Common control transactions v Newco formation
are two different events, that sometimes interact
- Common control transactions represent the transfer of assets or an exchange of equity interests among entities under the same parent’s control. “Control” can be established through a majority voting interest, as well as variable interests and contractual arrangements. Entities that are consolidated by the same parent—or that would be consolidated, if consolidated financial statements were required to be prepared by the parent or controlling party—are considered to be under common control.Determining whether common control exists requires judgment and could have broad implications for financial reporting, deals and tax. Just a few examples are:
- A reporting entity charters a newly formed entity to effect a transaction.
- A ‘Never-Neverland‘-domiciled company transfers assets to a subsidiary domiciled in a different jurisdiction.
- Two companies under common control combine to form one legal entity.
- Prior to spin-off of a subsidiary by a parent entity, another wholly owned subsidiary transfers net assets to the “SpinCo.”
- As part of a reorganization, a parent entity merges with and into a wholly owned subsidiary.
- Newco formations may be used in Business Combinations or businesses controlled by the same party (or parties). Just a few examples are: Common control transactions v Newco formation
- A Newco can be formed by the controlling party (for example, to facilitate subsequent disposal of the newly created group through an initial public offering (IPO) or a spin-off or by a third-party acquirer (for example to raise funds to effect the acquisition); Common control transactions v Newco formation
- A Newco can pay cash or shares to effect an acquisition; and
- A Newco can be formed to acquire just one business or more than one business.