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CHAPTER 14 Selling Your Business: Tax Considerations and Strategies
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if they rise over a specified target value, and then using the proceeds from sale of the call to buy the put5
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Straight Merger
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This is simply a merger of one corporation into another corporation pursuant to applicable state law This is a relatively flexible form of reorganization because: 1 Shareholders of the entity being acquired may receive stock or a combination of stock and other consideration, such as cash) 2 Shareholders receiving both stock and nonstock consideration are not taxable on the stock consideration 3 Shareholders do not have to be treated equally, so, for example, certain shareholders may take stock, others cash, and still others a combination of stock and cash 4 Straight mergers are not subject to certain restrictive provisions applicable to other forms of reorganization As a general rule, in a straight merger, some or all of the shareholders of the corporation being acquired may receive as much as approximately 60 percent of the sales price in cash or
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5 These arrangements are usually structured by investment bankers, and, if structured properly, will not result in a deemed sale of the stock by the hedging party for income tax purposes Sometimes such hedging arrangements are not available or feasible, in which case the seller should consider attempting to obtain a put right from the acquiring corporation, which, if structured properly, would not affect the tax-free nature of the reorganization Although not technically a hedge, another possibility would be to request that the acquiring corporation issue convertible preferred stock rather than common stock to the sellers pursuant to the reorganization The convertible preferred stock would have liquidation rights superior to the holders of the corporation s common stock, thereby hedging the sellers investment risk by essentially requiring the holders of common stock in the acquiring corporation to bear losses to the value of the acquiring corporation to the extent of the value of the outstanding common stock before the preferred holders would have to bear any losses yet it would allow the sellers to ride the upside of owning common stock through the conversion feature If this route is pursued, however, care must be taken to ensure that the applicable reorganization requirements are met and the stock is not considered nonqualified preferred stock pursuant to Code Sections 351 and 354
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PART TWO The Sale and Financing of a Business
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other nonstock consideration without being taxed on the stock portion of the consideration A potential nontax problem with this form of reorganization is that the acquirer directly assumes the liabilities of the acquired corporation in the merger, which can pose a risk to the acquirer s other existing businesses and assets
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This type of reorganization involves the acquisition of at least 80 percent of the stock of the corporation to be acquired solely in exchange for voting stock of the acquiring corporation The acquiring corporation may not pay a single dollar of nonstock consideration Though less flexible than a straight merger, in this type of reorganization the acquirer does avoid the problem of assuming the liabilities of the acquired corporation This is so because those liabilities remain encapsulated in the acquired corporation (which becomes a subsidiary of the acquired corporation) This same result may be accomplished, however, through use of a subsidiary merger (discussed below), which is generally more flexible and therefore preferable to stock-forstock reorganizations
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This reorganization involves the acquisition of substantially all of the assets of the selling corporation solely in exchange for voting stock of the acquiring corporation Although, like the stock-for-stock reorganization, this requires that solely voting stock of the acquirer be used, there is a special rule that permits nonstock consideration to be used so long as the total nonstock consideration given by the acquiring corporation (including the assumption of liabilities of the acquired corporation) does not exceed 20 percent of the total consideration given (including liabilities assumed) Stock for assets offers the acquirer the benefit of not having to assume the unknown or contingent liabilities of the acquired corporation (either directly or by taking the acquired assets subject to such liabilities, as in a merger and a stock-forstock reorganization)
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