interest in the Target corporation be preserved in Reorganization ii

Interest in the target corporation be preserved in

This preview shows page 140 - 142 out of 166 pages.

interest in the Target corporation be preserved in Reorganization ii. Qualitative What is the consideration ? 1. Equity Interest common stock, preferred stock, voting stock, non-voting stock, as long as its equity 2. Doesn’t all have to be stock iii. Quantative How much stock is consideration for transaction to qualify? 1. At least 50% of the total consideration is Equity (some sort of stock) Rev Ruling 77-37 a. Case law is more liberal Supreme Court has ruled that 38% equity is enough b. Regulation have established that 40% continuity qualifies 2. So although not totally definite, if its in the 40-50% range then it should be good iv. Continuity of Interest is measured in the aggregate 1. Each shareholder does NOT have to meet the 40% equity consideration threshold; the total combined shareholder consideration has to meet the threshold v. What happens when the stock value goes down at time of closing? 1. If there is a clause in the merger contract, which states that the consideration is fixed , then you measure the COI on the last business day before the contract is binding. a. This ensures that the value fluctuations will not cause the transaction to fail the COI test. vi. Do Prior Acquisition Sales matter? 1. Reg. 1.368-1(e)(1)(i) Seagram Approach Disposition of T stock prior to a transaction will be disregarded for measuring COI unless disposed to a person related to the parties to the reorganization. 2. Requirement: Exchange Target stock for Purchaser stock and have at least 50 percent of the entire consideration received being equity. vii. Do Post Acquisition Sales matter? 1. Ignore the post acquisition sale UNLESS a. The sale is made to P (the acquirer) or party related to P; COI will not be met 2. BUT if P has a buyback plan in place that was NOT negotiated with T or its shareholders, and some T shareholders sell their P stock to P for cash, the sale will NOT be treated as “in connection with” the merger, which will NOT have a negative effect on the COI c. Continuity of Business Enterprise (COBE) i. Acquiring Corporation must either continue T’s historic business or continue to use a “significant portion” of T’s “historic business assets” in a business. 140
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1. The fact that the Acquiring Corporation and T are in the same line of business tends to establish requisite continuity but is not alone sufficient ii. When T sells all their assets, it’s hard to sell that the Acquiring Corporation will be continuing the business iii. Reg. §1.368-1(d):   “Continuity of business enterprise requires that the  issuing corporation either continue the target corporation's historic  business or use a significant portion of target’s historic business assets  in a business.”  iv. Reg. §1.368-1(d)(4):  COBE requirement is not violated if P transfers  acquired T assets or stock to (1) controlled subsidiaries or (2) a  controlled partnership. 
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