Initial Considerations Regarding a Corporate Acquisition

In any corporate acquisition, there are tax and non-tax issues, multiple business considerations and goals of the parties involved with the transaction.  The tax planning that is involved before, during and after the acquisition process may include many options and alternatives to achieve the tax and non-tax wishes and goals of the parties.  Thus, one of the most important steps in the planning process of a corporate acquisition is to discuss and review the party’s intentions and goals, which may include short term matters and long term matters.

First, we need to identify the parties.  In any corporate acquisition you will have the buyer who is looking to acquire one or more businesses that are operated and owned by another business.  The seller, which may be referred to as the “target” or “target-corporation” may wish to be disposing of the business in exchange for some type or form of consideration, or merge in some way with the buyer.  Broadly stated, the buyer may wish to purchase the stock of the target corporation, or acquire the assets of the corporation.  Thus, in general, you can consider the purchase options to be a stock purchase or asset purchase of the target.  Furthermore, there is the possibility that the acquisition could be a hostile acquisition.  A hostile acquisition involves the acquisition of a publicly held company, like Wal Mart.  The acquisition begins without any agreement between the purchaser and the target corporation.  It is possible that through a hostile acquisition, the target may not even wish to be acquired or purchased by the buyer.

It is likely that the single most important factor in an acquisition will be the consideration to be paid or consideration received by target (property, stock and other items could be used as consideration).  Thereafter, an important issue to consider and understand is whether the shareholders of the target corporation plan to or wish to have an equity ownership in the combined entity after the acquisition is completed, or if such shareholders wish to sell their entire ownership interest in exchange for a cash payment or other financial benefit.  This issue will likely dictate the overall consideration involved and will, in many respects, control the overall structure of the transaction as well as the characterization of the transaction for tax purposes (taxable versus tax free).  For example, if the parties wished to have a tax free reorganization, a common theme in a tax free reorganization is continuing ownership interest in the combined business by the previous shareholders of the target business.  The transaction may only be able to qualify as a tax-free reorganization if a substantial portion of the consideration paid is the stock of acquiring corporation, or perhaps the stock of the acquiring corporation’s parent.  Thus, consider whether or not the target shareholders receiving shares of the acquiring corporation would be practical if in fact the some or all of the target shareholders wished to receive cash consideration for their ownership interests.  This example illustrates how the goals and wishes of the parties involved can dictate the transaction structure and thus the tax implications to the parties.

The above article has been prepared by John McGuire of The McGuire Law Firm.  As a tax and business attorney, Mr. McGuire’s practice is focused on tax planning, tax matters before the IRS and business transactions from business start-ups & formation, to business contracts & acquisitions.  You can schedule a free consultation with a business attorney at The McGuire Law Firm by calling 720-833-7705.

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Denver Business Attorney Discusses Voting in a Statutory Merger

In previous articles, a Denver business attorney at The McGuire Law Firm has discussed certain types of mergers.  Recently, a client inquired as to who votes in statutory merger and such question or issue deserves some attention.  The article below has been prepared by a business attorney to provide general information regarding corporate voting issues in auspices of a statutory merger.  This article will use Delaware law as such law is followed in many jurisdictions and has been the cornerstone of many state corporate codes.

The default rule in Delaware is that corporate shares without general voting rights (non-voting common shares and preferred shares with no voting rights unless there are dividend arrearages) do not have the power to vote in large transactions.  Of course, to immediately contradict the above statement, many states do not follow this Delaware default law and class voting may be mandatory on statutory mergers.  Further, Delaware companies can and often do provide preferred shareholders a class vote in acquisitions.

There are exceptions to the rule as stated above.  Exception one is: the shareholders of the surviving corporation in a statutory merger do not have a right to vote if their rights, preferences and privileges of their shares will survive the merger, because their investment or investment contract has not changed.  Furthermore, their shares cannot be diluted by more than a specified amount through the statutory merger.  Exception two exists through a statutory merger of a parent corporation and a subsidiary when the parent holds over 90% of the subsidiary’s stock.  The Delaware code permits the merger of the subsidiary into the parent, also called an “upstream merger” solely on a resolution of the parent’s board of directors.  Thus, neither the shareholders of the subsidiary or the parent corporation vote to ratify the transaction.  Certain corporate codes may give the parent the right to vote if the parent is issuing stock in the parent to the subsidiary shareholders that carries more than 20% of the voting power in the parent corporation.  Exception number two is often referred to as the parent-subsidiary merger exception.  It is important to note that if the subsidiary is the surviving corporation (called a downstream merger) the shareholders of the parent corporation are entitled to vote.  The third exception may be somewhat novel to Delaware but other states will likely follow.  Under Delaware code, no shareholder voting may be required in specific reorganizationswhereby holding companies are reorganized, or holding companies are created.  This exception has been termed the holding company exception.

The merger of two businesses or the acquisition of a business can be confusing and have many implications, including tax implications. If you have questions regarding the potential merger with another business or acquisition of another business, speak with a Denver business attorney and tax attorney by contacting The McGuire Law Firm.  A free consultation is offered to all potential clients.