If you were hoping to own a piece of American car company, Chrysler, you’ll have to wait a little bit longer. Plans for an initial public offering (IPO) have been delayed – and taxes are reportedly to blame.
Chrysler Group, LLC, planned to go public by year-end but problems with what’s being called a “routine tax issue” have resulted in a delay. According to the Detroit Free Press, Chrysler is seeking a letter from the Internal Revenue Service to “clarify tax liabilities” and didn’t want to move forward with the IPO without it.
Chrysler has not made a public statement about the delay but reports indicate that the problem likely stems from the conversion from a limited liability company (LLC) to a C corporation. An LLC is a pass-through entity, usually taxed like a partnership, while a C corporation is taxed differently. While there are no legal restrictions barring an LLC from going public (Fortress Investment Group LLC (NYSE: FIG) is an example of one which has done so), most companies that do go public do so as a C corporation. As a practical matter, there are potential complications with LLCs, such as limits on classes of stock and transfers of interests, that make them less attractive for investors.
Depending on the nature of the transfer from an LLC to a C corporation, there may be federal tax consequences. It is possible to do a tax-free conversion where the new C corporation simply assumes the assets and liabilities of the old LLC. However, in some situations, a tax consequence could be triggered: this happens, for example, when the liabilities of the company might exceed the assets, resulting in a gain.
These kinds of trick tax considerations appear to be the hold up for the Chrysler IPO since any tax consequences would affect valuation.
The value of the car company is estimated at $10 billion. Italian carmaker Fiat is the majority owner of the company, holding 58.5% of the shares. The remaining shares are held by a United Autoworkers (UAW) medical trust fund which was set up in 2007 to help Chrysler pay health care costs for hourly employees at a time that the company was struggling for cash.
In 2008, Chrysler, one of the Big Three – or “Detroit Three” – automakers (the other two being General Motors and Ford) were all in the midst of what was being called an American car manufacturing crisis. Hat in hand (well, very expensive hat in hand riding on a private jet), car execs went to Washington, D.C., seeking help. By the end of the month, they were rewarded with a bailout, signed into law by President George W. Bush.
Three months later, the company was back in D.C., asking for more. And once again, the government obliged. That same year, the company declared bankruptcy.
As part of the bailout, the U.S. Treasury obtained 8% of the shares of the company. In 2011, Chrysler repaid its loans to the Treasury and Italian car company Fiat bought those shares from the government – at a loss to taxpayers.
Since that time, Sergio Marchionne, chief executive of Fiat and Chrysler, has expressed a desire to merge the two companies, a move that former Chrysler CEO Lee Iacocca championed nearly thirty years before. If you, too, are having flashbacks to the disaster that was Daimler-Chrysler, that might explain why that didn’t happen. Instead, the company is moving forward with an IPO.
The IPO was part of a strategy to allow the company to buy out those UAW trust fund shares, which represent 41.5% of the company. Reportedly, the trust wasn’t overly excited by the $10 billion valuation, hoping to see higher numbers, since health care costs are quite high. Marchionne has advised that the UAW “should buy a ticket for the lottery” if they hope to collect significantly more.
The IPO had been pegged to be offered on December 11, 2013, and would have been listed on the New York Stock Exchange with the proposed ticker symbol CGC. Pending resolution of the company’s tax issues, the IPO will likely be shuffled forward to 2014.
