HPE Micro Focus ("Seattle SpinCo") Spinoff - Details
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Summary (Updated Mar 31, 2022.)
The software businesses sold included big-data, security, and IT management products from companies that HP had bought -- such as ArcSight, Atalla, Autonomy, Interwoven, Mercury Interactive, OpenView, Peregrine, and Vertica.
If you owned HPE stock on Sept 1, 2017, you automatically received "Seattle SpinCo" stock -- which was immediately merged into Micro Focus.
Each share of HPE spun off 1 share of a temporary company, "Seattle SpinCo." Then, each share of SpinCo became 0.137 share of Micro Focus.
Complication #1 -- American Depository Shares.
- US HPE shareholders received American Depositary Shares, traded on the NYSE as "MFGP." An ADS is an equity share of a foreign company traded in dollars on an American stock exchange. (Details: Investopedia Definition of ADS and ADR Micro Focus ADR information Micro Focus Stock Listings )
The ADSs are administered by Deutsche Bank Trust Company and American Stock Transfer & Trust Company (AST), both incorporated in New York. MFGP is not a foreign stock -- the ADSs keep it domestic. AST transaction fee schedule
- Non-US HPE shareholders presumably received shares in Micro Focus via a mechanism similar to how their HP and HPE shares are administered and traded.
Complication #2 -- Corporate Inversion.
In the opinion of HPE's outside tax counsel, the transfer of HPE's US-centric software business to the UK-based Micro Focus should be treated as a "corporate inversion" -- a process by which companies move their legal home overseas to reduce their US tax bill -- and was therefore taxable to shareholders. HPE included that information in an SEC filing. HPE's "Dear Shareholder" Cost Basis letter,
Each of hundreds of firms is expected to read SEC filings, analyze Corporate Action Notices, and update the records they maintain on behalf of their clients.
Brokerages, plan administrators, and transfer agents reported the transaction in varying ways -- or not at all -- to the IRS.
If you paid tax on the 2017 transaction, the cost basis for your MFGP stock should be reset to approx. $29.34/share, instead of being linked to the cost basis of your HPE stock. Be sure you note this in your own records (and in your broker's records, if your broker tracks cost basis) -- so that you don't pay tax twice on the same gain.
As of Mar 2022, no member has reported -- privately or on the HPAA forums -- that a return has been questioned due how they reported the 2017 Micro Focus spinoff.
Details(Updated Nov 13, 2019)
How the spinoff was communicated:
The original Sept 7, 2016 HPE press release announcing the deal says: "The transaction is expected to be tax-free to HPE." (By contrast, the HPInc/HPE split was originally announced as "tax-free to HP's shareholders" and the DXC spinoff and merger as "tax-free to HPE and CSC and their respective shareholders.") [emphasis added.]
On August 31, 2017, an opinion provided to HPE by Skadden, Arps -- the company's outside tax counsel -- stated: "As a result, you generally do not recognize gain or loss for US federal income tax purposes on receipt of the Seattle Class A common stock in the Distribution, but US shareholders will be required to recognize gain (but not loss) on the exchange of their Seattle Class A common stock for Micro Focus ADSs."
The Sept 1, 2017 HPE press release announcing completion of the Micro Focus deal says "The spin-off of Seattle is intended to qualify as a generally tax-free transaction for US federal income tax purposes." [boldface emphasis added.]
The September 26, 2017 HPE Cost Basis letter, which quotes the outside tax counsel opinion, says "Dear Shareholder" -- but does not appear to have been actually mailed to shareholders by the transfer agent, plan administrators, or Brokers. (These roles are defined here: Where's my stock? )
As part of the advance written questions for the April 9,
2018 HPE "Virtual
Online Annual Shareholder Meeting" three stockholders
asked about the tax issue [page 5]:
HPE's written response to those questions: "For information regarding certain US federal income tax consequences of the distribution of Seattle common stock and subsequent merger, please see the document entitled 'Important US Federal Income Tax Information for Shareholders Concerning the Seattle Spinco, Inc. Common Stock Distribution' with a link to the HPE Cost Basis letter.
Micro Focus paid the CEO's $5.9M "inversion" tax. 2018 Micro Focus Annual Report (page 97)
Administrators and brokers holding HPE stock varied in what they reported to the IRS:
Members report that brokerages, plan administrators, and transfer agents vary (sometimes dramatically) in how (or if) they make gain/loss and cost basis calculations and in what they report to the IRS. Each of hundreds of firms is expected to read SEC filings, analyze Corporate Action Notices, and update the records they maintain on behalf of their clients.
- As covered in the previous step ( 2. Where's my stock? ) for shares held directly with a company's transfer agent -- in the Micro Focus case, Equiniti. Long-time HP employees will have old statements from HP's previous transfer agents: Harris Trust, Computershare (which bought the Harris registry business), BNY Mellon, then Computershare again. Employee purchase administration is now at Fidelity.
- Spinoff shares will be in a new direct-registration account administered by the new company's transfer agent -- in the Micro Focus case, American Stock Transfer.
- For shares held in a stock-purchase plan, option or equity award plan, or retirement plan, HPE indicates that spinoff shares should show up in your account at each plan administrator.
- For shares held at your broker, spinoff shares will show up in your brokerage account. -
- Some reported the HPE/SpinCo transaction to the IRS and sent you a 1099-B. However, they may not have used the correct cost basis for your HPE shares. Check their calculations with the assistance of the HPAA's unofficial stock cost basis spreadsheets.
- Some did not report the HPE/SpinCo transaction to the IRS. You can perform your own calculations -- even without detailed records -- with the assistance of the HPAA's unofficial stock cost basis spreadsheets.
- One member found that the HPE/SpinCo transaction was reported as interest on a 1099-INT and was able to convince their broker to correct it.
Any of the stock administrators or brokers involved with your HPE shares may have reported to the IRS -- and sent you 1099-B forms -- showing "proceeds" from the part they played in the two-step transaction.
A report will list only those stock Micro Focus lots with an apparent gain -- based on the broker's records. As explained in HPE's letter, if the cost basis in any of your lots is greater than the opening day Fair Market Value, you have a loss -- but that is not recognized for tax purposes and does not offset gains in other SpinCo lots. HPAA members indicate that Vanguard Brokerage apparently did not report the 2017 Micro Focus spinout to the IRS.
Table 1 in HPE's letter suggests a cost basis of $29.34 per MFGP share (the average of the first day's open and close prices), corresponding to $4.03 per Seattle SpinCo share ($29.34 x 0.137 MFGP share issued per SpinCo share). Members indicate that a report of the September 2017 transaction by your broker to the IRS will be in terms of the temporary Seattle SpinCo stock. Your broker may have used a different formula than the one suggested in HPE's letter -- resulting in a somewhat different value than $4.03. Check your brokerage account online -- or by examining a recent account statement -- to view your holdings in MFGP going forward.
In addition to the important transactions, members report receiving 1099-B forms for small amounts, 34-cent dividend checks, and other notifications of low-dollar-value stray transactions referring to either SpinCo or MFGP. These come from either the administrator of your existing employee shares or from the new company's transfer agent -- American Stock Transfer. If you get a trivial 1099-B, report it on your tax -- no matter how small. (Unlike 1099-INT's, there is no minimum reportable amount for a 1099-B.)
MFGP is not a foreign stock -- the ADSs keep it domestic.
Given the complex series of HP and HPE stock splits and spinoffs over the years -- and the number of administrators and brokers involved -- the cost basis for your HPE shares in your current broker's records may not be accurate, may not be tracked by purchase lot, or may be reported as "Unknown" -- i.e. defaulted to $0 and therefore incorrectly reporting that your MFGP shares were free. An incorrect cost basis could increase or reduce your possible tax liability on the new Micro Focus ADSs and for your future HPE and MFGP stock transactions.
If you don't have good records -- or did not input your lot-and-cost information into your broker's system -- you can use our spreadsheet to estimate your cost basis for each HP-related stock for any span of HP employment from 7/1/1959 through the 11/1/2000 plan changeover. hpalumni.org/StockSpread
Be sure to save the documents you used -- plus, for future reference, a copy of the HPE "Dear Shareholder" letter (which was not actually sent to shareholders.)
Be sure to save the spreadsheets you have modified -- under a different filename -- and keep them for future reference when you sell shares, etc.
Details on corporate inversions: Corporate Inversion
to current location of Cost Basis letter on the HPE website:
Link to current location of "Questions from Hewlett Packard
Enterprise Company 2018 Annual Shareholder Meeting" on the HPE
Official HPE presentation about the Micro Focus deal to
HPE employees (undated pdf file) which covers:
Micro Focus tax background documents: "Tax Documentation Cover Letter" (The document has no letterhead or logo. To authenticate it, go to the Micro Focus ADR page and select the "Seattle SpinCo, Inc / Micro Focus Merger Tax Documentation Additional Information" link.) There is a link in that document to find Micro Focus Form 8937.
If formerly a regular, direct U.S. employee of HP or HPE -- or are in the process of leaving -- join the HP Alumni Association. No charge, thanks to HPAA's Supporting Members.
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