Structuring divisive reorganizations.

• Author: Swenson, Michael C.

A Type D reorganization involves a transfer of assets between corporations. Immediately after the transfer, the transferor corporation or its shareholders must be in control of the corporation to which the assets are transferred (Sec. 368(a)(1)(D)). For divisive D reorganizations, control means ownership of at least 80% of the total voting stock and at least 80% of the total number of shares of all other classes of stock (Sec. 368(c)). Under Sec. 368(a)(1)(D), stock or securities of the corporation to which the assets are transferred must be distributed to the transferor's shareholders in a transaction that qualifies under Sec. 354, 355, or 356.

Type D reorganizations can be either acquisitive or divisive. However, the most common uses of D reorganizations involve the splitting of one corporation into two or more corporations in transactions commonly described as split-ups, split-offs, and spinoffs. Such transactions occur because the two businesses are perceived to be worth more individually than together, or because the shareholders want to split, with some owning one business (via owning the stock of one of the corporations) and others owning another (via owning the stock of the other corporation).

Type D divisive reorganizations can take the form of a split-up, a split-off, or a spinoff, whereby a corporation transfers part of its assets to one or more controlled corporations, which then distribute their stock in one of the following ways:

* In a split-up, assets are transferred from one corporation to two or more controlled corporations. The stock of the controlled corporations is then distributed to the transferor corporation's shareholders, and the transferor corporation is liquidated. The distribution of the controlled corporations' stock can be made on a pro rata or non--pro rata basis.

* In a split-off, certain assets of a corporation are transferred to a newly created corporation in exchange for all of the new corporation's stock. The transferor corporation then distributes the new corporation's stock to one (or one group of) shareholder(s), who are required to give up their stock in the transferor corporation in exchange.

* In a spinoff, certain assets of a corporation are transferred to a newly created corporation in exchange for all of the new corporation's stock. The transferor corporation then distributes the new corporation's stock to its shareholders, who are not required to give up any part of their stock in the transferor corporation.

In the following examples, assume that A Corp. operates a trucking business and a hazardous waste disposal business. Because of insurance concerns, the board of directors decides to operate the two businesses separately:

* In a split-up, B Corp. is formed, and the hazardous waste disposal business is transferred to it in exchange for all...