Mergers and Acquisitions in Colorado: a Practitioner's Roadmap
| Publication year | 1987 |
| Pages | 769 |
| Citation | Vol. 16 No. 5 Pg. 769 |
1987, May, Pg. 769. Mergers and Acquisitions in Colorado: A Practitioner's Roadmap
Robert F. Klueger, Denver, is a shareholder in the firm of Boris, Klueger, Nemkov & Jahde, P.C.
Practitioners who set out to structure a tax-free reorganization soon find themselves in a thicket of interlocking tax, securities and corporate law issues, with wildly fluctuating results, depending upon the form of reorganization employed. In every case, the parties will know, as a practical matter, which business is to be acquired and which will do the acquiring, and usually will know or have a sense of the consideration that is to be paid, leaving the details to their respective counsel. Unless the parties are quite sophisticated, they will first inform their counsel that they desire to "merge," using the term generically, even if a true "merger" is not desired or ultimately proves undesirable.
This article is designed to set forth briefly the possible methods for accomplishing the parties' business goals and to describe the pitfalls and opportunities inherent in each method, with particular attention paid to Colorado law.
Hypothetical: National Widget, Inc. ("National") is a publicly held Colorado corporation, with 10 million common shares issued and outstanding held by 1,000 shareholders. National desires to acquire Local Widget, Inc. ("Local"), a closely held Colorado corporation having two shareholders, Louis and Larry Local. The Local brothers and National have agreed that the Local brothers will receive 3 million authorized but unissued common shares of National and $300,000 in cash as part of a "tax-free" reorganization.
To determine the manner by which National may acquire Local in a "tax-free reorganization," the starting place is § 368 of the Internal Revenue Code of 1986 ("Code").(fn1) Section 368 defines the ways in which one corporation may acquire another "tax-free," in whole or in part. If the definitional requirements are met, the transaction is treated as a "reorganization." If the contemplated transaction cannot be fit into any of the definitions, the entire transaction will be deemed to be, and taxed as, a taxable purchase.
Before reviewing the Code § 368 definitions, two prefatory comments are in order. First, the tax-free status that § 368 affords benefits the shareholders of the acquired corporation (here, the Local brothers); other provisions of the Code assure tax-free treatment to the corporations which are parties to the reorganization.(fn2) Second, achieving reorganization status will result in the shareholders being able to defer taxation only with respect to the corporate stock they receive. The "boot" (in the hypothetical, the $300,000 cash) will be immediately taxed in any event, regardless of the method of reorganization employed.(fn3)
With this in mind, the three principal and two "hybrid" methods of tax-free reorganization permitted by § 368 are now reviewed.
Code § 368(a)(1) simply provides: ". . . the term 'reorganization' means---(A) a statutory merger or consolidation. . . ."In other words, if the provisions of state law are met relative to a merger (whereby one corporation is merged into a second, with the second being the "surviving" corporation) or a consolidation (whereby two corporations are combined to form a new corporation), the transaction will be a tax-free reorganization, at least to the extent of the corporate stock that is exchanged. If National and the Local brothers were to combine by means of an "A" reorganization, it could be diagrammed as follows:
Mergers and consolidations in Colorado are governed by Article 7 of the Corporation Code.(fn4) Accomplishing a merger is not difficult. The approval of the Board of Directors of both corporations is required, a "plan or merger" must be prepared and articles of merger filed.(fn5) The only difficulty (and opportunity) lies in the requirement of shareholder approval, governed by CRS § 7-7-103.
In all events, the approval of the shareholders of the acquired corporation is required. However, shareholder approval of the surviving corporation is not necessary if (1) the merger does not require the amendment of the surviving corporation's articles of merger, (2) there is no change in the rights, par value or identity of the surviving corporation's shares and (3) no more than 20 percent of the surviving corportion's shares are issued in the transaction.(fn6) In the hypothetical, approval by National's shareholders would be required, since it has 10 million shares outstanding and would be issuing more than 20 percent (3 million) additional shares to the Local brothers.
Colorado's Corporation Code places no restriction on the type or amount of consideration that the Local brothers may receive in the merger. Does this mean that they may receive any consideration in the merger, and still have the merger qualify as a tax-free "A" reorganization? Not quite. Since the philosophy underlying tax-deferred treatment is that the shareholders of the acquired corporation have a "continuity of interest" in the acquiring corporation, the Internal Revenue Service ("IRS") has ruled that the value of the cash (or other property) received may not exceed 50 percent of the total consideration received.(fn7)
In the hypothetical, tax-free treatment of the National shares received by the Local brothers would be jeopardized if the value of the shares was less than $300,000, the value of the cash received. Nonetheless, more cash consideration is permitted in an "A" reorganization than in other types of reorganizations. This makes the "A" reorganization a more flexible method than the "B" or "C" reorganizations, discussed below.
Code § 368(a)(1)(B) permits tax-free reorganization status if the shareholders of the acquired corporation cede "control" of their corporation in exchange for "solely voting" stock of the acquiring corporation.(fn8)
After a...
To continue reading
Request your trial