1. Structure and Tax Basics
2. Statutory Merger
3. Acquisition of Assets

Statutory merger tax consequences can vary depending on the exact structure you select for an acquisition or merger transaction. It is important to take these consequences into consideration when determining which structure is going to be right for your specific transaction.

Structure and Tax Basics

Acquisitions and mergers can make use of a number of structures that typically involve:

  • The acquirer, or business entity that is acquiring another business
  • The acquiree, or the business that is being acquired

Acquisitions and mergers require both parties involved to plan and consider alternate structures pertaining to the transaction that:

  • Maximize benefits for each party
  • Maximize benefits for equity holders
  • Are mutually attractive in terms of price, benefits, etc.

Some of the reasons behind choosing one structure over another can include:

  • The tax consequences surrounding the transaction
  • Preservation of tax advantages
  • Preservation of accounting advantages
  • Ability to acquire portions of the target company selectively
  • Liabilities associated with the target company
  • Avoiding the need to secure consent from related third parties who currently have business or contractual relationships with one party or the other

There are three primary alternative structures for transactions pertaining to acquisitions and mergers:

  • Statutory merger
  • Acquisition of assets
  • Acquisition of stock or other forms of equity associated with the target company

Statutory Merger

Statutory mergers are completed in accordance with state law that pertains to the governance of the organization of both parties involved in the transaction. Involved parties may include:

In most states, the laws are flexible enough to allow entities of different types to combine through the act of merging one company into another. Another possible way to accomplish this is to merge one company with another company's subsidiary.

Two-party mergers, otherwise known as "simple mergers," happen when the company being acquired merges with the company that is acquiring it. In most cases, the acquired company's shareholders receive one of the following from the acquiring company:

  • Stock
  • Securities
  • Cash
  • A combination of cash and securities or stock

Triangular mergers happen when the company acquiring a new business chooses to form a subsidiary for the sole purpose of facilitating the transaction. The acquired business is then merged with the newly formed subsidiary instead of merging it directly with the acquiring company. However, the acquired company's shareholders still receive one of the following from the acquiring company:

  • Stock
  • Securities
  • Cash
  • A combination of cash and securities or stock

This type of merger's name is derived from the act that the relationship between the three involved parties forms a triangle. "Forward mergers" happen when:

  • The target company merges directly into the acquiring company.
  • The target company merges into a subsidiary of the acquiring company.

In many cases, though, it's beneficial to structure the merger transaction in what is known as a "reverse merger." This happens when:

  • The acquiring company merges into the target company.
  • The acquiring company merges into a subsidiary of the target company.

"Reverse triangle mergers" happen when the acquiring company's subsidiary mergers into the target company. Simply put, this is the exact opposite of a forward triangle merger. In a reverse triangle merger, the acquired company's shareholders will still receive one of the following from the acquiring company:

  • Stock
  • Securities
  • Cash
  • A combination of cash and securities or stock

The following occurs when a forward triangle merger takes place:

  • The subsidiary that was formed by the acquiring company becomes the "surviving company."
  • The target company ceases to exist.
  • All the target company's assets and liabilities are passed to the acquiring company's subsidiary.

In comparison, the following will occur when a reverse triangle merger takes place:

  • The target company becomes the surviving company.
  • The subsidiary that was created to facilitate the transaction ceases to exist.
  • The target company retains its assets and liabilities.
  • The target company continues to exist as a subsidiary of the acquiring company.

Acquisition of Assets

When an acquiring company buys a portion or all of a target company's business assets and assumes specific liabilities of the said target company, an acquisition of assets has taken place. Normally, the acquiring company will only acquire the liabilities of the target company that it has specifically agreed to take on. This is outlined in the "successor liability" doctrines that are imposed by established law, as well as certain court decisions pertaining to this type of transaction.

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