Case Studies

Tannenbaum Helpern's client, a private equity fund manager with over a billion dollars in assets under management, sought to offer equity interests in its management company to certain employees on a tax-free basis. If the client issued capital interests to its employees, the employees would be subject to tax on the value of these interests as of the date of grant. The Tax Law practice at Tannenbaum Helpern structured and drafted provisions in the client's operating agreement to allow the client to offer future profits interests in the company to its employees such that, on a sale or other capital transaction with respect to the client, the employees only participate in the capital proceeds from the transaction in excess of the value of the client on the date of grant to each employee of its profits interest.

For certain of the client's employees, Tannenbaum Helpern's Tax Law attorneys drafted vesting requirements for these interests. For other employees, they drafted "catch-up" rights in the operating agreement to allow these employees to fully participate in all capital proceeds on a sale of the client (to the extent there are sufficient proceeds to satisfy the catch-up rights granted to the employees), but maintain the tax-free status of the grant of these interests to the employees. This structure allowed the client to offer equity interests in its management company to its employees as a retention and motivation tool on a tax-free basis.