Four-Years-Young Worldpay Acquisition Presents ATB Issue for Planned Spin-Off

By: Stuart E. Leblang, Michael J. Kliegman and Amy S. Elliott

On February 13, fintech company Fidelity National Information Services, Inc. (NYSE: FIS) (FIS) announced plans to distribute its Merchant Solutions business to its shareholders in a tax-free spin-off.¹  This decision is the result of a strategic review by management, which appears to have been initiated as a result of pressure by investment firms D.E. Shaw Group and Jana Partners.² Unusual for spin-off announcements, the company states that the name of the Spinco will be Worldpay, the name of the company FIS acquired in 2019, and the former CEO of Worldpay before the 2019 acquisition will be a strategic advisor to help with the spin-off and be reinstated to the CEO role after the spin-off.

FIS acquired Worldpay, Inc. (NYSE: WP) on July 31, 2019 for stock and cash consideration of approximately $48 billion.³If it is the case that Spinco will consist solely of the activities acquired in the 2019 acquisition of Worldpay, then there would be a real concern as to whether a spin-off occurring prior to July 31, 2024 (the five-year anniversary of the acquisition) would satisfy the active trade or business (ATB) requirement under Section 355 of the Internal Revenue Code. One of the key requirements of Section 355 is that, following the spin-off, both Parent and Spinco be engaged in an ATB that has been continuously carried on by Parent during the previous five years. There is an exception to the five-year requirement if the five-year ATB, although acquired by Parent less than five years prior to the spin-off, was acquired in a transaction in which no gain or loss was recognized. Unfortunately, the 2019 acquisition was a merger for 90% stock and 10% cash, and so some gain was recognized in the deal.⁴  

What about timing? The press release indicates that it intends for the separation to be completed within the next 12 months. That’s plenty of time, but not enough to play out the clock on the five-year ATB requirement, which would require closer to 18 months.

The company will be seeking a private letter ruling from the Internal Revenue Service, and while this is very common even for relatively “issue-free” spin-offs, we expect that one thing the IRS will be asked to rule on is that the Worldpay acquisition was an expansion of an ATB that FIS was already engaged in, albeit on a smaller scale, and so the ATB requirement is satisfied without reference to the Worldpay business. Under the well-established “expansion” doctrine, where a corporation that is already engaged in an ATB makes one or more taxable purchases of business operations that merely expand the scope of that ATB, the acquired assets may be spun without waiting for five years.⁵

We know from SEC filings that FIS only began reporting a separate Merchant Solutions segment following the Worldpay acquisition.⁶  Before then, FIS divided itself into three segments: Integrated Financial Solutions, Global Financial Solutions and Corporate & Other. Clearly FIS’s businesses were strongly oriented toward financial institutions, but it is possible that a much smaller version of Worldpay’s business was developing as well.

FIS will have to educate, document and persuade the IRS as to the elements of its business operations in place prior to 2019 that were integrated with, or even superseded by, Worldpay, but with sufficient connections to characterize the Worldpay acquisition as a very large expansion of that ATB. We expect that they will likely succeed in doing so.

Separately, what we know about the form of the transaction is that it will be a pro rata distribution of Spinco stock to the FIS shareholders, so not a split-off exchange. It seems the company is leaving it open whether they will distribute all of the Spinco stock or only some amount between 80% and 100%. It has been fairly common for companies, especially those with significant debt, to retain some of the Spinco stock and use it to reduce debt on a tax-free basis.

One or more authors may have positions in stocks referred to in this article. Akin may represent individuals or entities that may have positions in stocks referred to in this article.

Akin Gump Strauss Hauer & Feld LLP has a full tax team closely following developments in this area. Please feel free to contact any of them with any questions.

^{1 Press Release, FIS, FIS Announces Plans to Spin Off Merchant Business (Feb. 13, 2023) (https://www.sec.gov/Archives/edgar/data/1136893/000119312523034197/d422291dex992.htm).}

^{2 FIS “has been under pressure to explore strategic options from activist investors D.E. Shaw Group and Jana Partners,” as reported by Niket Nishant, Anirban Sen and Milana Vinn, Reuters, FIS takes $17.6 billion hit in merchant unit to be spun off, Feb. 13, 2023 (https://www.reuters.com/markets/deals/fidelity-national-spin-off-merchant-payments-segment-2023-02-13/).}

^{3 FIS, Form 10-K Annual Report filed Feb. 23, 2023 (https://www.sec.gov/ix?doc=/Archives/edgar/data/1136893/000113689322000038/fis-20211231.htm), see note 3 of audited financial statements on numbered page 65.}

^{4 See our report “FIS-Worldpay Cash-and-Stock Merger Is Tax-Free at the Corporate Level and Partially Taxable to Shareholders” (March 22, 2019), copy attached.}

^{5 See Treas. Reg. §1.355‐3(c), Examples 7 and 8, and Estate of Lockwood v. Comm’r, 350 F.2d 712 (8th Cir. 1965).}

^{6 Comparing FIS’s 2019 Form 10-K (https://www.sec.gov/ix?doc=/Archives/edgar/data/0001136893/000113689320000032/a10-k2019.htm) with its 2018 Form 10-K (https://www.sec.gov/Archives/edgar/data/1136893/000113689319000008/a10-k2018.htm)}