An Overview of The Up-C Structure in Energy Deals

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The UP-C structure — which offers tax benefits to pre-IPO investors and sponsors — likely will expand among energy companies.

In 2013, several energy companies went public using a so-called UP-C structure. In using this structure, the public company (IPOCo) typically owns a substantial equity interest in a subsidiary holding company (Holdings), which owns the operating assets and is a tax passthrough entity (e.g., a limited partnership or limited liability company). The equity interests in Holdings not held by IPOCo are typically owned by the pre-IPO owners, which may consist of individual investors, private equity funds or others. The pre-IPO owners in Holdings have the right to exchange their Holdings equity interests for shares in IPOCo, at which point IPOCo gets a stepped-up tax basis in the Holdings equity interests (which results in tax savings to IPOCo through additional depreciation and amortization). The pre-IPO owners are taxed on any gain recognized as a result of the exchange. The pre-IPO owners and IPOCo may enter into a tax receivable agreement pursuant to which IPOCo would pay the pre-IPO owners a portion (typically 75 to 85 percent) of the tax benefits realized from the basis step-up resulting from the exchanges.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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