Taxing Private Equity Carried Interest Using an Incentive Stock Option Analogy
A note in Harvard Law Review (Issue 121, Jan 2008) introduced Professor Victor Fleischer’s article, Two and Twenty: Taxing Partnership Profits in Private Equity Funds (.pdf) (22 pages):
The issue to which it relates is the taxation of the so-called “carried interest” that private equity professionals earn from their funds’ investments.
Private equity funds are in the business of buying and selling companies. They make money when they sell their holdings at a profit or, less frequently, when their holdings pay dividends. Fund managers are paid in part with a share of the fund’s profits — a share called carried interest, or simply “carry.” It has long been the law that when profits flow through to the managers, the managers pay tax on the profits as if they had sold the stock or received the dividend for their own accounts. That is, if the fund recognizes long-term capital gains, the managers recognize long-term capital gains and pay a 15% tax; likewise, if the fund recognizes qualified dividends, the managers recognize qualified dividend income and pay a 15% tax. These tax rates contrast with the marginal tax rate that workers pay on their salaries, which can be as high as 35%,4 plus 1.45% for Medicare,5 and up to 6.2% more for Social Security.
Securities Litigation Reform Act and “Strong Inference” Pleading Standard
“Strong Inference” Pleading Standard - Securities Litigation Reform Act
In passing the Private Securities Litigation Reform Act of 19951 (PSLRA), Congress sought to curb abusive private securities litigation by requiring that plaintiffs “state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Although Congress enacted this “strong inference” standard to provide uniformity concerning the plaintiff’s burden, the PSLRA failed to achieve that goal; it instead produced disarray among the circuit courts over how high Congress intended to set the bar for pleading scienter.
Last Term, in Tellabs, Inc. v. Makor Issues & Rights, Ltd., the Supreme Court resolved the circuit split by holding that a “strong inference” of scienter “must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” While the majority sought to provide a workable test for determining whether a plaintiff’s inference is “strong,” a closer analysis of that test reveals fundamental inconsistencies that will likely to lead to continued confusion among the lower courts.
Causation and class action in securities litigation
Harvard Law Review (Issue 121, Jan 2008) Case summery: Oscar Private Equity Investments v. Allegiance Telecom, Inc., 487 F.3d 261 (5th Cir.
2007).
SECURITIES LITIGATION — CLASS CERTIFICATION — FIFTH CIRCUIT HOLDS THAT PLAINTIFFS MUST PROVE LOSS CAUSATION BEFORE BEING CERTIFIED AS A CLASS
Shareholders v. Countrywide
NY Times reported Countrywide officers must face suit by shareholders:
Directors and officers of Countrywide Financial, the beleaguered mortgage lender, must answer shareholder accusations of insider trading and an overall failure to monitor lending practices that led to the company’s collapse, a federal judge in California has ruled.
Rejecting the arguments of Countrywide executives and directors that they were unaware of lax loan operations that led to ballooning defaults, Judge Mariana R. Pfaelzer of Federal District Court in Los Angeles ruled Tuesday that she found confidential witness accounts in the shareholder complaint to be credible and that they suggested “a widespread company culture that encouraged employees to push mortgages through without regard to underwriting standards.”
US Best Buy signs £1.1 billion Carphone deal
Large stores under the Best Buy brand will begin opening in the UK next year after the American retailer yesterday announced a joint venture with Carphone Warehouse to take on the European consumer electronics market.
The deal:
Best Buy is paying £1.1 billion for half of Carphone Warehouse’s retail business in what the companies hope will develop into a European consumer electronics empire.
The American group will be able to use Carphone Warehouse’s 2,400 retail stores across eight European countries, including France, Germany, Spain and Portugal, as well as the UK, to help it to break into the European market. It also plans to open a chain of new large-format stores of 35,000 sq ft each in Europe starting in 2009.
Carphone continues to trade under the Carphone Warehouse brand and retain full ownership of its fixed-line telecoms business in the UK, which includes TalkTalk, AOL Broadband and Opal, as well as its share of the Virgin Mobile France joint venture.
Carphone already has a presence in 500 Best Buy stores in the US, which it hopes to increase to nearly 1,000 by the end of next year. Mr Dunstone said the group would use the £1.1 billion to pay off £800 million of debt and invest in its fixed-line business and “new areas of growth presented by the transaction”. These could include a bid for the UK operations of Tiscali, the broadband provider. Mr Dunstone confirmed that Carphone is in talks with Tiscali. “I’d like to think at the right price we’d be a potential buyer,” he said.
British Energy not to be sold to one bidder
(photo: telegraph)
British Energy’s existing nuclear sites, such as Sizewell B in Suffolk, may be split between buyers.
The Government has ruled out selling British Energy to a lone bidder, despite the auction for the owner of Britain’s nuclear reactors drumming up interest only from France’s EDF by last Friday’s deadline.
The Daily Telegraph understands that the Government, which has a 35.2pc share in BE, is maintaining its position that no one body should have full ownership.
Sources said the Government would prefer to grant the winning company the sale of just six sites, thereby leaving the door open for another firm, such as Centrica, the only realistic British bidder, to acquire the remaining two.
Spring cleaning at Citigroup
NY Times reported how Vikram Pandit, the chief executive, clears out the bank and unloads non-profitable assets.
Many crossed wires in the Carphone handset
Patrick Hosking, Business commentary of Times, analysed Carphone Warehouse’s deal with Best Buy of the US.
Buy some candy
(1)
The Deal Professor has some thoughts about the transaction of Mars and Wrigley.
- Why is the transaction structured as a merger rather than a tender offer? Is it about antitrust?
- The buyers have some creative financing in such credit market.
- How important is the management talent of Buffet to Mars?
(2)
See Mars-Wm. Wrigley Jr. Merger agreement.
(3)
The Deal Professor said the deal is “structured as a private equity leveraged buyout deal with a reverse termination fee structure.”
True to the most optional form of this type of transaction, the merger agreement caps Mars’ maximum liability at $1 billion and bars specific performance. The effect is to give Mars a walk right from the transaction at any time, so long as it pays Wrigley $1 billion.
