Question

Acquiring Corporation is currently the parent of Subsidiary Corporation. Acquiring owns all the stock in Subsidiary.

Acquiring is now interested in acquiring either the assets or the stock of Target. Target holds a valuable license to produce military equipment that Acquiring is especially interested in obtaining. Target has assets worth $4,000,000, but with a tax basis of $1,000,000. Target has liabilities totaling $600,000 and E & P of $3,000,000.

The majority of Target’s shareholders are favorable to a takeover by Acquiring, but they want the takeover to be tax-free. Some Target shareholders are opposed to the takeover, but they are willing to claim a dissenter’s right to be paid the value of their stock in cash. Some of the shareholders of Acquiring are concerned about assuming all of Target’s liabilities.

Discuss the forms in which the takeover can occur to provide tax-free consequences to the shareholders. The dissenting shareholders own less than 20% of the Target stock.

Answer 1

Solution: Target's assests and liabilities would carry to Acquiring as a matter of law. Target's shareholders would receive stock in Acquiring worth $2,720,000{80% of Target's net value of $3,400,000 ($4,000,000 - $600,000 liabilities)} $3,400,000×80%÷100=$2,720,000. The dissenting shareholder's would receive cash of up to ($3,400,000 -$2,720,000)=$680,000. The continuity of interest test would be met. It requires that 50% of the value of the stock of the target Corporation be acquired with stock in the acquiring Corporation on. Because some of Acquiring's shareholders are concerned about assuming all of Target's liabilities, the parties could consider having Subsidiary acquire the assest of Target for voting stock in Acquiring.