Private Benefits in Public Offerings: Tax Receivable Agreements in IPOs
Historically, an initial public offering (“IPO”) was a process whereby a company sold all of its underlying assets to the public. A new tax innovation, the “tax receivable agreement” (“TRA”), creates private tax benefits in public offerings by allowing pre-IPO owners to effectively keep valuable tax assets for themselves while selling the rest of the company to the public.
Prior to 2005, TRAs were almost never used in IPOs. Today they have become commonplace, changing the landscape of the IPO market in ways that are likely to become even more pronounced in the future. This Article traces the history of various iterations of TRAs and shows that a new generation of more aggressive TRAs has recently developed. Although TRAs were historically used only for a small subset of companies with a certain tax profile, the new generation of innovative and aggressive TRAs can be used by virtually any company conducting an IPO, greatly expanding the potential use of TRAs.
TRAs have been described by a few critics as “bizarre” and “underhanded,” yet the economic and tax consequences of the different types of TRAs have gone mostly unexplored in the literature. This Article explores whether critics’ comments regarding TRAs have merit, or whether TRAs are simply an efficient contract between pre-IPO owners and public companies. It examines TRAs within the larger landscape of financial transactions, showing that the way TRAs are used in the public market deviates from similar private transactions in ways that are likely detrimental to public shareholders. This Article also shows how the Up-C, a type of IPO transaction where TRAs are most commonly used, allows pre-IPO owners to take money that should be earmarked for public shareholders in undisclosed ways and proposes remedies for this problem.
Associate Professor, Brigham Young University Law School