Presenting a live 90-minute webinar with interactive Q&A Advanced Tax Considerations for Negotiating, Structuring and Documenting M&A Transactions Evaluating Taxable Versus Tax-Free Deals, Stock Sales Versus Asset Sales, Tax-Free Reorganizations, Earnouts and More TUESDAY, SEPTEMBER 12, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Jonathan Golub, Attorney, Royse Law Firm , Palo Alto, Calif. Roger Royse, Attorney, Royse Law Firm , Menlo Park, Calif. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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M&A TAX CONSIDERATIONS FOR BUYERS AND SELLERS Roger Royse Jonathan Golub Royse Law Firm, PC Royse Law Firm, PC Silicon Valley Silicon Valley San Francisco San Francisco Los Angeles Los Angeles Orange County Orange County jgolub@rroyselaw.com rroyse@rroyselaw.com www.rroyselaw.com www.rroyselaw.com Skype: roger.royse Twitter @rroyse00 IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.
OVERVIEW OF TRANSACTIONS • Tax Free Reorganizations: – Type A – Merger – Type B – Stock for Stock – Type C – Stock for Assets – Type D – Spin Off, Split Off, Split Up, and Type D Acquisitive Reorganizations – Type E – Recapitalizations • Compensation Issues • Taxable Transactions: – Stock Sale – Asset Sale • S Corporation Strategies • Use of LLCs • Foreign Corporations 6
TAXABLE VS. TAX FREE • Type of Acquisition Currency – Stock – Securities/Debt – Deferred payments, earn out provisions – Compensatory • Nature of the Buyers and Seller – Foreign Parties – Tax Attributes of Parties • Shareholder Level Considerations – Tax Sensitivity of Shareholders – Appetite for Complexity & Risk • Some taxes subject to indemnification 7
CONTINUITY OF INTEREST • IRS – 50% Safe Harbor, Rev. Proc. 77-37 • IRS – 40% in Temp. Reg. 1.368-1T(e)(2)(v), example (1) • John A. Nelson – 38% Stock • Miller v. CIR – 25% Stock • Kass v. CIR – 16% Stock is Insufficient • 2011 Regulations address changes in value between the date of signing and close; – if fixed consideration (Consideration is “fixed” if contract states exact number of shares and other cash or property to be exchanged) • Consideration is valued as of last business day before the first day the contract is binding and • If a portion of the fixed consideration is other property identified by value, then the specified value is used for that portion (see Reg. 1.368-1(e)(2)). – 2011 Proposed Regulations (Prop. Reg. 1.368-1(e)(2)(vi)) – consideration that varies as the value of issuing corporation stock changes prior to closing will not fall below (or above) contractual floor (or ceiling) markers for purposes of continuity of interest. If binding contract uses average value of issuing corporation stock that average value can be used for continuity of interest. • Post transaction sales and redemptions 8
TAX FREE REORGANIZATIONS • Type A – Merger • Type B – Stock for Stock • Type C – Stock for Assets • Type D – Spin Off, Split Off, Split Up, and Type D Acquisitive Reorganizations • Type E - Recapitalizations • Ruling Guidelines – Rev. Rul. 77-37 – Rev. Proc. 86-42 – Rev. Rul. 73-54 (terms) – Rev. Proc. 89-50 – Rev. Proc. 96-30 (Type D Checklist) 9
TYPE A REORGANIZATIONS – SECTION 368(a)(1)(A) STATUTORY MERGER Shareholders Target Acquiror • Requirements: Statutory Merger – 2 or more • corporations combined and only Necessary Continuity of Interest • Business Purpose one survives (Rev. Rul. 2000-5) • Continuity of Business Enterprise • Requires strict compliance with • Plan of Reorganization statute • Net Value • Target can be foreign; Reg. Tax Effect: 1.368-2(b)(1)(ii) • Shareholders – Gain recognized to the extent of boot • • No “substantially all” Target – No gain recognition • Acquiror takes Target’s basis in assets plus gain requirement recognized by Shareholders • No “solely for voting stock” • Busted Merger – taxable asset sale followed by requirement liquidation 10
TYPE B REORGANIZATIONS – SECTION 368(a)(1)(B) STOCK FOR STOCK Shareholders Target Acquiror • Acquiror’s basis in Target stock is the • Acquisition of stock of Target, by same as the Shareholder’s Solely for Acquiror in exchange for Acquiror voting stock voting stock • No Boot in a B • Acquiror needs control of Target • Reorganization Expenses – distinguish immediately after the acquisition between Target expenses and Target • Control = 80% by vote and 80% of Shareholder expenses (Rev. Rul. 73-54) each class • Creeping B – old and cold stock purchased for cash should not be integrated with stock exchange 11
TYPE C REORGANIZATIONS – SECTION 368(a)(1)(C) STOCK FOR ASSETS Shareholders Acquiror Stock Acquiror Stock Target Acquiror Target Assets • Acquisition of substantially all of the assets • Reorganization Expenses – Aquiror may of Target, by Acquiror in exchange for assume expenses (Rev. Rul. 73-54) Acquiror voting stock • Assumption of stock options not boot • “Substantially All” – at least 90% of FMV of Net Assets and at least 70% of FMV of • Bridge loans by Acquiror are boot Gross Assets • Redemptions and Dividends – who pays • Target must liquidate in the reorganization and source of funds • 20% Boot Exception – Acquiror can pay boot (non-stock) for Target assets, up to 20% of total consideration; liabilities assumed are not considered boot unless other boot exists 12
TYPE D REORGANIZATIONS – SECTION 368(a)(1)(D) DIVISIVE SPIN OFF, SPLIT OFF, SPLIT UP Shareholders Transferee Stock Transferee Stock Transferor Transferee Transferor Assets • Control rules: Transfer by a corporation of all or part of its assets to another corporation if, immediately after the transfer, the transferor or its shareholders are in control of the transferee corporation . • Distribution Rules: Stock or securities of the transferee must be distributed under the plan in a transaction that qualifies under Section 354, 355, or 356. • Must satisfy business purpose, transfer long-lived business, and not fail numerous anti-abuse provisions. • Precaution: Protectively file §336(e) election in case this fails to be a tax-free reorganization, to at least get inside basis step-up (see later slide) 13
TYPE D REORGANIZATIONS – SECTION 368(a)(1)(D) NON-DIVISIVE Merger Treated as Acquisitive D • If shareholders of Transferor stock receive Acquiror stock and own at least 50% of Shareholders Acquiror stock, the transaction may be with 20% treated as a non-divisive D REORG even if it fails as an A REORG for lack of continuity Acquiror Stock Acquiror Stock Transferor Acquiror Transferor Assets Merger Failed Type C Treated as D Liquidation / Reincorporation Shareholders Shareholders Assets Transferor Acquiror Transferor Acquiror Cash & Stock 14
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