Strategic Corporate Finance: Applications in Valuation and Capital Structure

TAX CONSIDERATIONS AND STRUCTURAL REFINEMENTS

Section (§) 355 of the Internal Revenue Code (IRC) stipulates the following conditions to qualify as a tax-free event:

• The parent must have control of the subsidiary prior to distribution and must have had controlling (80 percent) ownership for at least 5 years,
• All subsidiary stock and securities owned by the parent must be distributed (with occasional exceptions),
• Continuity of historic shareholder interest (minimum 50 percent continued interest) must be maintained in the parent and subsidiary,
• Business operations of the subsidiary and parent must be continued after divestiture, and
• Subsidiary and parent may not be acquired within two years of divestiture; this feature can be used as a defense against hostile bids.

Under §338(h)(10) treatment, a stock acquisition is treated as an asset deal; subsidiary net operating losses (NOLs) remain with the parent as the cost basis of assets are marked to market. Without the §338(h)(10) election, all tax attributes of a subsidiary carry-over to the acquirer.

• In an “A” reorganization, the acquirer receives all assets and all liabilities of the target in exchange for a mix of stock (50 percent minimum) and cash.
• In a “B” reorganization, the acquirer must use 100 percent stock to acquire a minimum of 80 percent of the target’s stock.
• In a “C” reorganization, the acquirer receives most (70 to 90 percent) of the target’s assets (but not liabilities) in exchange for a combination of stock and cash ...