Delaware Act, a governing instrument is defined as any “any instrument (whether referred to as a trust agreement, declaration of trust or otherwise) which creates a statutory trust or provides for the governance” of its business and affairs. 12 Del. C. §3801(f). The Delaware Act further provides that the governing instrument may consist of one or more documents, including bylaws, and may contain any provision that is not inconsistent with law or the certificate of trust. Id. The 2000 legislative amendments clarified that the governing instrument may consist of separate instruments – one instrument that creates the statutory trust and one or more others that govern its internal affairs. The 2002 legislative amendments clarified that a statutory trust is not required to execute the governing document and is bound by it whether or not the governing document is executed. Id. The 2006 legislative amendments confirm that beneficial owners and trustees are also bound by the governing instrument regardless of whether they sign them. Id.

3. Beneficial Owner. The Delaware Act defines a beneficial owner as “any owner of a beneficial interest in a statutory trust, the fact of ownership to be determined and evidenced (whether by means of registration, the issuance of certificates or otherwise) in conformity to the

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applicable provisions of the governing instrument of the statutory trust.” 12 Del. C. §3801(b). Thus, a statutory trust is not required to issue certificates evidencing beneficial interests.

4. Trustee. The Delaware Act defines trustee as “the person or persons appointed as a trustee in accordance with the governing instrument of a statutory trust, and may include the beneficial owners or any of them.” 12 Del. C. §3801(c). The defined term “person” is broadly defined to include entities as well as natural persons. 12 Del. C. §3801(d).

B. Formation. Similar to most limited partnership and limited liability company statutes, the Delaware Act provides that a statutory trust is “formed” at the effective time of the filing of the initial certificate of trust. 12 Del. C. §3810(a)(2). Section 3810(a)(2) was added to the Delaware Act in the 1996 amendments.

1. Certificates of Trust. A Delaware statutory trust must file a certificate of trust with the Delaware Secretary of State, setting forth the following required information: (i) the name of the statutory trust and (ii) the name and address of the Delaware resident trustee (or trustees). 12 Del. C. §3810(a). The certificate of trust may also contain any information that the parties desire including, for example, a future effective date provision, provisions respecting the internal management of the business trust, and provisions, authorized by 12 Del.C. §3804(a), that provide for limitation of liabilities among series or portfolios of the statutory trust. Unless the certificate contains a future effective date provision, it is effective when filed. The certificate of trust must be executed by all of the trustees of the statutory trust. 12 Del.C. §3811(a).

2. Delaware Resident Trustee. At least one trustee of a Delaware statutory trust

must be a resident of Delaware, or if a non-natural person, it must have its principal place of business in Delaware. 12 Del. C. §3807. However, if a statutory trust is, becomes or will become a registered investment company under the Investment Company Act of 1940, it is not required to have a resident Delaware trustee so long as such statutory trust has and maintains in Delaware a registered office, which may but need not be its place of business in the state and a registered agent for service of process on the statutory trust. 12 Del. C. §3807(b) and (c).

3. Certificates of Amendment. The certificate of trust may be amended at any time by the filing of a certificate of amendment with the Delaware Secretary of State and must be amended if information set forth therein changes rendering the certificate materially false. 12 Del. C. §3810(b). The authority of trustees to amend the certificate may be made subject to requirements set forth in the certificate of trust or the governing instrument, such as a requirement for prior approval by the beneficial owners. A certificate of amendment must be executed by at least one trustee. 12 Del. C. §3811(a)(2).

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4. Restated Certificate of Trust. The certificate on file with the Secretary of State may be integrated into one restated certificate of trust at any time for any purpose as the trustees may determine. Such certificate must set forth the following: the present name of the statutory trust and the name under which the statutory trust was originally formed if such name has been changed, the date of the filing of the original certificate of trust, and the information required to be included in a certificate of trust. 12 Del. C. §3810(c). A restated certificate must be executed by at least one trustee. 12 Del. C. §3811(a)(2).

5. Certificates of Correction. The Delaware Act permits the correction of any certificate filed with the Secretary of State which “is an inaccurate record of the action therein referred to, or was defectively or erroneously executed.” 12 Del. C. §3810(e). A certificate of correction, which must be signed by at least one of the trustees, shall be effective as of the date of filing of the original certificate that is being corrected, except as to those persons who are substantially and adversely affected by the correction. 12 Del. C. §§3810(e) and 3811(a).

6. Certificate of Cancellation. The certificate of trust of a statutory trust must be canceled by the filing of a certificate of cancellation upon the completion of winding up of the trust’s business. 12 Del. C. §3810(d). The filing of a certificate of cancellation terminates the separate legal existence of the statutory trust. It must be executed by all of the trustees unless otherwise provided in the governing instrument. 12 Del. C. §3811(a)(3).

7. Execution and Filing of Certificates. Trustees who execute certificates are deemed to swear or affirm, subject to penalties for perjury, that the facts stated in the certificates are true. 12 Del. C. §3811(c). The Delaware Act also permits any person, including a trustee, to execute any certificate or governing instrument by an agent or attorney-in-fact. 12 Del. C. §3811(b). Signatures on Delaware certificates may be by facsimile and certificates may be filed by electronic transmission. 12 Del. C. §3812(e). Under the Delaware Act, a filing fee of $200 must be paid at the time of the filing of any certificate and no filing is effective until such fee is paid. 12 Del. C. §§3812(c) and 3813.

8. Use of Names Regulated. The name of a statutory trust set forth on the certificate of trust must distinguish the trust from the name of any domestic or foreign corporation, partnership, limited partnership, limited liability company or statutory trust reserved or registered with the Delaware Secretary of State, unless the written consent of the previously registered entity is obtained and filed with the Secretary of State. 12 Del. C. §3814. The name of a statutory trust may contain the name of a beneficial owner or trustee.

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C. Contributions by Beneficial Owners.

1. Form of Contribution. Under the Delaware Act, beneficial owners can contribute any form of property to a statutory trust in exchange for its beneficial interest. Moreover, a person may become a beneficial owner or receive a beneficial interest in the statutory trust without making any contribution. 12 Del. C. §3802(a).

2. Enforcement of Contribution Obligation. Except as provided in the trust instrument, a beneficial owner is obligated to the statutory trust to perform any promise to contribute to the trust, despite inability to perform because of death, disability or any other reason. If a beneficial owner fails to make a required contribution of property or services, it is obligated at the option of the statutory trust to contribute cash equal to the contribution not made. 12 Del. C. §3802(b). The governing instrument can provide for any type of penalty against the interest of a beneficial owner who fails to make a required contribution. 12 Del. C. §3802(c).

D. Liability of Beneficial Owners and Trustees.

1. Beneficiaries. The modern business trust statutes reject the “control test” that would impose liability on beneficial owners who exert “control” over the trustees or the management of the trust. Under the Delaware Act, for example, except as otherwise provided in the trust’s governing instrument, the beneficial owners have the same limitation of personal liability as stockholders of a Delaware corporation. 12 Del. C. §3803(a). Under the Delaware corporate law, shareholder liability for corporate obligations is limited to the shareholder’s investment in the corporation. 8 Del. C. §102(b)(6) (“…the stockholders or members of a corporation shall not be personally liable for the payment of the corporation’s debts except as they may be liable by reason of their own conduct or acts.”). Moreover, the Delaware Act expressly permits the beneficial owners to participate in the management of the trust without being deemed trustees or otherwise losing the limited liability that attaches to the status as a beneficial owner. See 12 Del. C. §3801(c) and 3806(a).

2. Trustees. Under common law, trustees of business trusts, like trustees of

personal trusts, were generally liable for obligations of the trust. Trustee liability was addressed by inserting exculpatory provisions in the governing instrument and, more importantly, in contracts between the trust and third parties. The modern statutes eliminate this concern by providing that trustees are not liable for the statutory trust’s obligations. Under the Delaware Act, a trustee is not personally liable to any person, other than to the statutory trust or a beneficial owner, for actions taken while acting in the capacity of trustee. 12 Del. C. §3803(b). With respect to fiduciary duties and liabilities among trustees, the trust and beneficial owners, the statute provides that (1) the trustees will not be liable to the

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trust or beneficiaries for acts taken in good faith reliance on the provisions of the governing instrument and (2) the fiduciary obligations and liabilities of a trustee may be varied or eliminated by the governing instrument of the trust. 12 Del. C. §3806(c). The implied covenant of good faith and fair dealing in the governing instrument may not be eliminated. Id.

3. Other Persons. Since the Delaware Act permits management authority to be

vested in or delegated to persons other than trustees, the Delaware Act provides that officers, employees, managers or other persons who may manage the business and affairs of the statutory trust (pursuant to §3806(b)(7) of the Delaware Act) are not personally liable to any person, other than to the statutory trust or a beneficial owner, for actions taken while acting in such capacity. 12 Del. C. §3803(c). Like trustees, managers and officers will have limited liability for good faith actions in reliance on the governing instrument. 12 Del. C. §3806(d).

E. Rights of Beneficial Owners in Trust Property.

1. Nature of Beneficial Interest. Under the Delaware Act, except as provided in the governing instrument, a beneficial owner has an undivided beneficial interest in trust property and “shall share in the profits and losses of the statutory trust in the proportion (expressed as a percentage) of the entire undivided beneficial interest in the statutory trust owned by such beneficial owner.” 12 Del. C. §3805(a). The beneficial interest is personal property and a beneficial owner has no interest in specific trust property. 12 Del. C. §3805(c). The governing instrument of a statutory trust may authorize an unlimited number of shares. See Nakahara v. The NS 1991 American Trust, Del. Ch., C.A. No. 15905, Chandler, C. (March 20, 1998) slip op. at 26 n. 67. Unless otherwise provided in the governing instrument, beneficial interests are freely transferable. 12 Del.C. §3805(d). Once a beneficial owner becomes entitled to a distribution, he or she obtains the status of creditor of the statutory trust with respect to the distribution, except if the governing instrument provides otherwise. 12 Del. C. §3805(e).

2. Rights of Creditors. The Delaware Act expressly provides that “[n]o creditor of

the beneficial owner shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the statutory trust.” 12 Del. C. §3805(b). The title to trust property may be vested in one or more trustees, but shall not be subject to claims against the trustee which are unrelated to the statutory trust.

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F. Management of Statutory Trust. The statutory provisions addressing management of statutory trusts are very flexible and generally defer to the right of the parties to the governing instrument to draft governance provisions appropriate for their needs. This carries on the practice relating to common law business trusts which recognized that the governing instrument essentially established the “law of the entity.” See J. Langbein, The Secret Life of the Trust, supra. The Delaware Act at §3806 provides that, except as otherwise provided in the governing instrument, the business and affairs of a statutory trust shall be managed by or under the direction of its trustee. Moreover, with respect to organizational structure, the Delaware Act permits the governing instrument to create classes or groups of beneficial owners, classes or groups of trustees, separate series or portfolios of the statutory trust, and classes of interests within series. Voting rights and management rights may be granted or denied to any such group or class of beneficial owners or trustees. The 2006 legislative amendments confirm that meetings may be held by telephonic or other communications.

1. Power to Direct the Trustee. To the extent provided in the governing instrument, any person (including a beneficial owner) may direct trustees or other persons in the management of the statutory trust. Under §3806(a) neither the power to give direction nor the exercise thereof by any person (including the beneficial owner) shall cause such person to be a trustee. The 1998 amendments to the Delaware Act clarified that there is the contractual power to direct the management of the trust and that such power does not necessarily result in the imposition of fiduciary or other duties on the person exercising such power.

2. Power to Delegate. The governing instrument of a Delaware statutory trust may provide for the appointment, election or engagement, either as agents or independent contractors of the statutory trust or as delegatees of the trustees, officers, employees, managers or other persons who may manage the business and affairs of the statutory trust and may have such titles and such relative rights, powers and duties as the governing instrument shall provide. 12 Del. C. §3806(b)(7). Delegating management authority to a person other than the trustee has been recognized for common law business trusts. See Commonwealth Trust Co. v. Capital Retirement Plan. Del. Ch., 54 A.2d 739 (1947) (trustor retained management power over the trust property). The 2004 legislative amendments clarified that the trust agreement “may provide rights to any person, including a person who is not a party to the governing trust, to the extent set forth therein.” §3806(b)(8).

3. Series of Portfolios. The Delaware Act permits the governing instrument to establish separate series of the trust which may each have its own investment objective or purpose, beneficial interests, trustees, managers, assets and liabilities. 12 Del. C. §3806(b)(2). The Delaware Act also provides that the debts and liabilities of a series will be enforceable against the assets of that series only and not against the trust’s general assets or the assets of any other series so long as (1) the governing instrument so provides, (2) the certificate of trust sets forth the limitation of interseries liability, and (3) separate and distinct records are maintained for each series and the assets of each series are accounted for separately from the other assets of the trust or any other series thereof. In addition,

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unless otherwise provided in the governing instrument, none of the trust’s general debts and liabilities or the debts and liabilities of any other series will be enforceable against the assets of such series. 12 Del. C. §3804(a). The 1998 amendments to the Delaware Act further clarified that the dissolution and winding up of a series will not trigger the dissolution of the trust. 12 Del. C. §3808(f).

4. Treasury Interests. In 1996, a section was added to the Delaware Act that expressly provided that a business trust may redeem or repurchase its beneficial interests and that such repurchased interests will be deemed cancelled, unless otherwise provided in the governing instrument. 12 Del. C. §3818.

5. Information Rights. Also in 1996, Section 3819 was added to the Delaware Act to provide for information and inspection rights for beneficial owners similar to the inspection rights of corporate shareholders, limited partners of limited partnerships and members of limited liability companies. See 8 Del. C. §220; 6 Del. C. §§17-305 and 18-305. Unlike the corporate and partnership provisions, however, the Delaware Act permits the governing instrument to limit or completely restrict the rights of beneficial owners to inspect the books and records of the trust (subject only to public policy and securities laws requirements).

G. Existence and Dissolution of Statutory Trusts.

1. Dissolution by Beneficial Owner. A concern with respect to common law business trusts is the ability of a settler or a beneficial owner (or a creditor of a beneficial owner) to terminate the trust and gain access to the trust property. Under common law, a beneficial owner does not generally have authority to cause or compel the dissolution of a business trust. State Street Trust Co. v. Hall, 311 Mass. 299, 41 E.E. 2d 30 (1942); But see Papale-Keefe v. Altomare, 38 Mass. App. Ct. 308, 647 N.E.2d 722, 727 (1995) (sole beneficial owner of a Massachusetts business trust was authorized to terminate the trust). The Delaware Act provides that, except as provided for in the governing instrument, the statutory trust shall have perpetual existence, and a statutory trust may not be terminated or revoked by a beneficial owner or other person except in accordance with the terms of its governing instrument. 12 Del. C. §3808(a). Moreover, the death, incapacity, dissolution, termination or bankruptcy of a beneficial owner will not cause termination of a Delaware statutory trust. 12 Del. C. §3808(b). The 2006 legislative amendments set forth that the existence of a statutory trust that has encountered an event of dissolution under its governing instrument may be continued by the unanimous vote of beneficial interest holders.

2. Dissolution and Winding Up of a Statutory Trust. The Delaware Act, as

amended in 1996, provides for dissolution procedures analogous to dissolution procedures for limited partnerships and limited liability companies. The Delaware Act does not provide any specific events of

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dissolution but instead leaves it entirely up to the governing instrument to provide dissolution events. 12 Del. C. §3808(a), (b) and (c). The Delaware Act does require that a person designated in the governing instrument wind up the affairs of the trust. 12 Del.C. §3808(d). The Delaware Act also requires that all current, contingent and unmatured claims and liabilities be paid in full or provided for prior to any distribution to beneficial owners. 12 Del.C. §3808(e). A trustee who complies with Section 3808(e) will not be liable to claimants of the dissolved statutory trust by reason of the trustee’s actions in winding up the trust. Id. The 1998 Amendments to the Delaware Act require that the winding up of dissolved series must follow the same requirements to satisfy claims prior to distributing assets to beneficial owners of such series. 12 Del. C. §3808(g).

H. Applicability of Trust Law. Traditional trust principles are generally applicable to common law business trusts. See Papale-Keefe v. Altomare, 38 Mass. App. Ct. 308, 647 N.E.2d 722, 726 (1995). Under the Delaware Act, Delaware common law trust principles will apply to Delaware statutory trusts to the extent not otherwise provided in the governing instrument or the Delaware Act. 12 Del. C. §3809. However, notwithstanding this provision, it is likely that corporation law fiduciary concepts (as opposed to potentially more stringent trust law) will apply, at least by analogy, to trustees of statutory trusts that are structured similarly to corporations. See Richardson v. Clark, 372 Mass. 859, 861-862, 364 N.E.2d 804 (1977) (“Business trusts possess many of the attributes of corporations and for that reason cannot be governed solely by the rules which have evolved for traditional trusts.”); Saminsky v. Abbott, Del. Ch., 185 A2d 765 (1961). Also, several other business trust statutes provide that corporate law will govern the affairs of the business trust. See Indiana Code Ann. §23-5-1-9 (1998); Kansas Stat. Ann. §17-2035 (1997). The 2006 legislative amendments set forth that a governing instrument may not eliminate the implied contractual covenant of good faith and fair dealing.

I. Merger and Consolidation; Conversions.

1. Merger. The Delaware Act provides that a statutory trust may merge or consolidate with another business entity under the laws of Delaware or any other jurisdiction. 12 Del. C. §3815. Unless otherwise provided in the governing instrument, all trustees and all beneficial owners must approve a merger. In order to effect a merger, the statutory trust must enter into a merger agreement with the constituent entities to the merger and file a certificate of merger or consolidation with the Delaware Secretary of State. The Certificate of Merger must set forth the name and jurisdiction of merging entities and the name of the surviving entity, that an agreement of merger or consolidation has been executed, that it is on file at the place of business of the surviving entity and that it will be furnished to any interested person. If no Delaware entity survives, the Certificate of Merger must also include the surviving entity’s consent to process, an appointment of the Delaware Secretary of State as agent and an address to which the Secretary of State may mail a copy of such process. The agreement of merger or consolidation may effect any amendment to the governing instrument or adoption of a new governing instrument if a statutory trust is the surviving entity. The 2004 Amendments added a new

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paragraph (4) clarifying that a name change to the surviving trust due to a merger is effected by the merger. §3815(b)(4). In addition, the 2004 Amendments provide that no further action is needed to amend a certificate of trust when a certificate of merger sets forth any amendment in accordance with the new §3815(b)(4). 12 Del. C. §3815(e).

2. Conversions. The 2004 legislative amendments provide for a new §3821 that sets forth the conversion process of a statutory trust to another business entity, Delaware or non-Delaware. The new legislation sets forth the filing process, and the rights, obligations and liabilities associated with the conversion of the existing statutory trust.

J. Legal Proceedings.

1. Process and Jurisdiction. Common law business trusts are generally treated as distinct legal entities for purposes of suit. See Great Bay Hotel & Casino, Inc. v. The City of Atlantic City, 624 A.2d 102, 105 (N.J. Super. 1993). Under the Delaware Act, a statutory trust may sue and be sued for debts, obligations or liabilities incurred by trustees or their agents, and for damages to persons or property resulting from their negligence in performance of their respective duties under the governing instrument of the trust. 12 Del. C. §3804(a). The Delaware Act also provides that the property of the statutory trust is subject to attachment and execution as if it were a corporation. Id. Service of process in Delaware on the trust can be effected by serving the Delaware resident trustee or, if the trust is a registered investment company under the Investment Company Act of 1940 (the “1940 Act”), by serving the trust’s registered agent in Delaware. 12 Del. C. §3804(b). A person shall not be deemed to be doing business in Delaware solely by reason of being a beneficial owner or trustee of a domestic statutory trust or a foreign statutory trust. 12 Del. C. § 3863(b). However, Section 3863, which also identifies activities not constituting doing business in Delaware, does not apply to determining whether a foreign statutory trust is subject to service of process. 12 Del. C. § 3683(c). Finally, a governing instrument may subject a trustee to the non-exclusive jurisdiction of any state or the exclusive jurisdiction of the courts of the State of Delaware.

2. Derivative Actions. The beneficial owners have a right to bring an action in the

right of the statutory trust if trustees with authority to do so, refuse to bring the action or efforts to cause the trustees to bring the action are unlikely to succeed. The Delaware Act imposes the requirement that the plaintiff must be a beneficial owner at the time of bringing the action and the time of the transaction of which he or she complains. 12 Del. C. §3816. The complaint must set forth the efforts taken to compel the trustees to bring the action and or the reason for not taking such efforts. The requirements are derived from Delaware statutory and case law respecting corporate shareholder derivative actions. See 8 Del. C. §327. Unlike Delaware corporate law, however, the Delaware Act authorizes the governing instrument to impose standards or restrictions on the bringing of a derivative action, such as

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requiring that a minimum percentage of beneficial owners must join in bringing a derivative action. 12 Del. C. §3816(e).

The 2000 legislative amendments clarified that with respect to a statutory trust that is an investment company under the 1940 Act, the determination of whether a trustee is independent and disinterested will be made in accordance with the 1940 Act.

K. Indemnification. The Delaware Act provides that, subject to any restrictions in the

governing instrument, the statutory trust may indemnify any trustee, beneficial owner or other person from and against any and all claims and that the absence of an indemnity provision in the governing instrument will not deprive any person of the right to indemnity otherwise available under Delaware law. 12 Del. C. §3817. The Delaware Court of Chancery has held that the governing instrument of a Delaware statutory trust may contain a mandatory or permissive advancement of expenses provision notwithstanding the fact that Section 3817 refers only to indemnification and not advancement. Nakahara v. The NS 1991 American Trust, Del. Ch., C.A. No. 15905, Chandler, C. (March 20, 1998) slip op. at 26-27 (“[T]he language of the [Delaware Act’s] indemnification provision is broad and flexible. Such a general authorization of indemnification compels a permissive interpretation with the language intended to authorize as much as possible and exclude only that which is expressly prohibited.”).

L. Construction of Statutes. The Delaware Act provides that the rule that statutes in derogation of the common law will be strictly construed does not apply to the Delaware Act. 12 Del. C. §3825(a). The Delaware Act states also that it “is the policy of this chapter to give maximum effect to the principles of freedom of contract and to the enforceability of governing instruments.” 12 Del. C. §3825(b). These are the same provisions that are included in the Delaware Revised Uniform Limited Partnership Act, 6 Del. C. §17-101, et seq., and the Delaware Limited Liability Company Act, 6 Del. C. §18-101, et seq., and have been given effect by the Delaware courts. Nakahara, slip op. at 29 (“Clearly the Legislature intended to provide Delaware business trusts and limited partnerships wide latitude in the drafting of their governing instruments.”). If you have any questions regarding this article, please contact The Delaware Counsel Group, LLP at (302) 576-9600. This article is prepared for informational purposes only and should not be relied upon as or be considered legal advice. Copyright © 2004, 2008, The Delaware Counsel Group, LLP.

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A Comparison of the Law Governing Delaware Statutory Trusts and Maryland Corporations

Operating as REITS

Delaware Statutory Trust (DST) Maryland Corporation (MD Corp.) Advantages of DST

Governing Documents

Certificate of Trust • Filing Certificate of Trust with the Delaware Secretary of State forms DST.

Articles of Incorporation • Filing Articles of Incorporation with the State of Maryland required to form MD Corp.

• In a DST, the freedom to establish by contract the rights and obligations of the parties is subject to very limited exceptions.

• One page document, includes only name of trust and name and address of its Delaware trustee.

• Detailed information must be included.

• DST requires no public filings other than one page Certificate of Trust notice filing.

• Information filed is available to the public.

Trust Agreement • Parties relationship is governed by contract -- Trust Agreement. • Trust Agreement is private and is not filed with the Delaware Secretary of State.

• Shareholder approval (with limited exceptions) and filing with the State of Maryland required to amend Articles of Incorporation.

• Trust Agreement can provide for amendment without investor approval, or public filing.

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Delegation of Management

• Business and affairs can be managed by trustee(s) or delegated to another person or entity.

• Statute requires operations to be governed by the board of directors in accordance with statute and powers set forth in Articles of Incorporation.

• In a DST, the parties to Trust Agreement determine delegation of trustee powers without statutory limitation.

• No limitation on trustee(s) power to delegate management.

• Authority of board to delegate to other parties is generally limited to ordinary course of business decisions.

Duties of Fiduciary

• Fiduciary duties of trustee(s) and any managers can be established and limited or eliminated by Trust Agreement, and are not set by statute.

• Fiduciary duties of the board of directors are governed by statute and by common law.

• In a DST, the parties to the Trust Agreement establish and thereby may limit or eliminate by contract the fiduciary duties of the trustee(s) and any trustee delegatees, thus minimizing exposure to liability.

Trustee/Director Liability

• Trust Agreement can restrict liability, subject only to public policy exceptions; i.e. implied covenant of good faith and fair dealing.

• Statute imposes on directors a good-faith and reasonable person like standard.

• In a DST, the parties establish the limitation/extent of Trustee(s) and management liability to shareholders and other parties.

• No punitive damages in Delaware Court of Chancery, a court of equity.

• Can limit director liability for monetary damages in Articles of Incorporation – cannot limit liability where director received an improper benefit or conduct was actively and deliberately dishonest. • Punitive damages could be awarded in a Maryland court of law.

• A DST can provide Trustee(s) and management more certainty and less exposure to liability.

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Series and Classes of Ownership Interest

• Unless otherwise provided in the Trust Agreement, management may establish new classes, groups or series of shares or “beneficial interests” when desired without shareholder approval. • Management may amend rights, powers and authority of existing shares without shareholder approval to the extent provided in the agreement.

• Shareholder approval is required to change the terms of any existing series or class or to create new series or class -- can grant authority to board of directors to increase or decrease total authorized shares or shares of any class without shareholder approval.

• In a DST, management can have the power to alter capital structure without shareholder vote or public filing.

• Trust Agreement can limit liability between series of shares

• Shareholder approval required to amend rights, powers and authority of existing shares.

• No filing required with Delaware Secretary of State to establish new class, group or series or amend rights, power and authority of existing shares.

• Any change requiring amendment to Articles of Incorporation must be filed with State of Maryland.

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Shareholder Voting Rights, Meetings, Quorum, Record Dates and Proxies1

• Trust Agreement establishes trustee and shareholder voting rights, if any, including with respect to Trust Agreement amendments, mergers and sales of assets.

• Statute mandates voting rights for shareholders.

• DST can restrict or even eliminate the right of investors to vote on any and all issues. • DST has no mandated shareholder meetings.

• No requirement to have an annual meeting. • DST statute imposes no rules with respect to notice of meetings, quorum requirements, record dates, or proxies.

• Statute mandates that significant actions such as amendments to Articles of Incorporation, mergers and sales of assets require two-thirds shareholder vote unless Articles of Incorporation requires otherwise. • Statute mandates annual shareholder meetings

• Statute mandates shareholder meeting notice and record date requirements.

• Generally, statute requires a majority of shareholders to establish quorum. Statute establishes rules and restrictions on proxies, their duration and exercise.

1 New York Stock Exchange or NASDAQ rules may impose requirements for shareholder voting and other matters beyond the requirements of Delaware or Maryland law.

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Removal of Trustees/ Directors

• Trust Agreement can prescribe any requirements for removal of trustee(s). •There must be at least one Delaware based trustee at all times unless trust is registered under the 1940 Act.

• Statute mandates that director(s) can be removed with or without cause by a majority vote unless otherwise provided in the Articles of Incorporation.

• In a DST, the parties are free to establish in the Trust Agreement how the trustee removal process will operate.

Shareholder or Investor Liability

• Limited to investment. • Limited to investment. • Liability limited to investment in both DST and MD Corp.

Indemnification • Trust Agreement may provide indemnification for any trustee, director, officer, employee, shareholder or other person from and against any and all claims.

• Statute allows indemnification for directors, officers, employees and agents for expenses in defending against a proceeding, for settlements, judgments, penalties and fines.

• In a DST, the flexibility to establish broader indemnification makes it easier to attract quality trustees/directors and management.

• No indemnification allowed when found liable in derivative suit unless ordered by Court, or where person:

(i) found to have acted in bad faith/active and deliberate dishonesty

(ii) received an improper benefit or,

(iii) believed he/she was acting unlawfully.

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Shareholder Right of Inspection of Business Records

• Trust Agreement may limit or eliminate the shareholders statutory right to inspect business records.

• Shareholder (including a group of shareholders) holding 5% for six months has a statutory right to inspect the books and records, including the shareholder list.

• In a DST, restrictions against right to inspect is permitted, including eliminating access to shareholder list.

• Any shareholder may inspect by-laws, shareholder meeting minutes, annual statements of affairs and voting trust agreements.

Development of Business Laws

• Common law well developed by Delaware Court of Chancery

• Business related common law and statutory interpretation not fully developed.

• Delaware business law is the most developed in the United States.

Courts • Delaware Courts, including well-

known Court of Chancery, ranked #1 by U.S. Chamber of Commerce study.

• Maryland Courts ranked #29. • Universal demand requirement in derivative cases.

• Delaware Courts ranked #1 • DST can establish requirements for derivative cases.

• Trust Agreement prescribes rules regarding derivative cases, including demand requirements.

Legislature/ Government

• Delaware lawyers work with legislature to continually update business laws as needed to reflect changing business environment.

• Delaware Legislature very responsive to business needs and accustomed to changes and innovation in business laws.


• Delaware has very accessible and experienced Secretary of State corporation office.

This chart is prepared for information purposes only and should not be relied upon as or be considered legal advice. Please contact us if you have specific questions regarding the application of this information. Copyright © 2004, 2008, The Delaware Counsel Group, LLP.

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OVERVIEW OF SIGNIFICANT 2007 AMENDMENTS TO THE DELAWARE LLCA, DRULPA, DRUPA AND THE DGCL1

I. LLCA/DRULPA/DRUPA.2

A. Definitions. Amended §18-101 of the LLCA and §17-101 of DRULPA

to, among other matters:

• Include in the definition of limited liability company (“LLC”) agreement and limited partnership (“LP”) agreement, implied agreements.

B. Registered Agent and Registered Office. Amended §18-104 of the

LLCA, §17-104 of DRULPA and §15-111 of DRUPA to, among other matters:

• Confirm that the business office of a partnership’s or LLC’s

registered agent shall be identical to such entity’s registered office. Also amended §18-904 of the LLCA and §17-904 of DRULPA to:

• Conform such sections to § 18-104 of the LLCA and § 17-104

of DRULPA regarding the entities that may serve as registered agents for foreign LLCs and LPs, and to confirm that a foreign LLC’s or LP’s registered agent’s business office shall be identical to the registered office of such foreign LLC or foreign LP.

1 These amendments were effective August 1, 2007. 2 “LLCA” refers to the Delaware Limited Liability Company Act (6 Del. C. § 18-101, et seq.), “DRULPA” refers to the Delaware Revised Uniform Limited Partnership Act (6 Del. C. § 17-101, et seq.) and “DRUPA” refers to the Delaware Revised Uniform Partnership Act (6 Del. C. § 15-101, et seq.). Copyright © 2007 The Delaware Counsel Group, LLP.

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C. Formation and Cancellation. Amended §18-201 and §18-203 of the LLCA, §17-201 and §17-203 of DRULPA, and §15-105 of DRUPA to, among other matters:

• Confirm that a LLC agreement (written, oral or implied) is required

to form a LLC under the LLCA. • Add a new subsection to §17-201 of DRULPA to conform it to the

structure of the LLCA and provide that a LP agreement can be entered into or exist before, after or at the time of the filing of a certificate of limited partnership and be made effective as of the formation of the LP or at such other time as provided in or reflected by the LP agreement.

• Provide that the Delaware Secretary of State shall not issue good

standing certificates for an LLC, LP or partnership if the certificate of formation, certificate of limited partnership or statement of partnership existence is cancelled.

D. Merger, Conversion, Domestication or Transfer. Amended §18-209,

§18-213 and §18-216 of the LLCA, §17-211, §17-216 and §17-219 of DRULPA, and §15-902, §15-903 and §15-905 of DRUPA to, among other matters, provide that:

• A LLC agreement, LP agreement or partnership agreement may

provide, as the case may be, that a LLC, LP or partnership shall not have the power to merge or consolidate, transfer, domesticate or continue, or convert.

• Confirm that a merger or consolidation of a LLC, LP or partnership

does not constitute dissolution of such entity.

E. Series. Amended §18-215 of the LLCA and §17-218 of DRULPA to, among other matters, provide that: • An LLC agreement or LP agreement may establish series of assets. • Clarify the manner in which assets of a series must be accounted for. • Add a new subsection to confirm the broad purposes and powers of a

series, including that a series shall have the power to, in its own name, contract, hold title to assets, grant liens and security interests, and sue or be sued.

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F. Certificates of Interest. Amended §18-702 of the LLCA, §17-702 of DRULPA, and §15-503 of DRUPA to provide that an LLC, LP or partnership shall not have the power to issue a certificate of LLC interest, or partnership interest, as the case may be, in bearer form.

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II. DGCL.3

A. Board of Directors. Amended § 141 of the DGCL to clarify that when a

certificate of incorporation confers upon a director greater voting power, such voting power applies to such director’s vote in a committee or subcommittee of the board, unless otherwise specified in the certificate of incorporation.

B. Election of Directors. Amended § 216(4) of the DGCL to clarify that,

unless set forth in the certificate of incorporation, where a class or series is granted a separate vote in the election of directors, such directors are elected by a plurality of the applicable votes.

C. Appraisal Rights. Amended §262 of the DGCL to, among other matters:

• Provide that beneficial holders of stock held in street name or in a voting trust may file petitions for appraisal in their own name and demand a statement of shares as to which appraisal demands were received.

• Clarify that stockholders who have not filed a petition for appraisal

or joined an existing appraisal action, may withdraw their appraisal demands and receive the merger consideration.

• Establish a presumption, which may be overcome for good causes,

that interest on the value of the shares be awarded from the effective date of the merger until the payment of judgment compounded quarterly at the rate of 5% over the Federal Reserve discount rate.

D. Merger. Amended §§ 251(c), 251(g) and 255 of the DGCL to provide

that merger agreements do not need to certify as to the stockholder or non-stock member vote if a certificate of merger or consolidation is filed in lieu of filing the merger agreement.

3 The “DGCL” refers to the General Corporation Law of the State of Delaware (8 Del. C. § 101, et seq.).

This overview is for informational purposes only and should not be relied upon as or be considered legal advice. Copyright © 2007, The Delaware Counsel Group, LLP.

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LLC’s, LLP’s, DST’s, LP’s: Why and how are alternative entities used in cross border transactions?

1. Introduction

Thank you for inviting me to the ABA Global Business conference to speak on this topic. My name is Robin Johnson. I am a corporate partner at Eversheds LLP, with over 20 years’ experience specialising in M&A, private equity, fundraising and joint venture work in the UK and across Europe. Joining me will be Ian Molyneux, the European General Counsel of Parker Hannifin, who will be talking about how Parker Hannifin organise their European structures in practice.

My session will focus on the different business structures and entities that can be established in Europe, such as different types of company structure, partnerships, limited liability partnerships and incorporated branch offices of overseas parents.

I will examine the advantages and disadvantages of alternative structures and entities in comparison with the traditional parent company/subsidiary limited company structure. I will review the key considerations that must be taken into account and although we will not be able to cover the whole of Europe in the time allowed, provide some basic analysis on a few countries, such as England, Germany, France and Italy, as well as the tax reasons for doing business in Switzerland, for example, so that I can flag the issues for you when you are embarking on an international acquisition.

I will also provide a case study on why and how a specific European structure was set out the way it was and the lessons to be learnt.

2. Key Considerations

Before a company sets up various entities across Europe it is very important to have given forethought to the key considerations and reasons why it is establishing a presence in Europe. Key considerations include what the tax

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treatment of the entity will be as well as the wider implications for the parent and the international group.

You need to think about the corporate governance and administrative burden of particular entities and particular countries. This includes registration and filing requirements of the country’s company registry, accounting requirements and standards and compliance with company and regulatory legislation, whether this is an act of parliament, a civil code or both.

You should also consider the corporate control of the entity and decision making in practice. Chains of command need to be established and the balance of power between officers in different countries considered. Management consent issues are paramount and there needs to be the flexibility and adaptability to make decisions on the ground without bureaucratic decision making structures that cause unnecessary delays in a group’s home country.

It is also necessary to consider the fiduciary duties and employee rights of directors, managers and officers that come with a particular company or a particular structure.

You should check the company’s liability for debts and contractual obligations, as well the directors’ and managers’ potential exposure, civil and criminal liability and the governing law provisions of each country, whether this is EU law, national or local law. The court system and the enforceability of judgements in a country should be examined. It is useful to establish whether a country has an arbitration treaty with a parent’s country, as well as a double taxation agreement (DTA).

Finally there are also reputational and public relations issues. It is necessary to consider how the new entity will be conceived by employees, customers, clients, business partners as well as national and local government. Will partners in a country prefer the perceived prestige of working with a company rather than a branch office?

3. Tax

I do not want to speak ‘chapter and verse’ to you on particular aspects of particular tax systems in Europe but to give you a flavour of the kind of tax rules

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that must be taken account, I have put up a screen shot of a table Eversheds has prepared comparing the tax aspects of different holding companies in different European countries. At a glance, this includes factors such as what, if any capital duty is payable on increasing share capital, rules on acquisition finance, thin capitalisation, withholding tax on payments to foreign parents, tax on dividends received, capital gains tax on shares and subsidiaries and tax on capital distributions on the liquidation of a holding company. It is crucial to consider these issues when deciding upon setting up a company in a particular territory.

4. Directors Law of Europe

In addition to tax considerations you must consider the different rules each country has for the company itself as well as directors, managers and officers in each European state. Eversheds has produced a product that allows you to search through different countries’ regulations that affect the directors. This is called “Directors Law of Europe” and I will now run a quick demonstration to show you how to search for the questions that you may find yourselves having to answer in crucial situations.

5. Structures in England

In England, alternatives to a limited company or public limited company (plc) include branch offices of the overseas parent, partnerships and limited liability companies.

5.1 Branch or subsidiary?

To give you an idea of the issues, I will now talk about the decision as to whether to set up a branch office compared to a subsidiary company in England.

A company incorporated in England, whether or not a subsidiary of an overseas company has a distinct legal personality so it can own and deal with the property and can sue or be sued in its own name. This has advantages and disadvantages. A branch for an overseas company has no legal personality distinct from the overseas company. A subsidiary is liable for its own debt but its parent is not. However, an overseas company with a branch in England is liable for the debts and obligations contracted through the branch in its home country. Despite this

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there may be enforcement issues about going against the overseas company’s assets outside of England. It should also be noted that there is a general international rule that one country does not collect the taxes of another, though Sovereign Wealth Funds are causing interesting issues here, so it is unlikely HM Revenue and Customs in the UK would be able to enforce a UK tax liability against an overseas company’s non-UK assets.

It is necessary to consider the territory of the head office of your company and the effect of any relative double taxation agreement the UK has with that country when considering which vehicle to use.

A branch in the UK may not attract any UK tax if its activities do not constitute trading. This could be if you only want to set up a representative office in the UK that, for example, channels enquiries to overseas head office and just purchases materials for the business overseas. This representative office status is only obtained when these ancillary services are provided solely or mainly for the benefit of the overseas company in question. Nevertheless, if a subsidiary company is carrying on similar peripheral activities, it is usually possible to negotiate with HM Revenue and Customs for tax to be assessed on a fixed basis on a deemed profit of 10% of overhead expenses or a percentage of turnover.

Rate of UK Corporation Tax

The full rate of corporation tax payable by a UK resident company changed from 30% to 28% with effect from 1 April 2008. There are further benefits potentially available - if a company has no associated companies and if its taxable profits in any year are less than £300,000, then a small companies rate of 21% tax will apply. There is also marginal relief available to companies whose profits are between £300,000 and £1.5m. Once profits exceed £1.5m the 28% rate applies to the total profits and not just for the excess over £1.5m.

Conversely, profits of a branch office are taxed at the full 28% except where there is a double taxation agreement (DTA) that provides for non-discrimination against an overseas company operating in the UK.

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Dividends

There is no withholding tax on dividends. Therefore, subsidiaries of foreign companies can remit profits without further charges to tax. However, although a dividend carries a tax credit of 10%, generally a repayment cannot be obtained in relation to this. Some repayments may be obtainable in relation to certain DTA’s but these are likely to be immaterial unless in relation to extremely large dividends.

Transfer Pricing and Thin Capitalisation

It is difficult to minimise taxable UK profits by a UK branch or subsidiary dealing with its head office or parents on disadvantageous terms, as there are provisions in UK legislation and DTA’s is to counteract this. HM Revenue and Customs can adjust profits to what they should have been under an arm’s-length transaction. Interest payments on loans to finance UK operations may be disallowed for tax purposes if the UK company is thinly capitalised. If the debt to equity ratio for the UK business is greater than 1:1 then capitalisation rules have to be considered. This also occurs if subsidiaries or branches’ borrowings are guaranteed by parents.

Utilisation of Trading Losses

Losses of a UK branch may be available to set against the worldwide profits of the overseas company which established the branch and against future taxable profits of the branch for UK purposes.

In contrast, in the case of a UK subsidiary with trading losses, in the absence of a US ‘check to box’ rule procedure which allows transparency for foreign tax purposes, losses can normally only be carried forward to set against future profits of the UK subsidiary.

Therefore it may be beneficial in the early years of trading in the UK to do so through a branch to take advantage of this double loss relief. Once profitable the UK business may be advised to carry on through a subsidiary to obtain the lower rate of corporation tax. There may also be other UK companies in the UK tax group to set group relief off against. Tax considerations also need to be thought about in terms of the current or future sale of businesses or shares.

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Company law requirements

Company law requirements are more onerous on subsidiaries than branch offices. There are more Companies House requirements for accounts to be audited, more filing deadlines as well as, for example, the regulation of director service contracts, loans and issues such as substantial property transactions with directors. There are even more administrative requirements for public limited companies as regulations such as the listing rules and takeover code apply on offers of shares to the public.

Liability

In theory, branch offices of overseas parents carry more liability than subsidiaries, as creditors can go against the overseas parent of a branch, although as discussed there are enforceability issues. Creditors of a subsidiary can only go against that separate legal entity, unless of course the parent has provided guarantees. Generally borrowing is easier for a subsidiary in the UK than a branch, although power of the parent may influence this as well.

In terms of directors’ liability, it is unusual but possible to pierce the corporate veil in England and directors can have both civil and criminal liability. The Companies Act 2006 codifies many of the duties of directors and directors now must promote the success of the company for the benefit of the members in various ways. Criminal liability may attach to directors if the company commits an offence and it is due to the consent, connivance or neglect of the directors. There can also be criminal liability in relation to various health and safety offences, financial markets abuses such as fraudulent trading and deception in insolvency situations.

Control

In relation to the control of an entity in another country, the parent needs to be careful that the directors have enough power to effectively manage the day to day operation of the company but not too many powers whereby they can make decisions that disadvantage the parent. Having said that, it would be inconvenient for all key decisions of the branch to have to be made overseas, especially if flexibility is required and speed at the coalface.

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Reputation

Reputationally in England there may be more prestige and comfort working for or dealing with a company subsidiary actually incorporated in England, rather than a branch office whereby it is apparent that all decisions are made overseas.

5.2 Partnerships

The advantages of partnerships compared to a company are that they have a flexible structure and much greater freedom of how they are financed and managed. There is also a favourable tax regime for partnerships as there is no employee’s national insurance payable on partner profit shares.

However, the big drawback of the partnerships is that there is joint several liability and potential unlimited liability to third parties for the partners. It is also difficult to accommodate partners with different interests, different exposure and different roles within the structure.

5.3 Limited partnerships

Limited partnerships are a form of partnership in the UK regulated by the Limited Partnerships Act 1907. These LP’s are not legal separate entities. As well as one or more general partners with the task of managing the business, some partners can register an election not to take an active role in managing the business in exchange for getting limited liability. There must be at least one partner with unlimited liability anyhow. There is currently a Law Commission review underway in the UK as to whether there should be an option to form a partnership as a legal separate entity that will assist in limiting liability.

5.4 Limited Liability Partnerships

Limited Liability Partnerships have become an extremely popular vehicle for professional firms such as lawyers and accountants to organise themselves. They combine certain aspects of companies with other aspects of partnerships.

Similarities LLPs share with companies include:

• A LLP is a body corporate - its own legal entity with the ability to enter contracts, own property and incur liabilities. The body corporate is

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separate from the members. As the LLP owns the assets of the business, it is liable for its own debt.

• Members have limited liability because they are separate from the LLP. Members bind the LLP, but not themselves personally, when the LLP enters a contract, just like directors bind a company. This is in contrast to partners, who are jointly liable for contracts entered into by the partnership. The members of an LLP are agents whose liability is limited to the contributions they have made.

• Nevertheless, as with directors, members can be held liable for negligence for breaching a duty of care that they have assumed. In some instances, banks can ask for personal guarantees from them as well.

• LLPs have very similar incorporation, accounting and filing requirements to companies. Such documents must be filed at Companies House and a significant number of the provisions of the Companies Act and Insolvency Act apply to LLPs.

• LLPs can create floating charges like a company.

• Members of LLPs may be individuals or corporate bodies and there is no limit on the maximum number of members. There must be two appointed members, but (unlike a partnership) the LLP will continue for a certain period if one member leaves. However, this cannot be indefinite and Insolvency Act winding up provisions may apply.

Similarities LLPs share with partnerships include:

• LLPs have the tax transparency of partnerships so members are taxed on their share of the profits. They also benefit from various reliefs and favourable national insurance treatment.

• The members are governed by a Limited Liability Partnership agreement that is private and versatile. Members can agree different profit shares, management responsibilities and procedures for making decisions, as they see fit.

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• LLPs have no share capital and thus no rules on maintaining this capital.

Therefore, the advantages of LLP’s are that they have the flexibility and tax treatment of partnerships in addition to the limited liability of members and a corporate body with a separate legal personality. LLPs also have less formal decision making and administration than companies and the advantage of a confidential LLP agreement.

5.5 Limited Liability Company

Having discussed these alternative entities, it should be remembered that a limited liability company has several advantages such as a separate legal entity in which shareholders’ liability is limited to the contributions to the company’s share capital, established law and practice and the flexibility of equity and debt finance. There are also the employee incentives such as share options. People may see disadvantages of a limited liability company as having a complicated and formal administrative burden and complicated tax rules in terms of liability for CGT various rules on transfer duty credits and the ability to off-set losses.

6. Structures in the rest of Europe

Obviously I would need to bring in my colleagues in Eversheds’ other offices across Europe to fully brief you on how to organise entities in their respective countries, but I thought it would be useful just to give you a flavour of the different entities that exists in France, Italy and Germany in order for you to gain appreciation of why different structures should be considered. Please appreciate that there are many different corporate vehicles in a country and these have characteristics and differences that may assist or burden you.

France

In France there are various different forms of company. These include an SA which is a corporation, an SARL, which is a limited liability company, an SAS, which is a simplified joint stock company and there are also partnerships as with the UK.

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An SA corporation is common investment vehicle if you want your subsidiary to list on the stock market or do an initial public offering (IPO) of its shares. This has a lot of administrative and regulatory requirements

An SARL is a traditional limited liability company that can be transformed into an SA before an initial public offering.

An SAS is a simplified joint stock company and is similar to a limited company in the UK in that it has some registration formalities, a minimum share capital of approximately $50,000. Its parent company will be separate from the subsidiary so is unlikely to be liable for the actions of the subsidiary.

Tax issues to be considered for any of these companies are thin capitalisation rules, restrictions on loans from foreign affiliates and controlled foreign company tax rules. There are also double taxation agreements for example with the US, whereby if there is any discrimination against a US subsidiary, the company may be able to use a DTA to its advantage.

In France, as outlined in our Directors Law of Europe product, directors can be held liable for civil breaches of duty in terms of non-compliance with company rules or wrongful managerial acts and criminally, such as for breaches whilst performing their directorial duties, breaches of employment law and if employees under their control are fraudulent, negligent or put people’s lives in danger.

Partnerships

As with the UK, partnerships in France are tax transparent. Profits and losses are directly attributable to partners unless the partnership elects to apply corporation tax. When considering a partnership it is necessary to consider the French legislation -the administrative guidelines and the translucency approach, as well as concerns over limitation of liability.

6.1 Italy

In Italy companies are incorporated as either an SPA, a share company or an SRL, a limited liability company.

The main differences between an SPA and an SRL are the following:

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• Mimimum share capital requirements: SPA: € 120,000; SRL:€ 10,000;

• The ownership of an SPA is represented by shares. Shares certificates are tradable in accordance with the ordinary rules applicable in respect of negotiable instruments. On the other hand, the ownership of an SRL is represented by so-called "quotas", which are not embodied in negotiable instruments, but are equally freely transferable by way of notary deed.

• SRL companies, as opposed to SPA companies, cannot be listed in the stock market.

• Directors in an SRL type of company may be appointed for an indefinite period of time (i.e. until revocation), while the term of office of Directors in an SPA cannot exceed three years, but Directors may be re-elected.

• It is mandatory for an SPA to have three permanent and two alternate members for the Board of Statutory Auditors (“Sindaci” in Italian i.e. external advisors with duties of control over the Directors’ activities and the company’s accounts). This requirement only exists for an SRL if it has a share capital in excess of Euro 120,000 or if in the course of its business for two consecutive years, two of the following thresholds are met/exceeded: the total assets are over 3,250,000 Euro; revenues are over 6,750,000 Euro; and/or the average number of employees per year is fifty (50).

SRL companies are, in general, more flexible and less costly vehicles than SPA companies, but SRLs are not permitted to issue bonds and marketable securities (for example shares, as with a SPA). Therefore, the ability of a SRL to raise capital from the public is limited.

Directors of Italian companies can be held liable towards the company for failing to fulfil their duties, towards creditors for failing to preserve the company’s assets or shareholders or third parties for fraud or gross negligence.

SPA, SRLs and branches are subject to Italian corporate tax (IRES) levied on profits at 27.5%. Branches limit this taxable income to the local income, while

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SPA and SRLs are taxed on their worldwide income. IRAP (regional tax) is also levied at 3.9 % on a different tax basis, i.e. without deducting financial interest and cost of employees.

Tax returns must be filed annually. An annual tax return in respect of withholding income tax to be paid on the employees' salaries also needs to be filed with the local competent tax authorities.

Partnerships do not have a legal personality and therefore there is unlimited personal liability for at least some of the partners. Profits and losses accrue directly to partners. However the benefits of double taxation treaties do not generally apply to partnerships.

6.2 Structure in Germany

The most common form of entity in Germany is a private limited liability company - a GmbH. A GmbH in principle has no restrictions on foreign control or the residency of directors. There are registration formalities, i.e. the GmbH needs to be registered with the commercial register of the local court located at the company’s corporate seat, in order for the GmbH to become a legal entity as such. The minimum share capital of a GmbH currently amounts to EUR 25,000 (but there are legislative ambitions to reform the law pertaining to private limited liability companies and, in the course of such reform discussions, it is being considered that the minimum share capital requirements will be decreased). The parent company is generally not liable for the debts of the subsidiary unless, for example, it has given a guarantee or is contractually liable to make up the subsidiary’s loss. As in other countries there are various reporting and filing requirements and from a tax perspective, different rules on, for instance, corporate income tax, trade tax, VAT, dividends, interest barrier rules on loans and similar financial instruments and control foreign company rules.

Other structures in Germany include the AG - a stock corporation. This is the only German entity that can have shares quoted on the stock exchange, and it requires the fulfilment of various – and, compared to other legal forms of organisation, stricter – formalities. The AG likewise needs to be registered with the commercial register of the local court located at the entity’s corporate seat, and the minimum nominal value of its share capital amounts to EUR 50,000.

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A director of a German GmbH or an AG cannot usually be held liable if the company is the contractual party. The managing director of a GmbH is, however, liable vis-à-vis the company in cases of breach of duty, i.e. if he/she has not applied the due care of a prudent businessman in relation to the affairs of the company. The members of the management board of an AG are subject to similar provisions under the German stock corporation law, but are generally – unlike the managing directors of a GmbH – not bound by the instructions of the shareholders’ meetings. In addition, criminal negligence could arise for negligence, for example, in relation to tax liability or certain misrepresentations. The GmbH can (and in some specific cases must) and the AG must have a supervisory board whose primary function is the supervision of the management board; its members likewise can be subject to civil and criminal liability in cases of violation of their duties.

In Germany a partnership based on civil law is called a GbR and is often used for smaller real estate transactions or joint ventures. However, partners are jointly and severally liable without limitation. GbRs are not registered with the commercial registers.

A general partnership in Germany is known as an “OHG” which is used for commercial trade under a joint business name. The OHG needs to be registered with the commercial register. The personal liability of each of its partners is unlimited. Therefore, often the form of a limited partnership, a so-called KG, is chosen for the operation of a commercial enterprise in Germany. Liability of some of the partners is limited to the amount of their respective capital investment. However at least one other partner must be subject to unlimited liability. A GmbH can fulfil this unlimited liability rule and this type of entity is called a “GmbH & Co KG”. Therefore as the GmbH is only liable to the value of its assets, the liability of a “GmbH & Co. KG” in fact becomes limited, but in general also subject to the registration and filing rules which govern corporations such as the GmbH and the AG. The “GmbH & Co. KG” is nevertheless quite popular as it allows, within a certain framework, the combination of the advantages of a partnership and a limited liability company.

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6.3 International Structuring

As you will have seen there are many different types of vehicle available in the major jurisdictions in Europe which can be treated very differently for tax purposes.

The objectives in structuring cross border transactions is normally to ensure that tax is paid wherever possible in a low tax jurisdiction and double taxation of the same profits is avoided.

There is a network of double taxation treaties designed to eliminate double taxation to facilitate international trade and such treaties together with a combination of different tax rates in different jurisdictions and the choice of entities available can enable international groups to structure their operation so that profits are realised in the lower tax jurisdictions.

It is also important to ensure whatever group structure is put in place repatriation of funds to the parent can take place in a tax efficient way. Tax withholdings can apply in relation to payments of dividend or interest in certain jurisdictions and group structures can avoid such withholdings for example by structuring dividend and interest payments through countries which have double taxation treaties which reduce applicable withholdings to a nil or nominal amount.

The use of intermediate holding companies in tax favoured jurisdictions can also minimise tax if proceeds are not remitted to the parent jurisdiction. Such structures can also increase the tax efficiency of financing arrangements for example by locating finance companies in jurisdictions which have no or minimal transfer pricing or thin capitalisation rules or taking advantage of the different tax treatment of entities in different countries to secure tax deductions for interest to reduce the overall economic cost of borrowing (so called double dip structures).

In particular an Irish finance company can be attractive because of no thin capitalisation and minimal transfer pricing rules in Ireland and its global network of double taxation treaties.

Switzerland can also be attractive because of the low corporation tax which can apply particularly for certain companies which are tax privileged, for example

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where a company’s revenues are exclusively or primarily derived from commercial activities outside Switzerland or if the activities in Switzerland are administration activities carried out in Switzerland on behalf of companies in the group. If so corporation tax rates of as low as 10% may apply.

Holland and Belgium in particular can also be attractive countries because of their extensive double taxation treaties and relatively low tax rates, particularly if proceeds are not repatriated and in relation to financing arrangements.

It is not possible to give a hard and fast rule as to what jurisdictions may be appropriate for European operations without a full understanding of the nature of the business, financing requirements and how profits are repatriated within the group.

The Eversheds tax group have extensive experience of structuring cross border transactions to minimise tax in the jurisdictions where permanent establishments are created, to minimise tax on repatriation of funds through dividends and interest payments and advising on the most appropriate jurisdiction for a headquarter company or finance company.

6.4 Worked example of an organisation change across Europe

Now that we have given you a flavour of the different structures that you can apply throughout various countries in Europe and some of the reasons for doing so, we will now show you a worked case study, on a no-names basis, of how one of our clients organised itself throughout Europe and the lessons it learnt from this.

The original structure (as shown on the slide) involved an American holding company, a Dutch subsidiary, followed by a Dutch BV holding company and then various European subsidiaries. In order to benefit from US ‘double dip’ taxation and streamline burdensome regulatory requirements throughout Europe, the group structure was changed to keep the top three companies in place but add a Belgian BVBA holding company level above the other European subsidiaries.

In addition to this, based on some of the considerations I have discussed, the French subsidiary was changed from a SA to a SAS, a Belgian subsidiary was

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changed from a NV to a BVBA and a Spanish subsidiary was changed from a SA to a SL. This streamlined the administration considerably but to do these conversions, please remember there are practical issues to be dealt with such as bank consents in relation to the security over assets, auditors signing off the change and company law and employee rights issues such as the Works Council in France.

While the transaction was slightly unusual, it did highlight a number of interesting issues. In this particular case, and I think Ian will be talking about what he does in a little while, we had two parties that were prepared to cooperate with each other to get the most optimal structure. Advisors often say they will but in this case, they really did. The transaction involved both cash and stock as part of the consideration and that stock element helped there to be a mutuality of interest in terms of minimising tax leakage. In order to achieve this, the purchaser came up with steps they required the seller to take pre closing (there was a split exchange and completion so these were steps to be taken after exchange and post closing). Then there were other steps that were to take place at post closing but with the help of both parties.

Something that we do come across quite often in European deals is the fact that by taking a business out of a larger group, it may well be that some of the key internal functions of the target group are actually held in a different place within the sellers group so the first step that took place pre closing was to actually set up a Principal BVBA in Belgium and an Establishment Secondment in France to host the management personnel coming over as part of the deal.

Again, pre deal, the seller set up a Dutch holding company and transferred the shares of the target Opcos into the Dutch company for an intergroup loan.

As there was a stock element to this deal, the purchaser issued some of its shares to its own Dutch holding company in exchange for shares ie did a share for share exchange and to meet the rest of the consideration the new Dutch holding company of the purchaser also entered into a non recourse banking facility with a bank so that the Dutch holding company now held shares in its parent and had a facility from a bank.

This allowed at close for the shares in the parent company of the purchaser to be transferred plus cash to the seller who sold its Dutch holding company to the

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purchaser’s holding company. In addition, in this particular case there was an assumption of certain liabilities and the Purchaser also bought certain indebtedness from the seller which was of the target’s group, primarily the internal cash management systems.

The next step was for the purchaser’s holding company to capitalise up further the original seller’s holding company which is now the intermediate holding company of the target companies. This was done by way of a cash contribution and allowed the intermediate Dutch holding company to then have a treasury function with the target co’s.

The structure post closing looked like this. Seller owning a percentage of shares in US holding company which owned its own Dutch subsidiary, the Dutch subsidiary having a bank loan from a third party and that Dutch subsidiary owning the original target holding company with Opcos in a number of territories below.

However, because the main assets and the main operation of the business was going to be in Belgium, this wasn’t the end of the story. Post deal, the intermediate Dutch holding company transferred the shares of the target Opcos into the BVBA in exchange for a hybrid instrument. This hybrid instrument was treated as debt for Belgium purposes but equity for Dutch purposes.

The intention being that they would enter into a principal and toll management arrangement whereby in effect the income and operations of the group would be in Belgium and the target companies in each target Opcos would simply act as an agent or toll manufacturer for the Belgium company.

7. Conclusion

I hope my speech has been informative on different structures across Europe. If nothing else I hope it has enabled you to appreciate that when setting up entities/structures across Europe it is vitally important to consider the different options available in each country, what you are seeking to get out of your presence in that country, what your priorities are, whether it be tax considerations, liability issues or public relations implications and, on timing, that it saves a lot of time and effort in the long run if these issues are considered before you start operating in these European countries.

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I will now hand over to Ian Molyneux who will give further practical advice on how Parker Hannifin has structured itself in Europe.

Ian Molyneux

Thank you very much, Robin.

Following what Robin said in terms of the recent example that he has been involved with, as an International General Counsel in charge of both their European and Asian divisions of Parker Hannifin, you can imagine that my team and I spend a considerable amount of time dealing with reorganisations and implementations following acquisitions and divestments that we make.

Before I go into detail, perhaps I can just tell you a little bit more about Parker Hannifin.

Parker Hannifin is a $10 billion revenue conglomerate in the industrial and technical products area. We have five divisions, all of which are very internationally focussed. Each of those five divisions at any one time could be looking at a number of opportunities and as we operate down individual business lines with Group General Counsel for each of the divisions, as well as the overall international structure, we are having to review on a constant basis our corporate structure.

Notwithstanding the fact that Parker is such a multinational business, I am very keen on keeping as lean a corporate structure in Europe as possible. Having said that, we do have over 150 corporate entities in Europe alone.

By keeping the corporate structure as lean as possible, we ensure as few people as possible have personal liability as directors. It is vital the business works efficiently from a tax and treasury perspective so that cash management is kept to a maximum and we are able to repatriate funds and keep our tax cost base as low as possible.

As you can imagine, we do this on literally a daily basis and we are constantly reviewing our structures to ensure that we are creating the most efficient structure for Parker within Europe which then links back into its operations in the States.

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We have a very active acquisition program and if we don’t keep our corporate structure and our treasury and tax and repatriation objectives in line, we can easily come up with a very unwieldy structure and lose complete control so consequently one of the things we do on any acquisition is, even during the acquisition process, we are already planning and considering the best way in which we can integrate a business into our corporate structure. Consequently, it is important to us to give us as much flexibility in the acquisition documentation as possible to do substantial reorganisations post deal.

We have our own implementation team and each acquisition has its own implementation manager. That manager is not only going to be dealing in conjunction with legal on ensuring good compliance programmes are immediately put in place, that the target understands really the culture of Parker but also that implementation manager concentrates on getting the corporate structure right, the treasury functions right, the tax right so that it fits within the overall Parker arrangements.

We have substantial debt and assets below the holding company level and we are regularly talking to the tax authorities about matters on an international basis, for example thin capitalisation, interest deductions and withholding taxes.

It is essential to us that we are able to operate in Europe to the extent we can on an independent treasury management basis and therefore management of cash is extremely important to us whether it be looking through a cash pooling arrangement or whether it be looking at the ways in which dividends can be moved around the group or interest payments can be made on loans.

In terms of personal liabilities, we do try to keep our operational people away from board structures as much as possible. However, we do recognise that it is necessary in certain jurisdictions to have local/resident directors and in fact Directors Law of Europe which Robin showcased earlier has been an extremely useful tool for us in this regard where we do need to have local management on boards.

However, we do in our structure try to ensure that those boards whose local directors are present are operational only and do not get them involved in our corporate planning. For example, you may well find that we have holding

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companies in Europe where our treasury manager and I are both on the board but we don’t have an operational person.

Below that we may have operational boards where I may not be on the board. This allows the managers to concentrate on running the business, increasing its margin and meeting our target figures whereas it allows corporate people like myself to structure the business efficiently without having to explain in vast details to people who don’t really need to understand exactly what we are trying to do from a treasury, corporate compliance and tax basis.

I do however spend a lot of time training our people with compliance programmes such as export control, FCPA, anti trust, environmental, Health & Safety and directors duties is key to us and our people do understand the responsibilities they have and do understand the need to come and talk to us if they get into trouble which we obviously hope is kept to a minimum.

Within our corporate structure, we have had for some time a number of entities that exist and have been put in place for tax purposes over the years, mainly looking at things like withholding tax issues, double taxation treaties, the way in which we can move debt around and so to that end, higher up the level in our group we not only have a US holding company but a US investment company, a Bermuda company, Gibraltar companies and Luxembourg entities and we have a number of limited liability partnerships around the group and we also use to some degree the ability to do debt issues through the Channel Islands.

However, what I would like to talk about today is to just give you an example of exactly how our restructuring works in practice and the example I have is a pretty simple acquisition. Remember, one of our key aims is to reduce the number of corporate entities we have. If we don’t, we will become unwieldy, it will become very expensive in terms of audit and compliance fees, (notwithstanding the fact that Eversheds do a great job looking after a lot of our company secretarial work). We need to move cash around, we can’t leave cash in one particular entity. We can’t have that being managed on a dysfunctional basis. There would be a lot of leakage which we can’t afford to happen.

I am just going to take you through what would be a pretty simple deal but just to show you the acquisition integration planning which has to take place. I am not going to mention the name of the company though it is on record what deals

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we have done. This involved the acquisition of a UK company for one of our divisions and in this particular case, this company had assets in the Netherlands, France, Spain and a number of operations in Asia. However, I won’t for the purposes of today talk about the Asian operations.

As was mentioned earlier, for the purposes of US tax, a number of our companies could be branches, they could be corporations for the purpose of local tax, some will be treated as corporations in the States, some will be treated as partnerships in local jurisdictions and some will be treated as partnerships in the States but used as corporations in the local territory and in some cases, we actually have dual resident companies.

Our tax team are constantly looking at this and I don’t propose again to go into detail but what I am trying to make clear is that we do look at different structures.

This was not one of our larger deals, the consideration was less than $100 million but notwithstanding that, in terms of how you would fund the acquisition and then how you would do the restructuring, there were a number of steps that we had to take. The first was where do we get $100 million? Well, typically we fund through Canada and Bermuda but in order, as I said before, to manage cash on a standalone basis, we had done a recent deal where we had cash on the balance sheet in a Luxembourg entity which was an intergroup loan note account and so we started by transferring that money out of that entity into a Luxembourg acquisition vehicle. We normally use Luxembourg acquisition vehicle as vehicles to acquire businesses. Next our tax team looked at whether or not there were any 338 elections we needed to make either within the States or outside the States. During that, we are looking at NOLs, non operating losses, carry overs. The next thing we do is whether we should check the box for all the operations we had just bought in the UK, the Netherlands and France so that they are treated as being disregarded for US tax purposes.

The first thing we did in order to fund the acquisition of the Dutch part of the deal is that our Belgian operation which sits underneath our Dutch operation paid a dividend to the Dutch operation which allowed the Dutch operation to then purchase from the acquisition vehicle the operations of the Dutch group. When doing that, we are again looking at the tax implications of doing that, we

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look at the US implications to see whether or not there is any income on the dividends though normally there isn’t due to look through rules. We look to see whether any UK treasury consents are needed. They aren’t if you transfer companies between companies resident in the EU though the treasury does need to be notified but only within six months of it happening. We look at cash repatriation issues, whether dividend or loan is the right structure. We have to look at the Dutch tax implications to see whether or not there is any tax deductibility for interest costs, any elections for fiscal unity and we have to look at the Belgian tax considerations determining whether or not we have sufficient distributable reserves and the availability of the funds to actually pay the dividend.

Now we have the structure whereby the Dutch businesses have now moved across and we have a Luxembourg owner of a UK, French and Spanish operations and cash has moved from the Parker Netherlands to the Target Holding company.

The next step is now to move the UK operations from the Luxembourg operation to under our UK entity and we do that in exchange for the cash. This cash has come via our treasury in the US via Canada and involves issuing LP participation units into an LLP in the UK. However, because the Luxembourg entity has only held the operations for less than 12 months, there is a potential gain on the Luxembourg entity which we have to take account of but because we want to move the operations, that is part of the risk we have to take.

So the business structure is now like this. The Luxembourg acquisition vehicle has retrieved a lot of its original outlay.

The next step would be to move the French entities so they are owned by the Parker Hannifin existing French entity from the UK acquisition vehicle into Parker Hannifin France. Again, taking these steps which would be an intergroup transfer, we again would be looking at taxation issues, what is the capital gains position in France? Do we need treasury consent? How do we deal with repatriation when moving the monies between France and the acquisition vehicle? Is that a dividend? Should it be an upstream loan? Of course the intention would be ultimately for these companies that are existing acquisitions to be liquidated. What registration duties are payable? Do we need works

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council approval? Are there any thin capitalisation issues? For example, in France we realise that we have to make contributions of equity in exchange for new shares. By this stage in the process, we have got rid of the French entity, we have moved the Dutch entity and we are now left with a Spanish branch and a UK entity and cash has moved from France to the UK.

Well, again, repeating our theme we don’t like to have unnecessary entities within the UK so what we would do there is we would do a hive up of the assets except for the Spanish branch, up to the UK and we would probably leave that on an intergroup basis, so we would do a simple hive up on an intergroup basis. To clear out the monies that might be sitting in that company, we would then do a dividend up to the existing top company of the acquisition vehicle and remember all these companies have done a check in the box exercise so any tax will be disregarded for the purposes of US tax purposes. We would also do another dividend of the original holding company back up to one of the Parker Hannifin holding companies of any cash that has been received and the dividend note.

That then just leaves us with solely the Spanish branch and in that particular case, what we did here was because we had other activities that we were doing in Spain, we set up a Newco which purchased the shares of the remaining UK vehicle in exchange for cash or a loan note. There were no stamp duty implications, there was a substantial shareholders exemption in the UK and because it was a share deal, there was no real estate tax or VAT. So we have this Newco and we have the UK company, we have still got the branch so what we do next is we contribute the assets of the branch to the Spanish vehicle which was set up in exchange for shares and then we distribute those shares up to the holding company and enter into a liquidation of the UK entity. The process is completed. We now have done this acquisition but the whole of the original target group has now been put into the various bits within Parker Hannifin. What have we achieved? Well, we have achieved a number of steps. We have kept down our corporate structure to a minimum, absolutely key. We have moved the assets of various entities into the way that Parker Hannifin works on a divisionalised basis so we don’t need to now worry about this acquisition be separate to the rest of the group. From a tax and treasury perspective in doing all this exercise, we have checked what situation is with tax and treasury and we have now just included it within the ongoing operations of the group so we don’t

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need to worry about those. Obviously we had to look at the SPA to ensure that what we were doing did not lose us the benefit of reps and warranties, that is very important to us but we have gone back to keeping that structure as simple as possible.

While cash has moved around the group, the only outlay is the original acquisition cost. A single deal - yes - but ones that took over 50 steps to advise.

Any questions?

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LLCs, LLPs, DSTs, LPs: Why and How are Alternative Entities Used in Cross Border Transactions?

Different structures across Europe

Robin Johnson, Eversheds LLP andIan Molyneux, Parker Hannifin LimitedThursday 29 May 2008

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Different Structures across Europe

• Different entities• Advantages and disadvantages of alternative

entities and structures• Key considerations• Tax overview• Some country examples• Case study

Introduction

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Key Considerations

• Tax and DTAs• Corporate Governance and Administration• Corporate control• Liability – the company, the shareholders and

the directors • Court system/Arbitration• Reputation and PR

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Tax Overview

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Directors Law of Europe

• Key issues affecting directors across Europe

• Duties, Disclosures, Disqualifications, Disasters

• Resource tool

• Demonstration : www.eversheds.com/dledemo

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Structures in England

• Branch or Subsidiary

• Partnerships

• Limited Liability Partnerships (LLPs)

• Limited Liability Company

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Entities in France

• SA – corporation

• SARL – limited liability company

• SAS – simplified joint stock company

• Partnerships

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Entities in Italy

• SpA – share company

• SrL – limited liability company

• Partnerships

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Entities in Germany

• GmbH – private limited company

• AG – stock corporation

• Partnerships – civil law (GbR), general partnership (OHD), limited partnership (KG)

• “GmbH and KG” – limiting liability

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Tax Structuring

• Minimising the overall tax burden• Using double taxation treaties• Avoiding tax withholdings on interest and

dividends• Financing structures• Ireland• Switzerland• Netherlands/Belgium

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Case Study – Organisation Change Across Europe

Original Structure

Seller

Opcos (in 5 jurisdictions)

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Pre-Deal

Seller

Dutch BV

BVBA Opcos

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Share for Share Exchange

US ParentUS Shares

Newco Shares

Dutch Newco

Bank financing

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Seller Other Shareholders

US Parent

Dutch Newco

Seller Dutch Newco

Opcos BVBA

Bank debt

Structure Post Closing

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Seller Dutch Co

Opcos

Hybrid Instrument

OpcosBVBA

Parent

Dutch Newco Bank

Post Deal transfer

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Summary

• Consider the different options across Europe and in each country

• Consider the issues: – Tax– Governance– Administration– Liability– Reputation

• Forward planning!

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Parker Hannifin – Restructuring example

Target Holdco

Target Intermediate Holdco

Netherlands French Spanish Branch

Netherlands Netherlands Netherlands

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Target Holdco


Netherlands French Spanish Branch

Netherlands Netherlands Netherlands

Lux Co

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Target Holdco


French Spanish Branch

Lux Co

Cash moved from Parker NL to Intermediate Holdco

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Parker UK

Target Holdco


French Spanish Branch

Cash moved from Parker UK to Luxco

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Parker UK

Target Holdco


Spanish Branch

Cash moved from Parker France to Intermediate Co. Parker France funded by recapitalisation through NL

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Parker UK

Target Holdco


Spanish Branch

Dividend

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Parker UK

Target Holdco Target Intermediate Holdco

Spanish Cash/Note to Target

Spanish Newco

Target Co + Intermediate Co - Liquidated

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