More Related Content Similar to Alternative Structures for Life Sciences Companies: The LLC Holding Company (20) More from WilmerHale (20) Alternative Structures for Life Sciences Companies: The LLC Holding Company2. Presentation Outline
Overview
Establishing the LLC Holding Company
Benefits and Drawbacks of Using the LLC Holding
Company Structure
Timing Considerations
Summary
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3. Overview: What is Driving the LLC Structure?
Life sciences companies often have – or envision –
multiple programs
Multiple programs offer possibilities
Multiple exits
Different funding streams for different programs
Goal is to realize the maximum value for all
programs
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4. The Drawback of the C Corp
Sale or license of a program results in double
taxation if net proceeds are distributed to
shareholders
Sale of the stock of the whole company results in
a single level of tax
Buyer gets all programs, not just the ones it really wants
Little or no value attributed to “other programs”
Buyer likely to shut down the unwanted programs
Seller and its shareholders cannot realize the value of the
other programs
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5. What is the Alternative if Remaining a C-Corp?
Spin-off the other program(s) at the time of the sale
Likely significant tax cost
Spin-off the other program(s) at an early stage
Lower value results in limited, if any, tax cost
Independent companies
Required to finance each separately
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6. The LLC Holding Company Structure
Investors invest in LLC and programs are held in
subsidiaries (typically c-corps; possibly LLCs)
Investor
1
Investor
2
Investor
3
LLC Holding Company
Program 1
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Program 2
Program 3
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7. Establishing the LLC Holding Co. Structure
Original Company Merges with Merger Sub (tax free). Some or all of the existing
shareholders set up LLC Holding Company with a wholly-owned subsidiary corporation.
The subsidiary then merges with and into Original Company with all of the shareholders of
the Original Company receiving corresponding interests in LLC Holding Company. Merger
is tax free.
Pre-Merger – Some of Existing Shareholders
Post-Merger – All of Existing Shareholders
Existing
Shareholders
LLC Holding Company
Merge
Original Company
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Merger Sub
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8. Establishing the LLC Holding Co. Structure
Creating the Program Subsidiaries. If a new program will be pursued out of IP located in the
Original Company, the Original Company contributes IP to a newly formed C corporation
subsidiary and distributes stock of subsidiary out to LLC Holding Company. Process is
repeated for each program. This is a taxable transaction.
Existing
Shareholders
Existing
Shareholders
LLC Holding Company
LLC Holding Company
Stock
Original Company
IP/
Assets
Program
Subsidiary
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Original Company
Program
Subsidiary
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9. Establishing the LLC Holding Co. Structure
Operating and Scaling Up. The R&D employees, administrative employees and lease remain
at Original Company, which provides R&D services, administrative services and sub-leases
space to each program subsidiary under intercompany services agreements. If a new program
will be pursued out of IP located in an existing C corporation, that C corporation contributes IP
to a newly formed C corporation subsidiary and distributes stock of subsidiary out to LLC
Holding Company.
Holds only cash and
stock of subsidiaries
Existing
Shareholders
LLC Holding Company
Outside investor a
possibility
Services
contracts with
non-exclusive
licenses to
conduct R&D,
etc.
Original Company
(Lead Product)
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Program Sub #1
Program Sub #2
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10. Tax Benefits of LLC Holding Company Structure
LLC holding company is a tax “pass through”
vehicle
If program sale and distribution of net proceeds is
effected by sale of stock of subsidiary, just one
level of tax
Taxable gain is passed through to investors in LLC
Distribution of cash proceeds to LLC investors is tax free
Can provide management equity at LLC level
through profits interest
No cash payment required – zero cost equity
Capital gain rather than ordinary income
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11. Other Benefits of LLC Holding Company
Structure
Facilitates “Pure Play” equity investment
opportunities in individual programs (at program
sub) as well as all programs (at LLC)
Enhances preparedness for exit transactions,
including management continuity after exits
Provides convenient collection vehicle for
contingent payments
Can be implemented incrementally and is scalable
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12. Drawbacks of LLC Holding Company Structure
More complicated capital structure
Employees and some investors are not familiar with LLCs
Transfer of IP from Existing Company into program
subsidiaries is a taxable event from original
company
Could result in current tax due by existing company and
shareholders
Expensive to establish and administer
Create and operate multiple entities instead of a single
entity
Need to track and allocate management time and other
costs
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13. Drawbacks of LLC Holding Company Structure
Expensive to establish and administer, cont.
No consolidated tax returns
• Undesirable if some subsidiaries generate income and others
generate losses
Complex tracking of tax capital accounts
Corporate filings and sets of books and records for multiple
entities
More expensive financing rounds because all economic and
management terms must be precisely set forth; no
corporate law to backstop
Need for Intercompany agreements
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14. Drawbacks of LLC Holding Company Structure
Foreign investors and VC funds with institutional
LPs may be reluctant to invest in LLCs
C corporation subsidiaries avoid UBTI and ECI issues
Tax imposed on inter-subsidiary movement of cash
License deals would be at subsidiary level
Double tax problem persists
IP may need to be divided into fields in licenses to
subsidiaries
May be tricky to draw lines between fields
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15. Timing Considerations
Waiting until second program has matured means
the tax cost to implement structure may be too high
Establishing Holdco structure early in company life
means a lower tax cost but may be offset by the
extra cost of operating within the structure over time
Uncertainty as to likelihood of multiple exits
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16. Summary
Is it worth it?
Do you plan to develop multiple programs,
monetize these programs creating multiple exit
events and distribute the proceeds to the
shareholders upon each exit event?
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17. Wilmer Cutler Pickering Hale and Dorr LLP
Bill Caporizzo
Stuart M. Falber
william.caporizzo@wilmerhale.com
stuart.falber@wilmerhale.com
617-526-6411
617-526-6663
Rosemary G. Reilly
rosemary.reilly@wilmerhale.com
617-526-6633
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