Ch 7 Part 3 Flashcards
Advantages of type A reorganization 2
1 more flexible than other reoganizations, because consideration
Doesn’t need to be solely voting stock
2 substantially all the assets of target corp. need not be acquired
Acquire doesn’t have to by unwanted assets
Continuity of interest doctrine (applies to type A)
Stock of acquiring corporation must be significant part of total
Consideration used
4 disadvantages of type A reorganization
1 must have 2/3’s shareholder approval, which is costly and
Time consuming if both companies are publicly traded
2 dissenting shareholders of both corporation have right
To have shares independently appraised and purchased for
Cash by acquirer
3 all liabilities of target are assumed
4 target corporation’s may have licenses, rights or other
Privileges that are non transferable
Drop down type A reorganization
Rules permit acquiring corp. to transfer (drop down) to controlled
Subsidiary part or all of assets and liabilities acquired in
reorganization
Drop down does not affect nontaxable nature of reorganization
For parent or subsidiary
Drop down type A reorganization: basis of subsidiary
Subsidiary takes from parent a carryover basis of assets
Sec. 368: triangular mergers
Similar to straight mergers except parent corp. uses controlled
Subsidiary to acquire target corp. stock and assets
The target corp. then merges into subsidiary
Triangular mergers: consideration used
Consideration restricted to stock of parent corp., limited amount
Of subsidiary cash and securities can be used
Subsidiary can assume target corp’s liabilities
What requirement exists to make a triangular merger nontaxable?
Substantially all requirement
70% FMV of target corps gross assets and 90% FMV of target’s
Net assets
3 advantages of triangular merger over straight type A merger
1 target corp assets and liabilities become responsibility of
subsidiary, minimizes claims against parent for contingent liab.
2 because parent corp. is principal shareholder in acquiring
Subsidiary, shareholder approval is easy and less costly in
transaction
3 target corp. shareholders can use installment method to
Recognize gains on sale of parent stock
3 steps in triangular type A reorganization
1 additional Acquirer stock is exchanged for subsidiary stock
Between parent and subsidiary
2 Acquiring stock is exchanged from subsidiary to Target corp.
For substantially all of Target corp assets and liabilities
3 target corp liquidates and target’s shareholders receive
Acquirer’s stock in exchange for their target stock/securities
What is the post reorganization structure of a triangular type A reorganization?
Acquiring and former target shareholders both own acquirer’s
Stock
The acquiring corporation controls the subsidiary that owns substantially all of target’s assets and liabilities
Reverse triangular merger
Similar to triangular merger except subsidiary merges into
Target corporation and subsidiary ceases to exist
What is the advantage of a reverse triangular merger
Continuing the target corporation as a going concern allows
The continuing existence of non transferable rights, liscenses
And contracts that it owns
Type C reorganization
Asset for stock acquisition
Acquiring corp obtains substantially all of target corp’s assets
In exchange for acquiring corp. voting stock and possibly
Limited amount of other consideration
2 steps of type c reorganization
1 Acquiring corp transfers voting stock to target corp in exchange
For substantially all target’s assets
2 acquiring voting stock transferred from liquidating target corp
To target corp shareholders in exchange for target corp. stock
Post reorganization structure of type c reorganization
Acquirer’s and target’s former shareholders own Acquiring
Corp, which owns substantially all of target’s assets and liabilities
Type C reorganization: if target corporation dissolves what happens to liabilities not assumed by acquiring corporation?
Liabilities become responsibility of target corp’s directors
Main difference between a type C and type A reorganization
The target corp. doesn’t dissolve in a type C reorganization
Allowing the target corp to retain its corporate charter
Prevents others from using its corporate name or selling
It’s corporate name to 3rd party
Consideration in type c
Solely voting stock of acquirer must be used to obtain at least
80% of target corp
3 advantages of type C reorganization
1 type c does not have to comply with merger laws of state or
Federal government
2 acquirer only assumes liabilities in agreement, doesn’t assume
Contingent liabilities
3 in type c, shareholders of acquiring corp generally need
Not approve acquisition, thus reducing transaction cost
5 disadvantages of type C reorganization
1 must use voting stock in type C
2 type C has tighter boot restrictions
3 target liabilities might be substantial
4 substantially all test, limits target corp from selling, disposing,
Retaining assets acquirer doesn’t want right away
5 dissenting shareholders of target can have shares independently
Appraised and purchased for cash
2 other types of type C reorganizations
What type of reorganization doesn’t exist?
1 drop down type C reorganization
2 triangular type C reorganization
Reverse triangular type C reorganizations don’t exist
2 types of type D reorganizations
Can be either acquisitive or divisive
Acquisitive Type D reorganization 2 steps
1 Target corp transfers substantially all of its assets to an acquiring corp (transferee) in exchange for acquirer's stock
2 target corp liquidates and gives acquirers stock to shareholders
In exchange for their target stock and securities
Post reorganization structure of Acquisitive Type D reorganization
Acquirers shareholders own Acquiring corp. stock
Target corp’s former shareholders control acquiring corp
Section 368: Control in acquisitive type D reorganization
Control is either 50% or more of combined voting power of all
Classes if voting stock
Or 50% or more of total value of all classes of stock
Type B reorganization
Target corporation shareholders exchange Target stock that
Gives acquirer controlling interest in T corp for acquiring
Corporation voting stock
Target corp. remains in existence as acquiring corp’s subsidiary
Post reorganization structure of Type B reorganization 3 things
Acquirer and former target shareholders own acquiring corporation
Stock
Acquiring corporations controls the Target corporation
Minority shareholders own no more than 20% T corporation
Stock
Type B reorganization: basis of target corp’s assets (inside basis)
And tax attributes
Basis of targets assets and tax attributes remain the same
Type B reorganization: section 338 solely for voting stock requirement
Acquiring corporation must acquire target corp stock in exchange
Solely for acquiring corp voting stock
Strictest reorganization requirement out of any type of
reorganization
Type B reorganization: Debt obligations
Acquiring corp. debt obligations can be exchanged for target
Corp debt obligations and not recognize any gains/losses if
Face amounts are the same
2 exceptions where acquiring corp can use cash in type B reorganization
1 target corp shareholders can receive cash in exchange for
Fractional shares
2 acquiring corp can pay reorganization expenses (legal fees, accounting fees, administrative expenses) of target corp
Type B reorganization: section 368 control
80% of total combine voting power and value of all classes of
stock
Up to 20% minority interest shareholders can exist
What would make a type B reorganization taxable
Acquiring corp can’t use cash to purchase dissenting minority
Shareholders stock
Timing of type B reorganizations
Stock acquisitions must be completed within 12 month period
Tax consequence of type B reorganization for target corp. shareholders
1 shareholders recognize no gain or loss on exchange unless
Fractional shares are acquired for cash or target corp redeems
Some of their stock
2 target shareholders carry over basis and holding period
Tax consequences of type B reorganization for acquiring corporation
1 acquiring corp recognizes no gain or loss when it issues
voting stock for target corp stock
2 basis and holding period carry over
5 advantages of type B reorganization
1 acquisition of target corp. can be done in one transaction,
without approval of target’s management
2 target remains in existence and its tax attributes stay with it
3 corporate. America, goodwill, licenses and rights of target
Corp. may be preserved
4 acquiring corp doesn’t directly assume the target’s liabilities
5 acquiring and target corp. can report their post acquisition
Results on consolidated basis
5 disadvantages of type B reorganization
1 acquiring corp can use only voting stock as consideration
2 issuing additional stock for acquisition can dilute control
And voting power of corporate shareholders
3 acquiring corp must retain control through 80% ownership
4 dissenting minority shareholders
5 bases of target corp stock (outside basis) and target corp assets
(Inside basis) are not stepped up to FMVs upon ownership
Change (as in taxable transaction)
2 other types of Type B reorganizations
1 drop down
2 triangular
Type G reorganization
Transfer by corporation of part or all it’s assets to another
Corporation in Title 11 bankruptcy in exchange for stock
Of acquirer
Court approved plan
2 steps of divisive Type D reorganization (split off form)
1 distributing corporations transfers part of distributing corp’s
Assets for controlled corp’s stock and other securities
2 distributing corp distributes controlled corp stock to distributing
Shareholders in exchange for all the distributing stock held
By members of shareholder group
Post reorganization structure of divisive type D reorganization (split off form)
Some of distributing corps shareholders own Distributing corp
Some of distributing corps shareholders own controlled corp
3 forms nontaxable Divisive Type D reorganization can assume?
1 spin offs
2 split offs
3 split ups
How can a divisive type D reorganization be nontaxable
Both asset transfer and section 355 distribution must be part
Of single transaction governed by plan of reorganization
What 4 business objectives can a divisive type D reorganization accomplish?
1 divide an enterprise into 2 or more corporations to separate
High risk business from low risk business
2 split up single business among 2 or more disputing shareholders
3 reorganize an enterprise according to functions, profit centers,
Geographical areas
4 divest operations because anti trust laws
Split off
Distributing corp transfers some of its assets to controlled corp
In exchange for stock
The distributing corp distributes stock in controlled corp to
Some of its shareholders in exchange for some of their stock
Divisive Type D reorganization: distributing or transferor property acquired
D corp transfers part or all of its assets (liabilities) to controlled
Corp
Type D reorganization - acquisitive: consideration that can be used
Stock, securities and other property of controlled corporation
Type D reorganization - acquisitive: What happens to the distributing or transferor corporation
Distributing or transferor corp must distribute stock, securities,
boot received to its shareholders
Distributing corp may liquidate or remain in existence
Type D reorganization - acquisitive: shareholders’ recognized gain
Lesser of realized gain or FMV of boot received
What is control defined as in a Divisive D reorganization?
80% under section 368
