M&A 3 Flashcards
why is the target S/H not indifferent between taxable acquisition and nontaxable acquisition
the nontaxable acquisition allows the S/H to defer the tax on the gain from the stock purchase, whereas in both taxable structures, the target S/H has a current tax
how long can target S/H defer its taxable gain from a nontaxable acquisition
until sale of the stock
how does a transaction qualify as tax free under IRC 368
consideration from the acquiring company must partially consist of stock of acquiring company
what factors influence the S/H’s preference for the non-tax transactions
- holding period => longer deferral, greater pref
- liquidity needs
- future tax rates - lower future rate, greater pref
Does the acquiring company prefer the taxable stock or non-tax structure
indifferent, in all cases the corporate tax rate is deferred and the company takes the carryover basis in assets
what factors will influence the acquiring company in deciding between tax and nontax structure
- liquidity
- cost of debt financing
- tax on interest rate deduction
- dilution - managerial and S/H
when will the shareholder be indifferent between the taxable stock purchase and tax free options
when they both provide the same ATCF
What is the treatment of an acquisition, specifically in regards to gain recognized, when boot is received
Any realized gain is recognized up to the amount of boot received
given that a shareholder has a realized gain in target stock, would S/H prefer more or less boot, why
less boot, boot triggers the recognition of the gain up to the amount of boot creating a S/H level tax
How does the price of acquiring company stock target’s S/H’s demand to remain indifferent to a taxable stock change as more boot is received, why
it increases as percentage of boot increases -> the recognized gain triggers a S/H level tax, and the value of stock compensation must increase to generate the same ATCF as a taxable stock transaction
what effect does increasing n have on the S/H indifference price between a taxable stock and nontaxable acquisition (Ptaxfree)
increasing n decreases Ptaxfree, S/H defer taxes for longer periods and are able to compound initial investment longer
Describe a type A reorganization
- statutory merger
- A gets T’s assets/liabilities in return for A stock
- T distributes A stock to T S/Hs, and give up T stock
- Former T and A S/Hs now own stock in A, A owns assets and liabilities of both
Describe a forward triangular merger
- A trades its stock for stock of A-Sub
- A-Sub trades A stock for T assets and liabilities
- T distributes A stock to S/Hs in exchange for former T stock
- T and A S/Hs own stock in A, which controls A-Sub, which has T assets/liabilities
describe a type C reorganization
- stock for asset (tax free asset)
- at least 80% stock consideration
- A gives voting stock to T for assets/liabilities
- T distributes A voting stock to S/h in return for T stock
- A stock controlled by A and T S/Hs
describe a type B reorganization
- stock for stock (tax free stock)
- no boot (100% stock)
- A distributes voting stock to T S/Hs in return for T stock
- A corp now has a controlling interest in T corp, and A stock controlled by former T and A S/Hs
