B Reorganization Agreement

Tax-exempt M&A transactions are considered “reorganizations” and are similar to taxable transactions, except that the acquirer uses its shares in reorganizations as a significant part of the consideration paid to the seller and not in cash or debt. Four conditions must be met to qualify a transaction for tax-exempt treatment in accordance with Section 368 of the Internal Income Code (IRC): in the case of a “B” reorganization, the acquirer exchanges its eligible common shares and/or preferred shares (no kick, except for small amounts paid for fractions) for control of the target, defined as ownership of 80% of the “voice and value” of the target company`s shares. The objective survives as a subsidiary of the acquirer and protects the acquirer from the commitments of the target company. The buyer is not obliged to acquire the 80% of the shares concerned in one go, but must own at least 80% after the closing of the acquisition. This allows the buyer to gradually acquire the shares of the target company in a so-called “creeping” acquisition. Assuming Alpha buys Tango in a tax-free reorganization for $60 in cash and $40 $US in stock. The overall base of Tango shareholders in their shares is 20$US. The profit made by Tango shareholders is therefore $60 + $40 – $20 = $80. Your recognized win is the lowest of the realized gain and the amount of the boot received or $60.

In the event of a “C” reorganization, the acquirer exchanges its voting common and/or preferential shares for “substantially all” assets of the target entity. The offeree company liquidates and transfers the acquirer`s shares and remaining assets to its shareholders. The consideration paid in cash or in securities other than voting ordinary or preferential shares (boot) may not exceed 20% of the VF of the assets of the target entity prior to the transaction. All liabilities borne by the purchaser are included within the limit of 20% in case of payment in cash or other non-qualifying consideration. . . .

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