Corporate Reorganizations Lecture Note

Corporate Reorganizations � Why reorganize? � Do I acquire stock or assets? � Is the transaction taxable or tax-deferred Reasons for reorganizations � Improve economic efficiency • Vertical or horizontal integration • Economies of scale and / or scope • Exploit asymmetric information • Enter new lines of business (diversify) • Exit business � Extend managerial power � Transfer wealth Nontax issues � Financial reporting effects � Transaction costs � Contingent liabilities � Control issues � Political / regulatory costs � What consideration do I have to offer? Tax issues � Seller • Will a tax be owed by selling firm? • Will tax be owed by selling firm’s shareholders? � Buyer • What will the basis in the target’s assets be? • What will happen to the tax attributes of the target? � Both • What effect will the financing choice have? Key IRC sections � §368 Definitions related to corporate reorganizations • Specifically §368(a)(1)(A) - 368(a)(1)(G) � §336 Gain or loss recognized on property distributed in complete liquidation � §338 Certain stock purchases treated as asset acquisitions • Especially §338(h)(10), Elective recognition of gain or loss � §355 Distribution of stock and securities of a controlled corporation Acquisitive reorganizations � Transactions in which one corporation acquires assets or stock of another � Types • A - statutory mergers or consolidations • B - acquisitions of stock of target for voting stock of the acquiring corporation • C - acquisitions of assets of target for voting stock of the acquiring corporation Other reorganizations � Divisive reorganizations • Result in the division of a single corporation into two or more separate entities (often preceded by a D reorg) � Nonacquisitive, nondivisive reorganizations • Adjustments to the corporate structure of a single, continuing, corporate enterprise # Recapitalization (E) # Change in identity, form, or place of incorporation (F) # Certain transfers of substantially all assets from one corporation to another, followed by liquidation of the first corporation (nondivisive D) # Transfers of a corporation’s assets to another pursuant to a bankruptcy reorganization plan (G) Acquisition tax options Taxable asset acquisition Taxable stock acquisition Tax-deferred asset acquisition (Type A or C reorg) Tax-deferred stock acquisition (Type B reorg) Some basic concepts Taxable Nontaxable (1) Seller taxed on gain? YES NO (2) Buyer gets steppedup basis? YES NO (3) Buyer typically pays with: CASH STOCK Assets or stock? � Why only buy the assets of a corporation? The stock? • What are the consequences of each? • Does 100% of equity = 100% of assets? � What are the non-tax issues? � Who is potentially liable for tax? � What determines the amount of the tax? Overview of Taxable Acquisitions � Taxable asset acquisitions are a potential alternative (or necessary) in a number of situations: � Non-tax reasons: • T may be an unincorporated division of the seller or T may be a sole proprietorship, partnership, LLP or LLC • T may have “liabilities” that the acquiring corporation wishes to avoid Overview of Taxable Acquisitions - continued � Tax reasons: • T may have NOLs that can be used to shelter the gain on the sale of its assets • T may be a member of a consolidated group that has NOLs that can be used to shelter the gain on T’s asset sale Tax-free acquisitions � General tests • Must have a business purpose; will not qualify if it is undertaken solely for tax avoidance � Continuity of business • After the reorganization the acquirer either uses a significant portion of target’s assets or continues a significant line of the target’s business. � Continuity of shareholder interest • Material part of the consideration received by target shareholder consist of stock of the acquirer Divestitures � What motivates a divestiture? • Better management of units • Market valuation of individual activities • Isolation of certain activities � Types • Sale of subsidiary • Tax-free divestiture � Tax consequences • Subsidiary sale may be taxable or tax free