We were approached to provide consultation on a transaction that involved the following factual circumstances:
- A multinational group (referred to as ‘MNE’) has been involved in the provision of software development and digital automation services for nearly two decades. The MNE operates across multiple regions and has received financial support from angel and seed investors. It is led by two founders, both of whom have received backing from angel and seed investors.
- The Founders have reached a mutual agreement regarding the division of responsibilities and associated financial considerations. The details are as follows:
- Founder 1: The headquarters will be in the United States, with the establishment of a new entity in India focused on serving as the back-office for the USA entity. Founder 1’s Indian entity will not engage in soliciting or marketing third-party business in India. Additionally, the structure should be designed to attract a strategic investor and facilitate partial employee stock ownership plan (ESOP) liquidation for the employees who will be transferred to Founder 1’s business.
- Founder 2: The headquarters will be in India, with entities operating in regions outside the United States, as per the mutual agreement with Founder 1.
- The founders have mutually discussed the allocation of employees and assets (both tangible and intangible) based on an agreed ratio.
- Following the above, the shareholding ratio will be realigned based on the preferences of the respective investors and founders.
Key challenges that were addressed during the process:
- Legal Structure: The organization is established as a private limited company in India, with subsidiaries and branches located outside of India. Furthermore, the stakeholders and promoters are tax residents of various jurisdictions, including India, the United States, and the United Arab Emirates. Some of them also hold shares in the Indian entity.
- Implications: Conventional methods of restructuring would result in substantial tax costs without offering significant benefits to the promoters and stakeholders. Moreover, they would pose regulatory challenges.
- Complexity and Time Constraints: Traditional tax-neutral options, such as demergers, were time-consuming processes that required court approval and incurred substantial professional expenses. Through our engagement, we provided pragmatic solutions that facilitated the completion of the restructuring within sixty (60) working days, at a fraction of the estimated costs.
