a/k/a  top hat or double wing merger

• Can be used to avoid COI requirement

• Which applies to IRC § 368 reorganizations
  but not to IRC § 351-reliant transactions
• Allows greater use of cash while still avoiding tax
  on stock portion

• Sometimes used in Mergers of Equals

• Use of a new holding company can facilitate optics
  that transaction is fair and balanced

Three new shell companies are formed:

• Topco

• New holding company for the two combining companies

• Acquisition Sub 1

• Which is merged with the putative target

• Acquisition Sub 2

• Which is merged with the putative acquirer

After the two mergers, Topco is left as the holding company for the two combining entities

• Acquiror shareholders typically receive solely Topco stock
• Target shareholders can receive a combination of cash and/or Topco stock
• Typically in a Merger of Equals, all shareholders receive only Topco stock
• Structure entails time and expense of setting up Topco as a new SEC registrant
• After closing, holding company - dual subsidiary structure must be maintained for tax purposes

Siebel Systems - Oracle  2005

Cinergy  - Duke Energy  2005

Sears - Kmart  2004

Regions Financial - Union Planters  2004

Pinnacor - MarketWatch.com  2003

Conoco - Phillips Petroleum 2001

SmithKline Beecham - Glaxo  2000

Vivendi Universal -Canal Plus SA  2000

AOL - Time Warner  2000

Nisource - Columbia Energy  2000

Excelon - Unicom 1999

Daimler-Benz/Chrysler 1998

Turner Broadcasting - Time Warner  1996

Capital Cities/ABC - Disney 1995

National Starch - Unilever 1978

Private Letter Ruling 9143025 (07.21.91)

• Control test applies to both sets of shareholders
  in the aggregate

Revenue Ruling 84-71

• IRS ruled that an acquisitive IRC § 351 transaction is not subject to COI
• Target shareholders can exchange stock tax-free without regard to the percentage of the total consideration that consists of stock
• Rev. Rul. 84-71, 1984-1 C.B. 106 
• IRS ignores the formation and subsequent mergers of the two acquisition subsidiaries
• Treats the transactions as transfers by the target and acquiror shareholders of their shares to Newco in exchange for the relevant merger considerations
• Overall transaction qualifies as a tax-free incorporation of Newco under section 351
• Shareholders are taxed only to the extent they received boot
• Section 351 transactions that include the formation of a new holding company must demonstrate that the holding company was formed for a legitimate (non-tax) business purpose, but this requirement is much easier to satisfy than in the case of spin-offs or even tax-free reorganizations

Examples

• Joint Venture - Precedent

Mergers of Equals

M&A Tax Index