Santa Clara Valley Chapter: Mergers and Acquisitions, Software Get the Focus.

Mergers and Acquisitions

The monthly meeting for April highlighted the different aspects of mergers and acquisitions (M&A) for high tech companies. The key areas were compensation issues related to M&A transactions and the use of limited liability companies (LLCs) in corporate transactions. The speakers were Charles Purcell of Preston Gates & Ellis LLP and Mark Silverman of Steptoe & Johnson, LLP.

In the high technology company world, one of the main avenues of compensation in M&A transactions is compensatory stock options. Stock options may be cashed out, vested, or exchanged at the time of the merger or acquisition. If a compensatory option is cashed out the issuing company repurchases it, and the company should be allowed a deduction with respect to the payment to the employee. In the case of vesting, any unvested compensatory options held by the employees under a stock option plan will generally vest at the time of the merger. In this case, the acceleration of vesting raises issues under the "golden parachute" rules of section 280G of the Internal Revenue Code. Employees can also exchange the target company options for options of the acquiring company. Generally, this type of transaction is taxfree, whether the options are qualified or non-qualified.

There are several advantages and disadvantages to using LLCs in merger and acquisition transactions. The advantages include treating the LLC as a division with limited liability for state tax purposes, getting consolidated treatment without complying with the consolidated return regulations, and using "grandparent" stock in triangular reorganizations. The disadvantages include the inability of certain LLCs to be parties of tax-free reorganizations, the inability to conduct IPOs, and the loss in a corporate subsidiary if converted into an LLC.

Software Day III

On May 4, the chapter and Baker & McKenzie hosted the third Software Day (the chapter holds a Software Day every 18 months). The aim of the day was to discuss developments in the unique or critical tax issues facing the software industry. Many attendees were from companies not traditionally thought of to be software companies -- more and more industries are finding that software is now a key component of their business. More than 150 people attended the seminar, some from as far away as Massachusetts and Texas. The chapter was delighted to welcome these tax professionals.

Gary Sprague of Baker & McKenzie in Palo Alto lead a team of...