The what, how and why on UK businesses doing a “Delaware Flip” to break in to the US market
Putting in place a Delaware holding company structure is a time-consuming process but may allow a company to access more capital and create increased shareholder value over the long term.
In simple terms, a Delaware flip is where a new US holding company is created to hold the shares of an existing UK company. It is typically achieved by the shareholders of the UK company exchanging their shares for shares in a newly-formed US corporation, usually a Delaware “C” corporation.
- Access to US capital: The most common reason that we encounter is to facilitate investment from US venture capital or other investors. While US investors may be open to investing in early stage UK companies, there remains some resistance and US investors may require their investment to be made in a US entity. Some US accelerators will only accept a US company onto their programmes.
- Exit planning: Forming a US holding structure may facilitate a sale to a US acquirer or going public on NASDAQ or another US public market.
- Customer-facing: As some US buyers may prefer to “buy American”, forming a US company may increase US business (although this may also be achieved more simply by forming a US operating subsidiary of the UK company).
Also worth considering are the following:
- Tax implications: Tax issues in both the UK and US should be reviewed and analysed including the implications for any EIS investors and on EMI options. It may be possible to accomplish the flip on a tax-free basis for the UK company with prior HMRC approval. The Delaware corporation will be subject to US federal and state tax. Transfer pricing advice may be required. With President Biden’s proposed increase in corporate income tax rate to 28%, the tax UK/US tax differential may affect consideration and timing of the flip.
- Risk: By forming a Delaware corproation, the company may become exposed to the risk of litigation in the US.
- Compliance: The Delaware corporation will be subject to US law including securities laws.
- Share for share exchange: All of the shareholders in the UK company exchange their equity for the equivalent shares in the new Delaware corporation and no cash changes hands. Therefore, advance shareholder engagement and agreement is required to implement the flip.
- Group structure: After the flip the shareholders own shares in the Delaware corporation which owns all of the shares of the UK company. The terms of the UK company’s investment and shareholder documents will be reflected in the Delaware corporation’s constitutional documents.
- UK Operations: The UK company, now a wholly-owned subsidiary of the Delaware corporation, usually continues to employ its staff and conduct business as prior to the flip. In due course after a US investment round the investors may appoint a US based senior management team to manage US operations and certain operations to be conducted in the US.
- Share options: Any share options which have been granted by the UK company will likely be replaced by US stock options.
- Inter-company arrangements: Companies will wish to consider how their technology and other assets will be shared, licenced or sold between the US and UK entities.
- Consents: In addition to HMRC clearance and shareholder consent, third party consents may be required in relation to any contracts and commercial relationships affected by the flip.
- Timing: It may be simpler to put in place a new holding company and flip company ownership when the company is at an early stage of development, and the process may be more complex as its capital, debt and operational structure develops and become more complicated.
- Operational: As with any group company in a new jurisdiction, contracts should be reviewed for local law compliance and US liability insurance put in place.
Putting in place a Delaware holding company structure is a time-consuming process and legal, accounting and tax advice is required in advance to implement the process. However, it is a “well-trodden path” and may facilitate a company to access more capital and create increased shareholder value over the long term. MBM’s US Team has experience in preparing for and advising on Delaware flip transactions, so if this is something you are considering or would like to understand more please contact email@example.com for more information.