Explores the following: - Establishing the LLC Holding Company - Benefits and Drawbacks of Using the LLC Holding Company Structure - Timing Considerations

1. Alternative Structures for Life Sciences
Companies: The LLC Holding Company
March 8, 2013
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2. Presentation Outline
 Overview
 Establishing the LLC Holding Company
 Benefits and Drawbacks of Using the LLC Holding
Company Structure
 Timing Considerations
 Summary
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3. Overview: What is Driving the LLC Structure?
 Life sciences companies often have – or envision –
multiple programs
 Multiple programs offer possibilities
 Multiple exits
 Different funding streams for different programs
 Goal is to realize the maximum value for all
programs
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4. The Drawback of the C Corp
 Sale or license of a program results in double
taxation if net proceeds are distributed to
shareholders
 Sale of the stock of the whole company results in
a single level of tax
 Buyer gets all programs, not just the ones it really wants
 Little or no value attributed to “other programs”
 Buyer likely to shut down the unwanted programs
 Seller and its shareholders cannot realize the value of the
other programs
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5. What is the Alternative if Remaining a C-Corp?
 Spin-off the other program(s) at the time of the sale
 Likely significant tax cost
 Spin-off the other program(s) at an early stage
 Lower value results in limited, if any, tax cost
 Independent companies
 Required to finance each separately
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6. The LLC Holding Company Structure
 Investors invest in LLC and programs are held in
subsidiaries (typically c-corps; possibly LLCs)
Investor
1
Investor
2
Investor
3
LLC Holding Company
Program 1
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Program 2
Program 3
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7. Establishing the LLC Holding Co. Structure
Original Company Merges with Merger Sub (tax free). Some or all of the existing
shareholders set up LLC Holding Company with a wholly-owned subsidiary corporation.
The subsidiary then merges with and into Original Company with all of the shareholders of
the Original Company receiving corresponding interests in LLC Holding Company. Merger
is tax free.
Pre-Merger – Some of Existing Shareholders
Post-Merger – All of Existing Shareholders
Existing
Shareholders
LLC Holding Company
Merge
Original Company
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Merger Sub
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8. Establishing the LLC Holding Co. Structure
Creating the Program Subsidiaries. If a new program will be pursued out of IP located in the
Original Company, the Original Company contributes IP to a newly formed C corporation
subsidiary and distributes stock of subsidiary out to LLC Holding Company. Process is
repeated for each program. This is a taxable transaction.
Existing
Shareholders
Existing
Shareholders
LLC Holding Company
LLC Holding Company
Stock
Original Company
IP/
Assets
Program
Subsidiary
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Original Company
Program
Subsidiary
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9. Establishing the LLC Holding Co. Structure
Operating and Scaling Up. The R&D employees, administrative employees and lease remain
at Original Company, which provides R&D services, administrative services and sub-leases
space to each program subsidiary under intercompany services agreements. If a new program
will be pursued out of IP located in an existing C corporation, that C corporation contributes IP
to a newly formed C corporation subsidiary and distributes stock of subsidiary out to LLC
Holding Company.
Holds only cash and
stock of subsidiaries
Existing
Shareholders
LLC Holding Company
Outside investor a
possibility
Services
contracts with
non-exclusive
licenses to
conduct R&D,
etc.
Original Company
(Lead Product)
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Program Sub #1
Program Sub #2
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10. Tax Benefits of LLC Holding Company Structure
 LLC holding company is a tax “pass through”
vehicle
 If program sale and distribution of net proceeds is
effected by sale of stock of subsidiary, just one
level of tax
 Taxable gain is passed through to investors in LLC
 Distribution of cash proceeds to LLC investors is tax free
 Can provide management equity at LLC level
through profits interest
 No cash payment required – zero cost equity
 Capital gain rather than ordinary income
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11. Other Benefits of LLC Holding Company
Structure
 Facilitates “Pure Play” equity investment
opportunities in individual programs (at program
sub) as well as all programs (at LLC)
 Enhances preparedness for exit transactions,
including management continuity after exits
 Provides convenient collection vehicle for
contingent payments
 Can be implemented incrementally and is scalable
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12. Drawbacks of LLC Holding Company Structure
 More complicated capital structure
 Employees and some investors are not familiar with LLCs
 Transfer of IP from Existing Company into program
subsidiaries is a taxable event from original
company
 Could result in current tax due by existing company and
shareholders
 Expensive to establish and administer
 Create and operate multiple entities instead of a single
entity
 Need to track and allocate management time and other
costs
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13. Drawbacks of LLC Holding Company Structure
 Expensive to establish and administer, cont.
 No consolidated tax returns
• Undesirable if some subsidiaries generate income and others
generate losses
 Complex tracking of tax capital accounts
 Corporate filings and sets of books and records for multiple
entities
 More expensive financing rounds because all economic and
management terms must be precisely set forth; no
corporate law to backstop
 Need for Intercompany agreements
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14. Drawbacks of LLC Holding Company Structure
 Foreign investors and VC funds with institutional
LPs may be reluctant to invest in LLCs
 C corporation subsidiaries avoid UBTI and ECI issues
 Tax imposed on inter-subsidiary movement of cash
 License deals would be at subsidiary level
 Double tax problem persists
 IP may need to be divided into fields in licenses to
subsidiaries
 May be tricky to draw lines between fields
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15. Timing Considerations
 Waiting until second program has matured means
the tax cost to implement structure may be too high
 Establishing Holdco structure early in company life
means a lower tax cost but may be offset by the
extra cost of operating within the structure over time
 Uncertainty as to likelihood of multiple exits
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16. Summary
 Is it worth it?
 Do you plan to develop multiple programs,
monetize these programs creating multiple exit
events and distribute the proceeds to the
shareholders upon each exit event?
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17. Wilmer Cutler Pickering Hale and Dorr LLP
Bill Caporizzo
Stuart M. Falber
william.caporizzo@wilmerhale.com
stuart.falber@wilmerhale.com
617-526-6411
617-526-6663
Rosemary G. Reilly
rosemary.reilly@wilmerhale.com
617-526-6633
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