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Statutory merger Joint ownership

By Stacy Henderson,2014-04-18 18:36
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The target company survives as a subsidiary of the parent and the original subsidiary dissolves. A consolidation. A consolidation is much the same as a

Statutory merger: Joint ownership

    The result of this series of transactions is that the original shareholders of the acquiring corporation and the original shareholders of the target corporation jointly own the acquiring corporation, containing assets of the target corporation as well as those of the acquiring entity.

    As an alternative, the assets of the target may be dropped down into a controlled subsidiary of the acquiring corporation (IRC ?368(a)(2)(C)) if (1) no stock of the subsidiary is used in the exchange and (2) the

    exchange would otherwise have qualified as a Type A reorganization had the merger been into the parent. This alternative may be accomplished to protect the parent corporation from the target company's creditors or from contingent liabilities unknown at the time of the merger.

    If the series of transactions to accomplish the merger or consolidation fails to qualify as a reorganization, there is current taxation on the exchange at both the corporate and shareholder level.

Forward triangular merger

    In a forward triangular merger, the acquiring corporation must acquire substantially all of the properties of the target corporation as long as (1) the merger would have otherwise qualified as a Type A merger and (2) no stock of the subsidiary is used. The target corporation merges into a controlled (at least 80%), newly created, or existing subsidiary of the parent corporation in exchange for stock of the parent corporation. The acquiring corporation may assume the liabilities of the target corporation.

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The subsidiary remains and the target company dissolves.

    In a forward triangular merger, the types of consideration given in the exchange include voting or nonvoting stock of the parent (although not of the subsidiary), cash, and debt (of either the parent or the subsidiary), so long as the continuity-of-interest requirement is satisfied.

    Reverse triangular merger

    In many cases involving a triangular merger, having the target entity survive may be beneficial. This may be the case, for example, when the target is subject to a regulatory body (an insurance company) or has a particular asset (an operating license or favorable financing) that would be disturbed by merger into another corporation.

    A reverse triangular merger will be treated as a tax-free reorganization if it otherwise qualifies as a Type A merger, voting stock in the parent corporation is transferred, no stock in the subsidiary is used, and after the transaction the surviving corporation holds substantially all of the properties of the merged corporation. In a reverse triangular merger, the target corporation merges into a controlled (at least 80%), newly created or existing subsidiary of the parent corporation in exchange for voting stock of the parent corporation. The

    amount of stock constituting control is measured immediately before the transaction. Liabilities of the subsidiary may be assumed in the transaction.

    The target company survives as a subsidiary of the parent and the original subsidiary dissolves.

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A consolidation

    A consolidation is much the same as a simple statutory merger, except that neither the acquiring nor the

    target corporation survives. Rather, shareholders of both corporations exchange their stock for stock in a

    new corporation and both of the “old” entities dissolve.

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Stock-for-stock swap (Type B)

    In a statutory merger, which was just discussed, assets were acquired in exchange for stock. Consideration

    in a B reorganization under IRC Section 368(a)(1)(B) is limited to stock. The stock of the target corporation is acquired in exchange solely for all or part of the voting stock of the

    acquiring entity (or its parent company). Immediately after the transaction, the acquiring corporation must

    have control of the target corporation (whether or not the acquiring corporation had control immediately

    before the acquisition).

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Type C Reorganization

    In a Type C reorganization, the acquiring corporation must acquire substantially all of the properties of the target corporation solely in exchange for substantially all or a part of the voting stock of the acquiring corporation or its controlled subsidiary (IRC ?368(a)(1)(C)). A Type C reorganization is similar to a Type B reorganization only in that solely voting stock of the acquiring corporation or its parent (but not both)

    may be used.

    Rather than receive stock of the target, however, the acquiring corporation receives “substantially

    all” of the target's assets. A Type C reorganization is more similar to a Type A merger. A Type C

    reorganization has more restrictions regarding the consideration that may be used in the

    exchange, however. Liquidation of target required in a Type C

    As in a statutory merger:

    ? liquidation of the target is required in a Type C reorganization, unless specifically waived by

    the Internal Revenue Service (IRC ?368(a)(2)(G)), and

    ? the assets of the target may be dropped down into a controlled subsidiary of the acquiring

    corporation (IRC ?368(a)(2)(C)).

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Acquisitive D reorganization

    In an acquisitive D reorganization, the following must be true:

    ? Control ownership is at least 50% of the total combined voting power of all classes of voting

    stock or at least 50% of the total value of shares of all classes of stock (IRC ?368(a)(2)(H)).

    ? The target corporation must then distribute its remaining assets, plus the stock acquired in the

    exchange, to its shareholders and dissolve (IRC ?354(b)(1)(B)).

    ? The target corporation and its shareholders survive along with the acquiring corporation

    shareholders, but the shareholders of the acquiring corporation are in control (i.e., with greater

    than 50% ownership). The acquiring corporation is liquidated.

    Excess of adjusted basis

    If the target corporation assumes liabilities of the acquiring corporation in excess of the adjusted basis of

    the property transferred, the excess is treated as boot (IRC ?357(c)). The acquiring corporation recognizes gain to the extent of boot received.

    This picture needs to be reworked and I cannot figure out how to change it. My computer only allows me

    to use MS Paint. The arrows between A Shareholders and Corporation A are backwards. Also, the

    caption under the new Corporation B (bottom box) should read “Corporation B owns substantially all of

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Divisive D

    There are three types of divisive alternatives:

    1 A Type D spin-off is the transfer of certain assets of the original corporation's assets to a

    new corporation, and stock of the new corporation is distributed pro rata to all shareholders.

    The original corporation remains and the shareholders retain their original corporation stock

    and obtain stock in the new corporation.

    2 A Type D split-off is the transfer of certain assets of the original corporation's assets to a

    new corporation, and stock of the new corporation is distributed to all shareholders.

    Shareholders exchange stock in the original corporation for stock in the new corporation.

    3 A Type D split-up is the transfer of substantially all of the assets of the original corporation

    to two or more subsidiaries in exchange for all shareholder stock in the distributing

    corporation. Stock in the new corporations is transferred to the shareholders in exchange for

    stock in the original corporation. The original corporation is liquidated.

    Spin-off

    A spin-off is:

    ? the separate incorporation of some part of a corporation and

    ? the distribution of the new corporation's stock pro rata to shareholders of the original

    corporation.

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Split-off

    The distinguishing characteristic between a spin-off and a split-off lies in the fact that in a split-off,

    shareholders of the original corporation surrender some or all of their stock in exchange for stock in the

    newly formed subsidiary.

    This may occur when those shareholders do not want to hold stock of the subsidiary in the same proportion

    as stock in the original corporation.

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Split-up

    A split-up carries a split-off one step further. In a split-up, the following occur:

    ? All of the assets of the original corporation are divided into two or more separate corporations,

    each with an active trade or business.

    ? The stock of these separate businesses is distributed to the original corporation's shareholders

    in exchange for their stock of the original corporation.

    ? The original corporation dissolves.

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