The parent company in a spin-off transaction was obligated to indemnify its former subsidiary for per-closing taxes. The parent company argued that $94 million in license fees were not taxes.
M&A Stories
July 12, 2023
Introduction:
In business acquisitions, the allocation of liabilities such as taxes can often lead to disagreements between buyers and sellers. This particular case involves a parent company and its former subsidiary in India, with the parent company’s shareholders receiving stock in the subsidiary.
Background:
In 2005, a global satellite telecommunication company spun off its subsidiary in India. The subsidiary operated in India under a telecommunications license granted by the Department of Telecommunications. As per the licensing agreement, the company agreed to pay an annual license fee based on its revenue to access India’s telecommunications airways. The agreement allowed the Department of Telecommunications to review the company’s accounting records to ensure compliance with the fee payment.
Prior to the closing of the transaction in 2005, India audited the subsidiary’s books and assessed an additional $5.6 million in license fees. The company contested the assessment until 2019 when the Indian Supreme Court ruled in favor of the government. By that time, with interest and penalties, the assessed amount had reached $94 million.
The parent company had agreed to indemnify the subsidiary for pre-closing tax assessments. However, when the subsidiary demanded indemnification for the license fees under the tax indemnification provision of the asset purchase agreement, the parent company refused.
Lawsuit:
The subsidiary filed a lawsuit against the parent company in a Manhattan federal district court.
Outcome:
Initially, the court ruled in favor of the parent company, stating that the license fees were not taxes. However, the appellate court overturned this decision. The appeals court referred to the purchase agreement, which defined “taxes” and included “franchise taxes.” They deemed India’s license fees similar to franchise taxes, as they were mandatory fees imposed for conducting telecommunications business in India, calculated based on revenue.
Case Reference:
See Hughes Communications India Private Limited v. The DirecTV Group, Inc. No. 21-3013-cv, United States Court of Appeals, Second Circuit (Argued: February 23, 2023. Decided: June 22, 2023.)
Comment: It is worth noting that the additional pre-closing license fees were known before the deal was finalized. The parties involved in documenting the agreement could have specifically allocated these fees to either the parent company or the subsidiary within the purchase agreement.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Podcasts https://www.buzzsprout.com/2142689/12339043
Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
Legal Disclaimer
The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.
Recent Comments