Mistakes to watch out for

Author: | Published: 17 Nov 2008

Given restricted access to credit, companies in need of financing to support their international expansion have to meet lenders' requirement for additional collateral. One of lenders' typical requests when extending a loan to a US group parent company is to require that the borrower grant security over the shares of certain of its existing and future subsidiaries, often including up to 65% of the shares of its first-tier non-US subsidiaries, as part of a global security package.

Because of their multi-jurisdictional aspects, these transactions present a number of difficulties, some of which are well known. For example, the deemed dividend tax issue set forth in Section 956 of the Internal Revenue Code, under which the pledge to a lender of two-thirds or more of the voting power of a foreign subsidiary may trigger a deemed distribution of the current and accumulated earnings and profits of this foreign subsidiary to its...