[ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 531
have priority over or be on par with earlier series of stock, so that they receive an investment return either before or alongside of those earlier series. Preferred stock often includes protections for the holders of such preferred stock, such as rights to veto major corporate actions (sales of the corporation, issuance of dilutive securities, changes to the charter or bylaws), rights to participate in new offerings (“preemptive rights”), rights to participate in sales of stock by other stockholders (“tag - along” or “co - sale” rights), and even rights to force a sale of stock by other stockholders (“drag - along” rights). This is particularly true in the venture capital or private equity marketplaces, and the National Venture Capital Association maintains model documents that can provide considerable background on how these rights are used and what the documents for such investments look like. Delaware law also provides for special “class votes” when a class of stock is effected in a manner different than other classes, and this special approval can often be critical to major transactions, such as mergers and acquisitions. All issuances of equity need to be conducted either in accordance with, or pursuant to, an applicable exemption under the United States securities regulations and in accordance with the “blue sky” laws applicable in the states where the securities are being offered for issuance. For wholly owned or closely held corporations, such securities laws will not usually be of any substantive concern. But if shares are being issued to others (whether it be to “friends and family” or to unrelated third - party purchasers), securities laws will typically limit to whom those shares can be issued and require compliance with significant disclosure requirements that vary depending on the nature of the investors and the aggregate amount that they are investing.
United States securities regulations also provide special and very detailed rules for public offerings. While the overall rules for public offerings are beyond the scope of this overview, the ability to buy or sell stock on the public market may be restricted to certain “registered” shares even after a company has become publicly listed, unlike many other countries where simply “listing” provides access to the market. Thus, most investors in United States companies will negotiate “registration rights” at the time of making an investment. Registration rights agreements set rules for what shares first become liquid following an initial public offering. iii. Taxes on Transfers to Non-United States Investors Transfers from the United States to stockholders or investors in another country are potentially subject to withholding taxes. Which withholding taxes apply, however, depends on the underlying facts for specific transfers: is the transfer a return of debt, a payment of interest, a corporate dividend coming out of earnings and profits of the subsidiary, a corporate distribution that is not drawn from earnings and profits (probably a return of capital), a royalty payment, a payment for management services, or something else? Is the transfer governed by a tax treaty between the United States and the country of the recipient? When a non-United States business forms a United States subsidiary, it will usually enter into an intercompany agreement with that subsidiary which will help ensure that transfers occur in the most tax efficient manner. Withholding rates on different types of income can vary from zero to thirty percent, so properly characterizing payments back to the home country will be very important. Intercompany agreements are usually drafted
ILN Corporate Group – Establishing a Business Entity Series
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