Flip-up is equivalent to moving the parent company/HQ to a new jurisdiction.
The process is characterised by a company incorporated in X country reorganising by transferring ownership of its shares to a New Company in Y country. This is occasionally also referred to as a “share swap” transaction, and if properly executed is typically tax neutral from a UK perspective.
Through this process, the Existing Company becomes a wholly owned subsidiary of the New Company (parent company) when the shareholders of the Existing Company exchange shares for newly issued shares of the New Company.
Why should a company flip up?
A Company may decide to flip up to increase investments, promote commercial growth and attract talent. Investors will be more comfortable investing in companies where, among other things, they can benefit from tax relief and/or are familiar with the legal system where the company is registered.
A company becomes more attractive if it moves its HQ/parent company to the UK because of advantages such as greater access to capital spurred by tax incentives for local investors, a favourable corporate tax regime, an extensive tax treaty network to minimise tax payable by subsidiaries, access to talented labour pool, among other things. Once a company’s HQ is established in the UK venture capital investment is likely to rise in the long run.
As mentioned, a company headquartered in the UK can benefit from tax reliefs and exemptions which are exclusively available to UK investors. That said, the tax exemptions may only be applicable if the IP of the Existing Company is transferred to the New Company. Investors will usually only invest if the core assets of the business (particularly IP) are owned by the parent company. Therefore, it is important that IP due diligence is carried out.
From a commercial growth aspect, if the long-term plan is to have the hub of the business operating from the UK, then it is advantageous as it may be more comfortable for customers/suppliers/investors to engage with a parent company that is in the UK due to familiarisation of customs.
What is the process?
The process of flip-up involves several parties and companies in at least two jurisdictions, making it important to have dual-qualified corporate lawyers to provide tailored advice.
The stage at which a company flips up is part of a larger process requiring input from tax and legal advisors as discussed below.
- Create a step plan to set out the order in which the process is to be carried out. This will need to be done in conjunction with the tax advisers in both jurisdictions.
- An initial assessment will be required whereby all contracts and legal documents of the Existing Company are reviewed and notifications approvals or consents are obtained from third parties as required to ensure there are no restrictions imposed and to avoid potential liabilities for the Existing Company.
- Determine the optimal group structure. In some cases, shareholders may wish to ring-fence the liability of the business in each jurisdiction in which case it would be advisable to create a separate operating entity for the UK with the parent holding company above in which the shareholders will receive the shares in exchange for shares in the Existing company. This results in a structure where if any subsidiary enters financial or trading difficulties, there is no spill over consequences for the other subsidiaries.
- Consider the type of legal entity to incorporate in the new country. UK law provides several types of legal vehicles for carrying on business the most popular of which is a company limited by shares, often referred to as a limited company or LTD. Another type of entity is the unlimited company which has features that could be beneficial in a flip-up scenario. Chief among these is that unlimited companies can make distributions free of the strict constraints imposed on limited companies which can only make distributions to shareholders from distributable profits. Another benefit is that unlimited companies in most cases do not have to publish their annual accounts which can be advantageous in competitive industries. For more information on Unlimited companies, please see Redfern’s blog entitled “Unlimited companies: Why they may be right for your business”.
- Complete all incorporation documents such as memoranda and articles of association. To start with New Company may be incorporated with just one share assuming the Existing Company has a single shareholder, otherwise, it is advisable to incorporate with a number of shares that can be distributed equally to all existing shareholders.
- Execute a share exchange agreement between companies where each shareholder of the Existing Company transfers their shares in the Existing Company to the New Company in return for shares issued by the New Company. The rights of the shareholders from the Existing Company are preserved and will be exchanged for new shares issued by the New Company to the extent allowed by the jurisdiction of the parent company.
- It is possible the shareholders of the Existing Company will want the articles of association of the New Company to be a mirror image of the articles of the Existing Company.
- The post “flip-up” deal will need to go through a compliance check to ensure the incorporation documents and shareholding structure of the Existing Company are consistent with the company’s basic foundation.
When should flip-up be considered?
Deciding on a flip-up for companies looking to enjoy the UK’s strong market and favourable business ecosystem should be strategically timed. This move is most advantageous for businesses at a point when expanding into the UK market aligns with their growth trajectory and international aspirations. The UK, with its strong legal frameworks and vibrant tech and innovation sectors, offers significant incentives for foreign companies seeking to broaden their international reach.
It is also advisable to consider a flip-up at the early stages of the company. This avoids complexities like the valuation of the Existing Company. The longer the company waits and the more it grows, the more complicated the company’s capital structure gets. It is rare for “flip-ups” to be considered during growth stage financing.
At the outset, the process may seem simple and straightforward but it is important for corporate lawyers and tax advisers from both jurisdictions to be involved to ensure all considerations are addressed. At Redfern Legal LLP, dual-qualified corporate lawyers are available to advise on flip-ups where the Existing Company is Turkish or Canadian.
Is moving your HQ the right thing to do?
Every business is different. There are a number of things to be considered when deciding to move the business’s HQ and one of the prime discussions involves intellectual property (IP). As stated above, it is common practice in flip-ups that all IP rights are transferred to the HQ to support commercial growth. Investors are more likely to invest in a parent company that owns all the assets and IP – but is this favourable to the subsidiary?
The answer is not simple. As a subsidiary company, you may prefer to move IP rights to the New Company and to do so you may engage in negotiations with the New Company. An alternative route might be keeping the ownership with the Existing Company but having a licence agreement between the companies instead of transferring the intellectual property.
“Flip-up” is an expensive and time-consuming process. Therefore prior to proceeding, it is important for companies and their advisers to consider the nature of their business and long term business plan.
Flip-ups are not one size fits all processes and companies which consider a flip-up must undergo initial due diligence and understand the tax implications of the region where they are considering setting up the parent company.
The first step is to consult your corporate lawyers and tax advisers in both countries to assess if this is the most suitable course. If so, the next steps are as set out above.
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