October 13, 2022
M&A Tax: SPACs & the Buyback Excise Tax
I’ve blogged a couple of times about the potential impact of the tax provisions of the Inflation Reduction Act on M&A transactions. This Cooley blog looks specifically at the potential impact of the 1% excise tax on stock buybacks on SPAC redemptions. This excerpt describes how the excise tax might come into play in a de-SPAC transaction:
The excise tax may be applicable to a US SPAC, including a non-US SPAC that domesticates to the US in connection with a deSPAC transaction, to the extent holders of publicly traded SPAC stock exercise their rights to be redeemed after December 31, 2022 (and the netting rule does not fully eliminate the excise tax). Non-US SPACs that do not domesticate to the US generally should not be subject to the excise tax.
Note: Pending further guidance, it appears that redemptions by a non-US SPAC of its stock prior to a domestication would not cause the SPAC to be subject to the excise tax, but redemptions after a domestication could subject the SPAC to the excise tax.
If a deSPAC transaction is structured such that the SPAC does not issue a significant amount of stock in the transaction, the deSPAC transaction may not produce significant offsetting stock issuances to mitigate the excise tax under the netting rule. For example, a deSPAC transaction that is structured as an “UP-C” or a “double dummy,” or in which the operating company is in form the acquirer of the SPAC, may not result in significant stock issuances that could be netted against redemptions. In addition, as mentioned above, if stock issuances do not occur in the same taxable year as the relevant stock repurchases, such issuances would not reduce the associated excise tax under the netting rule.
The blog also says that the excise tax may come into play if a SPAC decides to liquidate, and recommends that companies considering that option before the end of 2022, which the excise tax goes into effect. It also says that it may be possible to structure liquidating distributions to stockholders in such a way that they are not considered redemptions “if and to the extent provided in forthcoming guidance.”
– John Jenkins