R Recent Developments in the t D l t i th Continuity of - - PowerPoint PPT Presentation
R Recent Developments in the t D l t i th Continuity of Proprietary Interest R Requirement i t District of Columbia Bar Association Taxation Section District of Columbia Bar Association Taxation Section Corporate Tax Committee January 31,
District of Columbia Bar Association Taxation Section District of Columbia Bar Association Taxation Section Corporate Tax Committee January 31, 2011 Speakers:
William Alexander, IRS Associate Chief Counsel (Corporate) R b t H ll C i t & B li LLP Robert Heller, Covington & Burling LLP Scott Levine, Jones Day
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The continuity of proprietary interest ( COI ) requirement is satisfied if a substantial part of the value of the proprietary interest in the target corporation (“T”) is preserved in the transaction. Treas. Reg. section 1.368-1(e)(1).
COI requirement generally is satisfied, where as little as 40 percent of th l f th T t k i h d f i i ti (“P”) t k the value of the T stock is exchanged for issuing corporation (“P”) stock.
section 1 368-1(e)(2)(v) (Ex 1) (as amended in 2005) (40 percent P stock section 1.368 1(e)(2)(v) (Ex. 1) (as amended in 2005) (40 percent P stock
is sufficient to satisfy the COI requirement).
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percent P stock is sufficient to satisfy the COI requirement).
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stock received by T shareholders was valued on the closing date.
date and the closing date, there was no guarantee that COI was satisfied (absent protective closing date adjustments).
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published on September 16, 2005 (the “Old Regulations”).
were published on March 20, 2007 (the “Temporary Regulations”).
Regulations if certain requirements are satisfied.
December 19, 2011 (the “Final Regulations”).
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last business day before the first date such contract is a binding contract ” (Emphasis added) contract…. (Emphasis added).
1.368-1(e)(2)(i).
Date Rule, it is irrelevant whether COI is satisfied on the closing date i th l i d t l f th P t k
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using the closing date value of the P stock.
against the parties to the instrument. The presence of a condition
p ( g p g y agency approval) shall not prevent an instrument from being a binding
negotiated by the parties to the contract, or that customary closing conditions remain to be satisfied, shall not prevent an instrument from being a binding contract.”
Temporary and Final Regulations.
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“If a term in a binding contract that relates to the amount or type of consideration the target shareholders will receive in a potential reorganization is modified before the closing date of the potential reorganization, and the contract as modified is a binding contract, the date of the modification shall be treated as the first date there is a binding contract.” (Emphasis added).
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Additional P stock;
ess s oc ;
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“amount” or “type” of consideration.
“amount” or “type” of consideration.
shares?
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the Signing Date Rule to apply.
Regulations will not provide for “fixed consideration” under the g p Temporary and Final Regulations.
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A contract provided for fixed consideration if it provided for one of the following:
1. The number of shares of P stock and amount of money and other property h d f ll f th T t k exchanged for all of the T stock; 2. The number of shares of P stock and amount of money and other property exchanged for each share of T stock; 3. The percentage of T stock exchanged for P stock and the percentage of T t k h d f d th t stock exchanged for money and other property; or 4. The percentage of each share of T stock exchanged for P stock and the percentage of each share of T stock exchanged for money and other
Tests ” Tests.
stock-for-cash/property exchange described in (3) and (4), above, each h d b i d d l “ i ll bl ”
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had to be independently “economically reasonable.”
COI prior to the closing date of a reorganization (i.e., the signing date) where the T shareholders “generally can be viewed as being subject to th i f t f th i i ti f th i i d t ” the economic fortunes of the issuing corporation as of the signing date.” (Emphasis added).
sections 1.368-1(e)(2)(iii)(A)(3) and (4) of the Old Regulations are inconsistent with this purpose.
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1. The number of shares of P stock and the amount of money and other property to be exchanged for all of the T stock; or 2. The number of shares of P stock and the amount of money and other property to be exchanged for each share of T stock.
Exchange Tests (and related “economically reasonable” requirements).
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F
shares of T stock) surrenders:
67% COI)
was not specified on the Pre-Signing Date.
and $400 in cash, i.e., 50% COI)
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F
shares of T stock) surrenders:
20% COI)
was not specified on the Pre-Signing Date.
and $400 in cash, i.e., 50% COI)
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“ i dj ” i i b h P E h T “contingent adjustment” provision because the Percentage Exchange Tests permitted contingent adjustments.
fixed consideration where the P stock to be issued to the T shareholders was subject to a “collar” (i.e., a type of contingent adjustment). See Slides 28-36 for a more ( , yp g j ) detailed discussion about collars.
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the T shareholders’ consideration may still provide for fixed consideration.
consideration if the contract provides for contingent adjustments to the consideration that prevent (to any extent) the [T] shareholders from b i bj t t th i b fit d b d f hi f [P] being subject to the economic benefits and burdens of ownership of [P] stock after the [Signing Date].” (Emphasis added).
f ll i d t id f fi d id ti following do not provide for fixed consideration:
P assets
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P assets.
into P on June 1, Year 1.
stock is worth $1, respectively. p y
shares and $60 cash in exchange for 100% of the outstanding T stock.
paid to the T shareholders (in the aggregate) for every $0.01 increase in value of the per share T stock price per share T stock price.
stock is $0.75 per share.
used.
provides [for] the number of shares of P stock and the amount of money to be exchanged for all the proprietary interests in T, and the contingent adjustment to the cash consideration is not based on changes in the value of the P stock, P assets, t th f ft J 2 Y 1 ” (E h i dd d)
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June 1, Year 1.
worth $1, respectively.
cash in exchange for 100% of the outstanding T stock.
$0.40 less P stock and $0.60 less cash for every $0.01 decrease in value of the per share T stock price on the closing date.
h per share.
for the number of shares of P stock and the amount of money to be exchanged for all of the proprietary interests in T, the contract does not provide for contingent adjustments to p p y p g j the consideration based on a change in value of the P stock, P assets, or any surrogate thereof, after January 2, Year 1, and the adjustment to the number of P shares the T shareholders receive is determined based on the value of the P shares on January 2, Year 1, there is a binding contract providing for “fixed consideration” as of January 3, Year 1.” (Emphasis added).
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( p )
transaction is signed may correlate with the value of the P stock. The examples, however, conclude that T is not a “surrogate” for P stock. I th bli t t t t ith t i il t th i th
examples may not be commercial. Under such a contract, the T shareholders would receive fewer P shares if:
The value of T s assets remained constant, and
Assuming T is not a surrogate for P stock for purposes of the Final Regulations, does a contractual provision providing that the T shareholders receive less P stock as T’s value (post-signing) increases and more P stock as T’s value decreases provide for fixed consideration?
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F
stock and T stock is worth $1, respectively.
after January 3, Year 1, the T shareholders will receive 40 P shares and $60 cash in exchange for 100 percent of the outstanding T stock.
shareholders (in the aggregate) for every $0.01 increase in value of the per share T stock price;
h h ld (i h ) f $0 01 d i l f h shareholders (in the aggregate) for every $0.01 decrease in value of the per share T stock price.
Final Regulations control?
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shareholder election if contract provides for:
1. Minimum number of shares of P stock and maximum amount of money d h h b i d i h f ll f h k and other property that can be received in exchange for all of the T stock;
2. Minimum percentage of T shares that must be exchanged for P stock and maximum percentage of T stock exchanged for money and other property maximum percentage of T stock exchanged for money and other property provided stock-for-stock exchange and stock-for-cash and other property exchange are “economically reasonable.”
y pp
property in exchange for T stock.
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shareholder election if contract provides for:
Signing Date.
p g g
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Old Regulations had economically reasonable requirement in Percentage Exchange Tests.
definition of fixed consideration.
with and into P on June 1, Year 1. P t t th t t th T h h ld ill h 60 h f T t k f
$80 of cash and 40 shares of T stock for 20 shares of P stock.
Example 7 concludes that:
20% of the consideration received by the T shareholders (based on the Signing Date l f h P k) i i h f f P k
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value of the P stock) is in the form of P stock.
sole outstanding class of T stock.
and B surrenders: and B surrenders:
p p the employ of P for two years and is not terminated for cause.
Regulations?
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S i 368( )(1)(C)/( )(2)(B)
T R i 1 367( ) 3( )(3)(iii) ( b i li )
cases? cases?
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Facts
(Merger Sub) will merge with and into T with T surviving.
cash for each T share outstanding.
C l i Th i ld i f h i 368( )(2)(E)
requirement that P acquire stock in T representing section 368(c) control in exchange for P voting stock.
permitted to be valued on the Pre-Signing Date.
value of P stock under the Signing Date Rule.
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“The IRS and Treasury Department continue to study whether other t i l i ti t id ti h ld b ithi th arrangements involving contingent consideration should be within the scope of the signing date rule. Among these arrangements are … cases in which the issuing corporation stock to be issued in respect of target corporation stock is determined pursuant to a collar.” p p
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T h h ld i h f h h f T t k t i t
their election, either:
Date; or
0 83 h f P t k if P t k i th th $1 20 th Si i D t
50% of T shares are exchanged for cash and 50% of T shares are exchanged for P stock (without any specificity as to how many shares f P t k ill b i d f th T h )
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50% of the value of the T equity is exchanged for cash.
Rule”);
(“Ceiling Rule”); and ( Ceiling Rule ); and
a multi-day average price of P stock (“Average Price Rule”).
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“changes as the value of a [P share] varies above a specified price (Floor changes as the value of a [P share] varies above a specified price (Floor Price), but does not vary below the Floor Price.”
The Floor Rule applies, and
Signing Date; and
g ,
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“changes as the value of a [P share] varies below a specified price (Ceiling changes as the value of a [P share] varies below a specified price (Ceiling Price), but does not vary above the Ceiling Price.”
The Ceiling Rule applies, and
Signing Date; and
g g ,
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F
shareholders receiving 50 P shares and $50 cash, subject to a price adjustment based
the AP,
if the AP is between:
h h ld i $60 h d 50 P h ith l f $12 50
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shareholders receive $60 cash and 50 P shares with a value of $12.50.
because:
h Si i l d d h l i d
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cash and $60 of P stock) because: )
independently.
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in lieu of the Closing Date price if—
The average price is based upon prices of P stock occurring after the Signing Date and before the Closing Date, and
the number of shares of each class of P stock and the boot to be exchanged for all the T stock, or to be exchanged for each share of T stock.
each rule “applies if….”
included in the definition?
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reorganization occurs. Prop. Treas. Reg. section 1.368-1(e)(2)(vi)(D). Wh i th Cl i D t i lti t t ti ?
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q a tender offer for $90 of cash and one share of P voting stock per T share surrendered, at a time when the FMV of a share of P stock is $10.
i M S b i h M S b i i h b
P
1
T Public
into Merger Sub with Merger Sub surviving whereby each T shareholder that did participate in the Date 1 tender offer receives one share of P voting stock per T share surrendered, at a time when the FMV of a share
75% 100 shares
the closing date value for COI purposes?
COI satisfying.
Merger Sub T
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COI satisfying.
32.5% of the consideration COI ti f i 41 satisfying.
With t t th Si i D t l ti th t i l t ith
respect to:
Sh h ld l ti
pricing rule do not apply, the term “closing date” remains relevant, for example, when the T shareholders receive consideration in a purported reorganization on more than one date.
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entered into after December 19, 2011.
binding contracts entered into on or before December 19 2011 the parties to binding contracts entered into on or before December 19, 2011, the parties to the transaction may elect to apply the Temporary Regulations. Although no formal election must be made, in order for the Temporary Regulations to apply to a transaction:
acquiring corporation if stock thereof is provided as consideration in the transaction, and any direct or indirect transferee of transferred basis property from any of the foregoing, may not elect to apply the provisions of [the Temporary Regulations], g g, y pp y p [ p y g ], unless all such taxpayers elect to apply the provisions of such regulations. This election requirement will be satisfied if none of the specified parties adopts inconsistent treatment.”
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additional stock and/or boot may be received by T shareholders or T shareholders may forfeit previously received stock and/or boot upon the shareholders may forfeit previously received stock and/or boot upon the
I l d h ldb k t
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reorganization?
At i i ?
Wh i h l P k l i COI d i i ?
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additional stock upon satisfaction of contingent liabilities.
payable in additional stock.
constituted stock.
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modifications (significant ones listed):
Only related to stock consideration
voting rights in P stock voting rights in P stock.
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s e b y
consideration is boot or a mixture of stock and boot?
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determining when there is “fixed consideration” under the Signing Date Rule if economic benefits and burdens of ownership of acquirer stock have passed.
contingencies
application to post-closing contingencies.
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shares and $60 cash for their T stock.
Pre-Signing Date value of P shares is $1/share.
(presumably between the Signing Date and Closing Date, but not stated)
t c os g, eac s a e s wo t $0. 5 a d o esc owed stoc s etu ed to P.
p
Does the Signing Date Rule apply to post closing contingencies?
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be issued.
shares are involved).
based on value when issued).
worst case is Example 2.
shares and $12 of cash.
total consideration paid will be at least 40% stock (based on appropriate values) total consideration paid will be at least 40% stock (based on appropriate values)
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Cl i D t i ti A h At l i t t th i ht t i
stock as stock and the right to receive boot as boot.
C l k f t i t t l ti
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FACTS
USHC (“Contribution 1”), which contributed it to FHoldco2 (“Contribution U.S. Parent
FS
1
( 2”), which contributed it to FHoldco1 (“Contribution 3”).
disregarded under Treas. Reg. section USHC FS
FS
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g g 301.7701-3 (“CTB Election”). CONCLUSION FHoldco2
FS
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under section 351.
as D reorganization. FHoldco1
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g
FACTS 1. S2 forms N. 2. P transfers all the stock of S1 to S2 for additional S2 voting stock. P
S1 stock
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g 3. S1 transfers substantially all of its assets to N in exchange for N shares. 4. S1 completely liquidates into S2. S2 S1 CONCLUSION
S1 N
1 3 4
N viewed as directly acquiring S1 assets for S2 stock.
neither S1 nor P control N. T i l C i i
Substantially all
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201150021, FS would have been treated as transferring its assets directly to FHoldco1 in exchange for U S Parent stock directly to FHoldco1 in exchange for U.S. Parent stock.
t t f d i b i t ti i ll b t assets were transferred in a carryover basis transaction, i.e., an all boot D reorganization.
201150021?
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