This time I write about projects, as the full range of industrial investments and R&D projects have been been my passion for several years now. For a lawyer, life could not get much more interesting than sitting on the driver's seat of a windmill project (check out Finnish windmill project players here), BtL facility project or similar cleantech initiative (check out cleantech investment opportunities and events here) where intellectual property, patents and know-how in particular, play an important role. Perhaps it is not only that but the fact that you face a variety of difficult legal questions and risks at once and try to navigate through these unchartered waters with a group of investors, technology vendors, customers and owners each typically having their own different business objectives and agenda. We have been very involved with these assignments and had them in mind while this post was written. Yet, the rules outlined below can apply to any other R&D project that needs to be separated from the parent.
There could be wide variety of reasons behind incorporating a project. There might be, e.g., the the establishment of a joint venture with a business partner, or a company might seek funding and contemplated funding structures, such as private equity, necessitate certain legal form. The incorporation might also be prudent due to the mere fact that one wishes to separate new ventures and risky projects as their own legal entities and this way they protect their core business from additional risk exposure. Whatever the driver is, when this incorporation is decided, we hear the following question presented quite often: how do I actually incorporate our project as a separate legal entity with a view of a forthcoming investment round or transaction? If this sounds familiar, let me show some viewpoints to the issue.
There are several issues influencing the decision but, naturally, tax neutrality is one of the starting points as one does not want to end up paying taxes unless mandatory. It s not always easy to achieve tax neutrality in IP driven R&D projects. Typically there is a requirement that you have to have a viable business entity. Another element is that in many cases it is difficult to say that the project has a positive value as the project might consist of a mere Tekes (public funding body, see more here) loan coupled with some patents and personnel. The latter can be solved with additional capital contribution.
Also it should be noted that there is another point in tax neutrality that is not related so much to incorporation per se but more precisely to a subsequent sale or investment round. So in some cases, if you already know how the following transaction will be done, some structures are preferable over others. As an example, if you wish to achieve tax neutrality for your share deal which is planned to take place soon after incorporation, you must take into account that in some incorporation forms it is required for tax neutrality, among other matters, that you must own the shares for a period of twelve months. Here you might wish to consider partial demerger in stead. We prepared a short summary of the structuring points that would be relevant that would guide you forward in your incorporation exercise and hopefully this helps. We have listed here incorporation types, how target business may be selected, with a view towards subsequent transaction what are the requirements for tax neutrality (capital gain) and finally ownership structure considerations.
The key guide however is that you need foresight for your structuring efforts, you need to have a clear target in mind what you want to achieve and then build the legal structure accordingly. One of the most common structuring pitfalls is that one incorporates a project too late only before an imminent financing round and then you might end up into long discussions on taxation risks and possibly you also end up having innovative investment structures that are not always the easiest ones to sell forward. Good luck for your structuring considerations!
At the same time I want to mention that TRUST arranges a spring kick-off event on 15th April 2014 at Bank starting at 8.30 a.m. Once again we have an interesting agenda with varying topics from M&A, corporate finance and IP & technology. More information to follow and request and invitation by sending us e-mail. Hope to see many of you there!
Regards,
Jan
