M&A 2018 Annual Review

1 TAX REFORM PRESENTS BOTH CHALLENGES AND OPPORTUNITIES Many aspects of 2017’s Tax Cuts and Jobs Act (TCJA) 3 remain to be refined in the coming year (or even years). However, several trends emerged during 2018, and tax savings will continue to be a source of potential value in 2019. Deal Structure and Terms Key structuring considerations include: • Potential for 100% tangible asset expensing – Newly proposed regulations may affect the ability to obtain these benefits. • Limitations on net operating losses (NOLs) and interest deductions – The new limitations have substantially complicated deal negotiations and financing considerations. • Interest expense limitations – Buyers must maintain sophisticated financial models in order to track the interest limitations. • International provisions , including deemed repatriation of previously untaxed foreign earnings – Several new reps and covenants have emerged in deal documentation. Choice of Entity The use of the corporate form relative to pass-through entities has received renewed focus due to a variety of considerations, including: • The flat 21% corporate tax rate; • The elimination of the corporate AMT; • The continued ability of corporations to deduct state and local income taxes; and • The continued availability of the Section 1202 exclusion for “qualified small business stock” and the reorganization provisions under Section 368. Impact on Specific Industries The significance of tax reform has varied among industries and types of businesses. For example: • Tech companies have generally not been able to obtain the benefits of the 100% expensing in connection with asset acquisitions, given that qualifying assets generally include only tangible asset classes and do not include goodwill or other types of intangible assets. • Highly leveraged industries and industries with substantial overseas manufacturing or other foreign operations have faced materially higher compliance burdens and planning issues as compared with those of other market participants. 2 U.S.-TRADE TRADE TENSIONS AND NATIONAL SECURITY CONCERNS MOVE THE GOALPOSTS U.S. national security concerns and the Committee on Foreign Investment in the United States (CFIUS) play a major role in cross-border transactions for both strategic buyers and PE sponsors. 4 The Foreign Investment Review Risk Modernization Act of 2018 (FIRRMA), signed into law in August 2018, expanded CFIUS’s scope and process. Highlights include: • CFIUS jurisdiction expanded to include non-controlling investments in cases involving critical infrastructure, critical technologies or sensitive personal data of U.S. citizens. • A mandatory declaration process for covered transactions in critical technology industries. • Civil penalties. • Clarifying when investment funds with foreign limited partners would be subject to CFIUS jurisdiction. 5 Most of the changes implemented by FIRRMA will become effective once CFIUS issues implementing regulations, expected late this year. However, the U.S. Department of Treasury (as the CFIUS chair) published interim rules implementing the critical technologies “pilot program” contemplated by FIRRMA that MORRISON & FOERSTER 2018 M&A ANNUAL REVIEW 2