The information presented is only of a general nature, intended simply as background material, is current only as of the latest revision date, October 15, 2007, omits many details and special rules and cannot be regarded as legal or tax advice.

Internal Revenue Code § 368(a)(1)(A)

A Reorganization Diagram

Post-Transaction Structure

To qualify as a reorganization, a merger must constitute a "statutory merger or consolidation." The IRS had long interpreted this language as requiring the merger to be effected under the laws of the United States, a state or territory or the District of Columbia. Under this view, foreign mergers, amalgamations or consolidations were not A reorganizations. However, in regulations adopted in 2006, the IRS reversed course and now permits transactions effected pursuant to statutes of foreign jurisdictions or United States possessions to qualify as long as the statute operates in a manner comparable to a domestic merger statute (i.e., by operation of law the separate legal existence of a merged entity ceases and all its assets and liabilities become assets and liabilities of the surviving entity).

Under temporary regulations adopted in 2003, and later incorporated in the final 2006 regulations, a merger with and into a disregarded entity (e.g., a single-member LLC) can qualify as an A reorganization as long as the owner of the disregarded entity is classified as a corporation for U.S. federal tax purposes.

Because of the continuity of interest requirement, a significant portion (i.e., 40%) of the consideration received by the former Target shareholders must be Acquiring stock.

Nonvoting and preferred stock may be used to satisfy this requirement. However, under the Taxpayer Relief Act of 1997, certain preferred stock ("nonqualified preferred stock"), including mandatorily redeemable or puttable preferred stock, is not treated as stock, except in certain circumstances where it is exchanged for comparable stock.

Stock issued into escrow, e.g., to provide security for any indemnification liability, can be treated as stock if several conditions are met.

Contingent stock can also be treated as stock if several conditions are met.

The remaining consideration can be cash, Acquiring indebtedness or any other property.

Cash election mergers (Target shareholders can elect Acquiring stock or cash subject to a limitation that a certain portion of the total consideration, say 55%, must be Acquiring stock) significantly reduce the continuity of interest margin for error.

Acquiring can transfer the former Target assets acquired in the merger to an Acquiring subsidiary as long as Acquiring is in control of that subsidiary.

© 2007