As the law firm memos on the Inflation Reduction Act’s 1% excise tax on stock repurchases continue to roll in, we’re learning that there are a lot of unknowns about how it will apply to specific situations. For example, there are a number of uncertainties associated with its application to accelerated share repurchase programs.
In an ASR program, a company typically enters into a “forward” contract with a broker-dealer and makes an upfront payment to the dealer. The dealer, in turn, borrows the company’s shares in the market and delivers them to the company (the shares typically have a value of between 70-85% of the company’s upfront payment). The dealer then buys shares in the open market to repay the borrowed shares during an agreed upon time period. At the end of that period, the company will either receive additional shares or return some of the shares (or cash) to the dealer.
ASR programs are a pretty complicated way to repurchase shares, and this excerpt from a Wilson Sonsini memo says that determining how the excise tax applies to ASR programs isn’t a layup either:
The form of the ASR is that a repurchase occurs on the prepayment date to the extent of the 70-85 percent delivered at the time, which would be subject to an excise tax if it occurs on or after January 1, 2023. This treatment is consistent with the fact that the delivered shares are canceled upon delivery and are generally not considered issued and outstanding (e.g., they are removed for purposes of calculating earnings per share). A second repurchase would occur on the termination date if the dealer delivers additional shares. If, on the other hand, the company delivers additional shares to the dealer, this would be an additional issuance. If the termination date is in the same taxable year as the prepayment date, the adjustment / netting rules described above should apply to reduce the excise tax on the initial repurchase.
However, if the termination date is in a different taxable year, the additional issuance would not offset the initial repurchase, although it could perhaps net against other repurchases in the year of the termination date. It is not clear how a delivery of cash by the company would be treated for purposes of the excise tax. Alternatively, it is possible that the excise tax would not apply until the number of shares that is repurchased is fixed, i.e., upon settlement on the termination date. In that case, an ASR that terminated on or after January 1, 2023, would be subject to the excise tax in its entirety based on the amount of stock finally repurchased, even if the ASR was executed prior to January 1, 2023 (unless regulations issued by the Secretary of the Treasury provide a grandfathering exception).
If it makes you feel better, the M&A folks are dealing with a whole bunch of interpretive issues as well, and I blogged about some of those last week over on DealLawyers.com.
— John Jenkins, TheCorporateCounsel.net, September 1, 2022