Consideration of Tax-Free Deals

Transcription

1 The Rise of Equities: Consideration of Tax-Free Deals Gerald Rokoff, Partner, DLA Piper - New Yorknsideratioof

2 General considerations Reverse Morris Trust / Morris Trust: Acquisitive: Separate out a business ( Sub ) that may be a drag on equity value of the distributing corporation ( Distributing ) tax-free. Debt can also be inserted that is supported by the Sub earnings which will be tax-free Distributing until principal payments are made. A subsequent acquisition can also be done tax-free. Distributing s shareholders must control the combined new entity but protections for the minority shareholders can be built in. Thus, the acquiring company s shareholders become minority shareholders of the acquired company which can raise social / management issues that can generally be worked out can be acquired or can achieve combination benefits without a lot of cash Key issue is agreeing on value and ratio of post-closing stock ownership Flexibility to have part-cash / part-stock deal so those that want cash get capital gain and those that want stock can get tax-free treatment IRS will rule in this area, but an opinion of each party s counsel will often work as well DRAFT- Privileged and Confidential 2

3 Recent tax-free deals DLA Piper Engagement: Confidential foreign Reverse Morris Trust transaction DLA Piper represents the foreign acquiring corporation PPG Industries, Inc. On January, 28, 2013, PPG Industries completed the separation of its commodity chemicals business and merger of its wholly-owned subsidiary with a subsidiary of Georgia Gulf Corporation in a Reverse Morris Trust transaction. PPG Industries received a ruling from the IRS and, as a result, the transaction was generally tax free to PPG Industries and its shareholders Tri Pointe Homes, Inc. Liberty Media Per a recent announcement (November 2013), it is anticipated that Tri Pointe Homes, Inc. will acquire Weyerhaeuser Company s homebuilding and real estate subsidiary via a Reverse Morris Trust transaction In January 2014, Liberty proposed to acquire the 48 percent of Sirius it does not already own in an all-stock deal valued at more than $10 billion, making the satellite radio provider a subsidiary of the media conglomerate Entergy Corporation RF Micro Devices Prior to the deal being called off due to regulatory opposition, Entergy planned to distribute its electric transmission business, which, thereafter, was to be combined with ITC Holdings Corporation. Prior to the transaction, ITC was to right-size itself by borrowing $700 million and either distribute the proceeds to its stockholders or engage in a stock buyback. In the anticipated combination of ITC and the Entergy subsidiary, former Entergy stockholders were expected to receive 50.1% of the combined entity s equity by vote and value. Entergy had requested a ruling letter from the IRS on the transaction RF Micro Devices and TriQuint Semiconductor, which make radio frequency chips, announced an all-stock merger of equals on February 24, 2014, creating a chip maker with more than $2 billion in annual revenue DRAFT- Privileged and Confidential 3

4 Reverse Morris Trust transaction - step #1 Step #1: is either spun off or split off to the Distributing shareholders. Tax consequences: See the following slide. Distributing Distributing Spin-off or Split-off 4

5 Reverse Morris Trust transaction: step #1 tax consequences Spin Off: Pro-rata Split Off: Some swap Distributing shares for shares (sale for accounting purposes). The transaction is tax free under Section 355 of the Code so long as the following requirements are met: Distributing shareholders must own at least 50.1% of both companies Distributing must own 80% of vote and value of before the transaction Active trade or business requirements Valid business purpose Distributing would generally bear any resulting corporate tax except where engages in a transaction that causes the spin off or split off to be subject to corporate tax 5

6 Reverse Morris Trust transaction: step #2 Step #2: forms a transitory US subsidiary ( Sub ) and contributes shares of its voting stock to Sub for stock and possibly securities tax-free. Using the shares as consideration, Sub then merges with and into, with surviving, and with the Distributing shareholders receiving voting stock Distributing Reverse Triangular Merger Sub Tax consequences: The reverse triangular merger would constitute a tax-free reorganization under Section 368(a)(2)(E) of the Code To avoid taxation of the spin off or split off to Distributing, the Distributing shareholders, in the aggregate, would need to receive more than 50% of the outstanding stock. There would be flexibility to reduce the value of so that the Distributing shareholders ownership of would not be substantially greater than the minimum majority interest of 50.1% -- by causing to take on debt prior to the transaction, the proceeds of which would stay with Distributing. The obligation to repay the debt would travel with and ultimately become an obligation of 6

7 Reverse Morris Trust transaction: final structure Distributing >50% Original <50% 7

8 Reverse Morris Trust transaction: Foreign acquirer step #2 Step #2: UK forms a transitory US subsidiary ( UK US Sub ) and contributes shares of its voting stock to UK US Sub. Using the UK shares as consideration, UK US Sub then merges with and into, with surviving, and with the Distributing shareholders receiving UK voting stock Tax Consequences: See the following slide Distributing UK Reverse Triangular Merger UK US Sub DRAFT- Privileged and Confidential 8

9 Reverse Morris Trust transaction: Foreign acquirer step #2 tax consequences The reverse triangular merger would constitute a tax-free reorganization under Section 368(a)(2)(E) of the Code Distributing shareholders need to receive more than 50% of the outstanding UK stock Flexibility to reduce the value of so that the Distributing shareholders ownership of UK would not be substantially greater than the minimum majority interest of 50.1% -- by causing to take on debt prior to the transaction For Distributing shareholders that are US persons to avoid gain recognition, the following must be satisfied: Distributing shareholders that are US Persons hold not more than 50% of UK stock after the transaction UK is engaged in an active trade or business (and has been so engaged for the 3 years preceding the transaction) outside of the US that receive at least 5% of the UK stock must also enter into gain recognition agreements to avoid gain recognition If Distributing shareholders recognize gain under Section 367(a), then, if Distributing s distribution of was a spin-off (and not a split-off), the Distributing shareholders recognition of gain would be treated as substantial evidence that the spin-off was used as a device for the distribution of earnings. A sufficient business purpose may overcome the device issue The inversion rules of Section 7874 would not apply because the assets of would not be transferred to a foreign corporation DRAFT- Privileged and Confidential 9

10 Reverse Morris Trust transaction: Foreign acquirer final structure Distributing >50% UK <50% UK DRAFT- Privileged and Confidential 10

11 Regular Morris Trust transaction Basically the same transaction as a Reverse Morris Trust transaction, but Distributing contributes unwanted assets to a newly formed subsidiary and spins it off. Distributing is then acquired The will take on Distributing s tax risk but the allocations of liabilities can be negotiated contractually 11

12 A reorganization Transaction: merges with and into with surviving. At least 40% of the consideration used by consists of s stock Considerations: Generally need shareholder approval of both companies Lots of cash No voting stock is required No substantially all of the properties requirement Merger 12

13 A reorganization final structure Original 13

14 B reorganization Transaction: acquires at least 80% of stock (vote and value) from shareholders solely in exchange for voting stock Considerations: Generally not used because not as flexible as an (a)(2)(e) Absolutely no cash can be used Must use voting stock stock voting stock 14

15 B reorganization final structure Original 15

16 C reorganization Transaction: acquires substantially all of the assets of the solely in exchange for voting stock and liquidates thereafter Considerations: Only used when must acquire assets Must use voting stock Consideration can be up to 20% cash, but the use of $1 of cash turns off the general rule that the assumption of liabilities is disregarded (i.e., assumption of liabilities would be considered boot and would count towards the 20%) Substantially all of the properties requirement Assets (substantially all) Voting stock 16

17 C reorganization final structure Original 17

18 Type A forward triangular merger (an (a)(2)(d)) Transaction: contributes shares of its stock to Sub. Sub then acquires s assets pursuant to a merger in exchange for stock. Sub survives the merger Considerations: Flexible like an A Reorg but added substantially all of the properties requirement May not need s shareholder s approval Forward Triangular Merger Sub 18

19 (a)(2)(d) reorganization final structure Original Sub 19

20 Type A reverse triangular merger (an (a)(2)(e)) Transaction: contributes shares of its voting stock to Sub. then acquires at least 80% of the shares (vote and value) by merging Sub with and into with surviving and the shareholders receive voting stock Considerations: Like a B Reorg but can use up to 20% cash Reverse Triangular Merger Sub 20

21 (a)(2)(e) reorganization final structure Original 21

22 Section 351 transaction Transaction: Should be considered when is being sold and shareholders prefer cash in an amount that would prohibit a tax-free reorganization. For example, a cash transaction where some shareholders prefer stock to get a step-up in basis upon death. No gain or loss is recognized if transferors contribute property (e.g., assets, stock, cash) solely in exchange for stock in the transferee corporation and immediately after the exchange the transferors control the transferee corporation. Transaction is taxable to shareholders that receive cash in exchange for their shares Considerations: contributes cash to Sub shareholders that prefer stock contribute shares (e.g., 10% of the value) and take back qualifying preferred stock (not redeemable for 20 years and the dividend rate is not tied to interest rates or a similar index). The cash is used to purchase the remaining shares The preferred stock is now backed by the and the cash that would have otherwise been paid to the preferred stockholders, so it enjoys great security that it will be redeemed in accordance with its terms Stock Sub Cash 22

23 Section 351 transaction final structure that were not cashed out Sub 23

24 IRS Circular 230 IRS Circular 230 Disclosure To ensure compliance with requirements imposed by the IRS, we inform you that any US federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. 24

25 Gerald Rokoff DLA Piper 1251 Avenue of the Americas 27 th Floor New York, NY Office Phone: Circular 230 Notice: In compliance with U.S. Treasury Regulations, please be advised that any tax advice given herein (or in any attachment) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax penalties or (ii) promoting, marketing or recommending to another person any transaction or matter addressed herein. March