Skinny Down Distribution

It’s almost summer, and we all know what that means: it’s time to start working on that beach body. That’s right: it’s time to start skinnying down. We need to trim the fat. Lose the dead weight. Cut down on all those Taco Tuesdays. It might not be a fun process, but we’re hoping it’ll be worth it when we look all fantastic and fit at that July 4th beach BBQ.

Corporations have their own version of the beach body prep process, and it’s called a “skinny down distribution.” The goals are the same—trim the fat, lose the dead weight, cut the excess spending—but instead of trying to fit into that trendy one-piece swimsuit, they’re trying to make themselves more attractive for potential foreign mergers or acquisitions.

In these situations, the foreign company is almost always smaller than the target company. This is important, because the U.S. has pretty strict tax laws about corporations with interest in foreign companies. Basically, unless the American side of the M&A represents less than 60% total ownership, the corporation is not going to be eligible for the tax benefits associated with multinational businesses. So when the target company embarks on its skinny down distribution journey, it’s essentially going on a diet until it drops below that 60% threshold. This might involve selling off assets, or it could involve issuing a nice, big dividend to shareholders. In some cases, the target company might even transfer some of its assets to the foreign company.

The IRS has a ton of rules about which skinny down distribution activities are legit and which aren’t, because they want to make sure companies aren’t going around merging and acquiring just to get out of paying their fair tax share, and the rules occasionally change. So if our company has caught the eye of a foreign corporate suitor and we’re thinking we might get our skinny down distribution on and see if it lands us an M&A deal, we should most definitely consult a tax professional before we start, um... ropping assets like they’re hot.