Ch 7 Part 3 Flashcards
(52 cards)
Advantages of type A reorganization 2
1 more flexible than other reoganizations, because consideration
Doesn’t need to be solely voting stock
2 substantially all the assets of target corp. need not be acquired
Acquire doesn’t have to by unwanted assets
Continuity of interest doctrine (applies to type A)
Stock of acquiring corporation must be significant part of total
Consideration used
4 disadvantages of type A reorganization
1 must have 2/3’s shareholder approval, which is costly and
Time consuming if both companies are publicly traded
2 dissenting shareholders of both corporation have right
To have shares independently appraised and purchased for
Cash by acquirer
3 all liabilities of target are assumed
4 target corporation’s may have licenses, rights or other
Privileges that are non transferable
Drop down type A reorganization
Rules permit acquiring corp. to transfer (drop down) to controlled
Subsidiary part or all of assets and liabilities acquired in
reorganization
Drop down does not affect nontaxable nature of reorganization
For parent or subsidiary
Drop down type A reorganization: basis of subsidiary
Subsidiary takes from parent a carryover basis of assets
Sec. 368: triangular mergers
Similar to straight mergers except parent corp. uses controlled
Subsidiary to acquire target corp. stock and assets
The target corp. then merges into subsidiary
Triangular mergers: consideration used
Consideration restricted to stock of parent corp., limited amount
Of subsidiary cash and securities can be used
Subsidiary can assume target corp’s liabilities
What requirement exists to make a triangular merger nontaxable?
Substantially all requirement
70% FMV of target corps gross assets and 90% FMV of target’s
Net assets
3 advantages of triangular merger over straight type A merger
1 target corp assets and liabilities become responsibility of
subsidiary, minimizes claims against parent for contingent liab.
2 because parent corp. is principal shareholder in acquiring
Subsidiary, shareholder approval is easy and less costly in
transaction
3 target corp. shareholders can use installment method to
Recognize gains on sale of parent stock
3 steps in triangular type A reorganization
1 additional Acquirer stock is exchanged for subsidiary stock
Between parent and subsidiary
2 Acquiring stock is exchanged from subsidiary to Target corp.
For substantially all of Target corp assets and liabilities
3 target corp liquidates and target’s shareholders receive
Acquirer’s stock in exchange for their target stock/securities
What is the post reorganization structure of a triangular type A reorganization?
Acquiring and former target shareholders both own acquirer’s
Stock
The acquiring corporation controls the subsidiary that owns substantially all of target’s assets and liabilities
Reverse triangular merger
Similar to triangular merger except subsidiary merges into
Target corporation and subsidiary ceases to exist
What is the advantage of a reverse triangular merger
Continuing the target corporation as a going concern allows
The continuing existence of non transferable rights, liscenses
And contracts that it owns
Type C reorganization
Asset for stock acquisition
Acquiring corp obtains substantially all of target corp’s assets
In exchange for acquiring corp. voting stock and possibly
Limited amount of other consideration
2 steps of type c reorganization
1 Acquiring corp transfers voting stock to target corp in exchange
For substantially all target’s assets
2 acquiring voting stock transferred from liquidating target corp
To target corp shareholders in exchange for target corp. stock
Post reorganization structure of type c reorganization
Acquirer’s and target’s former shareholders own Acquiring
Corp, which owns substantially all of target’s assets and liabilities
Type C reorganization: if target corporation dissolves what happens to liabilities not assumed by acquiring corporation?
Liabilities become responsibility of target corp’s directors
Main difference between a type C and type A reorganization
The target corp. doesn’t dissolve in a type C reorganization
Allowing the target corp to retain its corporate charter
Prevents others from using its corporate name or selling
It’s corporate name to 3rd party
Consideration in type c
Solely voting stock of acquirer must be used to obtain at least
80% of target corp
3 advantages of type C reorganization
1 type c does not have to comply with merger laws of state or
Federal government
2 acquirer only assumes liabilities in agreement, doesn’t assume
Contingent liabilities
3 in type c, shareholders of acquiring corp generally need
Not approve acquisition, thus reducing transaction cost
5 disadvantages of type C reorganization
1 must use voting stock in type C
2 type C has tighter boot restrictions
3 target liabilities might be substantial
4 substantially all test, limits target corp from selling, disposing,
Retaining assets acquirer doesn’t want right away
5 dissenting shareholders of target can have shares independently
Appraised and purchased for cash
2 other types of type C reorganizations
What type of reorganization doesn’t exist?
1 drop down type C reorganization
2 triangular type C reorganization
Reverse triangular type C reorganizations don’t exist
2 types of type D reorganizations
Can be either acquisitive or divisive
Acquisitive Type D reorganization 2 steps
1 Target corp transfers substantially all of its assets to an acquiring corp (transferee) in exchange for acquirer's stock
2 target corp liquidates and gives acquirers stock to shareholders
In exchange for their target stock and securities
