IPOs: The Up-C Structure’s Growing Popularity

WeWork Up-C

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The Story

For its upcoming Initial Public Offering (IPO), WeWork has turned to a corporate structure called an umbrella partnership corporation, commonly referred to as “Up-C”.

This corporate structure was first used by Barnesandnoble.com in 1999 but didn’t used to be particularly popular. However, in The Financial Times, Eric Platt notes that it has been used increasingly in the past decade: 74 Up-Cs having gone public since 2010, including Shake Shack and TradeWeb. Moreover, Platt adds that WeWork’s IPO would be the largest Up-C IPO to date and that given the publicity that surrounds it, it could be followed by more.

Impact on Businesses and Law firms 

If Up-Cs are likely to become more widespread, corporate lawyers need to be aware of their structure, mechanics and implications, in order to be able to assess their suitability for clients. Here is a brief introduction:

Up-Cs have a two-tiered structure. First, there is the pre-IPO company, which holds all the assets and operations of the business. It may be organised in any legal form that is taxable as a partnership (often a limited partnership or a limited liability company). Second, there is another entity, organised to be taxable as a corporation.

The owners of the pre-IPO companies are the only ones who continue to directly hold stakes in it. Public investors do not directly by stock in the pre-IPO company; instead, they have a chance to buy shares in the second entity – a holding company – which in turns owns stakes in the underlying partnership.

For pre-IPO owners, the Up-C structure has tax benefits. Indeed, because the entity they own is a ‘partnership’, it is not subject to corporation tax. Pre-IPO owners thus pay taxes on their share of any profits at individual income tax rates. IPO investors’ profits, on the other hand, are taxed on two levels: 1) the holding company pays corporation tax, and 2) shareholders pay taxes on dividends. In some cases, parties enter a tax receivable agreement, which establishes a percentage of the tax benefits to be shared with investors. This would be a crucial point of negotiation for lawyers.

There is a lot more to be said about the implications of Up-Cs. If you’re interested, you can find out more in this helpful document: https://www.stblaw.com/docs/default…lic-offering-structures-overview.pdf?sfvrsn=4.

By Elise Lanteri

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