When things don't go well: restructuring the start-up and liquidation

Case 1: Management buy-out

1. facts of the case

A-AG was founded in 20x1 with its registered office in ZH by the two founders A and B and develops software products for insurance solutions.

In 20x2, the listed Investor-AG acquired a stake in A-AG as part of a strategic partnership. It holds 75% of the shares in A-AG. At the same time, the management team was expanded to include a new CEO (Manager Y) and a CTO (Manager Z), who were also given the opportunity to acquire shares in A-AG (5% each), whereby these are employee shares.

However, A-AG's software did not develop as hoped. Sales and growth were also sluggish compared to the original forecasts. In order to cover A-AG's cash requirements, Investor-AG granted A-AG subordinated loans totaling CHF 17 million. At the end of 20x3, A-AG's equity was negative (CHF -16 million) and comprised the following:

In 20x4, Investor-AG comes to the conclusion that an improvement in the overall situation with regard to A-AG is unlikely. It seeks to sell its stake in A-AG. Founder B and managers Y and Z show interest in acquiring the shares.

Managers Y and Z are both employed by A-AG. Founder B is not employed by A-AG. He is employed by B-AG (a one-man company whose only customer is A-AG), which is wholly owned by him.

The transaction is to be structured as follows:

1. The Investor-AG waives repayment of the loan of CHF 17 million and grants the A-AG an additional interest-free loan of CHF 3 million to ensure the supply of liquidity.
2. Investor-AG sells its shares in A-AG for CHF 1 to founder B and managers Y and Z (25% each).

The transaction should take place as quickly as possible, especially as the Investor-AG fears the bankruptcy of A-AG, which would damage the reputation of the Investor-AG as the majority shareholder, which invests in many start-ups, and could also result in liability claims for the board members it has provided.

Questions

1. How is the debt waiver to be treated at the level of A-AG?
2. Does the acquisition of the shares in A-AG have tax consequences for managers Y and Z?
3. Does the acquisition of the shares in A-AG have tax consequences for founder B?

Variant

Investor-AG has a put option with an exercise price of CHF 1 on the shares in A-AG. How would the exercise of this put option be treated for tax purposes?

Case 2: Economic start-up

1. facts of the case

In contrast to case 1, Investor-AG retains its shares for the time being and managers Y and Z have never invested in A-AG. However, the restructuring of A-AG is not successful. Despite the restructuring measures, the company is still on the verge of bankruptcy.

Founders A and B realize that their original idea is not working. Founder A subsequently leaves the A-AG and transfers his shares for CHF 1 to founder B. The latter changes the purpose of the company in an attempt to expand into a new business area (abandoning the old one) and continues to run the A-AG on this new basis.

Questions

1. How is the sale of founder shares from founder A to founder B to be qualified?
2. Variant: A-AG is liquidated at the instigation of Investor-AG and a new company is subsequently founded by B.

Case 3: Preparation of the opening liquidation balance sheet

1. facts of the case

The restructuring of A-AG was not successful. After numerous discussions, the two founders come to the conclusion to liquidate A-AG. Founder B has a new idea (new business area) and is convinced that he can use the intellectual property developed. The last balance sheet prior to the liquidation resolution by the general meeting of A-AG is as follows:

A-AG recorded a bad debt provision of 10% on the accounts receivable. The FTA receivables relate to VAT credit balances.

There is also an estimate of the fair value of the intangible assets held in the amount of 160. The receivable from shareholder A bears interest at 4%.

Questions

1. What does the opening liquidation balance sheet look like?
2. Which positions do you see a need for discussion?

Excursus: "Transfer of registered office" abroad

1. facts of the case

B-AG is founded by shareholders domiciled abroad and in Switzerland and is also "managed" in an initial phase by the shareholders domiciled in Switzerland.

The management of the company will now only be carried out by a shareholder domiciled abroad and the shareholder domiciled in Switzerland will withdraw (will only carry out his supervisory activities as a member of the Board of Directors).

Questions

• How do you assess the situation from a profit and withholding tax perspective?