structuring reverse and forward triangular mergers:...

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Presenting a live 90-minute webinar with interactive Q&A

Structuring Reverse and Forward Triangular

Mergers: Anti-Assignment Triggers, Tax

Implications, Employment Considerations

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, AUGUST 25, 2016

Alan Haus, Attorney, Royse Law Firm, Menlo Park, Calif.

Satya Narayan, Attorney, Royse Law Firm, Palo Alto, Calif.

Roger Royse, Attorney, Royse Law Firm, Menlo Park, California

Harpreet Walia, Attorney, Royse Law Firm, San Francisco

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Reverse and Forward Triangular Mergers

Harpreet S. Walia Royse Law Firm, PC

[email protected]

@harpreetswalia

I. Corporate Law Requirements

Overview of Structure of Triangular Mergers

Legal Requirements

Advantages and Disadvantages

This presentation and its contents are solely for informational purposes and does not constitute legal advice.

5

• Structuring an Acquisition

– Asset Sale

– Stock Sale

– Merger

• Direct Merger

• Forward Triangular Merger

• Reverse Triangular Merger

CORPORATE REQUIREMENTS OVERVIEW OF STRUCTURE OF TRIANGULAR

MERGERS

REVERSE AND FORWARD TRIANGULAR

MERGERS

6

Direct Merger

• Target merges directly with Acquiror

Target Acquiror

Target

Shareholder

s

Acquiror

Shareholder

s

PARTIES INVOLVED- OVERVIEW OF STRUCTURE OF TRIANGULAR MERGERS


MERGERS

7

Acquisition

Subsidiary

Merger

Triangular Merger - Same parties as in Direct Merger but includes the

formation by the Acquiror of an Acquisition Subsidiary as acquiring entity

PARTIES INVOLVED - OVERVIEW OF STRUCTURE OF TRIANGULAR MERGERS


MERGERS

Acquiror

Shareholder

s

Acquiror

Target

Shareholder

s

Target

8

Acquisition

Subsidiary

Merger

Consideration

Merger

Forward Triangular Merger Target merges into newly formed Acquisition Subsidiary, with Acquisition Subsidiary as

surviving corporation and Target ceases to exist as a corporate entity.

All assets and liabilities of Target are held by Acquisition Subsidiary.

Target Shareholders receive Merger Consideration (cash/Acquiror stock) and Target

shares are cancelled


MERGERS


MERGERS

Acquiror

Shareholder

s

Acquiror Target

Target

Shareholder

s

9

POST MERGER ACQUIROR STRUCTURE – FORWARD TRIANGULAR MERGER


MERGERS

Acquiror

Shareholders

Acquiror

Acquisition

Subsidiary

10

Merger

Consideration

Merger

Reverse Triangular Merger Acquisition Subsidiary merges into Target, with Target as surviving corporation and Acquisition

Subsidiary cease to exist as corporate entity

All assets and liabilities of the Target remain in the Target (with all of the assets

and liabilities of Acquisition Subsidiary going to Target)

Target Shareholders receive Merger Consideration (cash/Acquiror stock) and Target shares are

cancelled


MERGERS


MERGERS

Acquiror

Shareholder

s

Acquiror

Acquisition

Subsidiary

Target

Target

Shareholder

s

11


MERGERS

Acquiror

Shareholders

Acquiror

Target

POST MERGER ACQUIROR STRUCTURE – REVERSE TRIANGULAR MERGER

12

Legal Requirements

Acquiror: • Formation of Acquisition Subsidiary

• Approval of Board of Directors of Acquisition Subsidiary

• Approval of Board of Directors of Acquiring Company (as sole shareholder of Acquisition

Subsidiary)

•Agreement and Plan of Merger (principal transaction document for merger)

Target: •Approval of Board of Directors of Target Company

•Approval of Target Company Shareholders

-State Merger laws typically require majority of Target Shareholder’s consent

to approve merger

- Dissenting Shareholders can be cashed out

•Filing of Certificate of Merger

Other Approvals:

•Additional Considerations for Public Companies

•Regulatory Approvals (Securities and Antitrust)

CORPORATE LAW REQUIREMENTS LEGAL REQUIREMENTS


MERGERS

13

Advantages of Triangular Merger

• Keeps Target liabilities out of Acquiror and contained in Acquisition Subsidiary

or Target

•Potentially fewer third party approvals

•Allows for less disruption to Target operations (especially where earn-outs are

part of Merger Consideration)

•No consent is required from Acquiror Shareholders to enter transaction

• Structure facilitates ability to undertake a tax-free transaction

Disadvantages

• Requires Shareholder approval of Target Shareholders

• Potential Dissenter rights issues

• While liability may be walled off Acquiror, no ability to leave behind liabilities of

Target

• May impede integration process of Target with Acquiror

• Ongoing maintenance of Surviving Company as a separate legal entity

CORPORATE LAW REQUIREMENTS ADVANTAGES AND DISADVANTAGES


MERGERS

14


Satya S. Narayan Royse Law Firm, PC

[email protected]

m

650.521.5745

II. Anti-Assignment Clauses


15

DOES THE ACQUISITION/ MERGER CONSTITUTE AN ASSIGNMENT?

Asset Acquisition

By definition, Target company’s assets (including

contracts) are assigned or transferred

Direct Merger

Target Co. survives

Acquiring Co. survives

Triangular (Subsidiary) Merger

Forward Triangular Merger

• Acquiring Co.’s Merger Subsidiary survives

Reverse Triangular Merger

• Target Co. survives as a subsidiary of the

Acquiring Co.


MERGERS

16

STATE MERGER STATUTES: “VESTING” LANGUAGE

• Effect of Merger: Vesting Language in State Merger Statutes

• Current ABA Model Business Corporation Act (“MBCA”) “Vesting”

Language:

“all property owned by, and every contract right possessed by, each

corporation or other entity that merges into the survivor is vested in the survivor without reversion or impairment” (§ 11.07(a)(3))

Majority of states merger statutes include provisions similar to the effect of

merger provision of the MBCA, but not necessarily from the current version

of the MBCA

• Vesting Language in Delaware Merger Statute:

• “… the rights, privileges, powers and franchises of each of [the merged]

corporations, and all property, real, personal and mixed, and all debts due

to any of said constituent corporations on whatever account … shall be

vested in the corporation surviving or resulting from such merger or

consolidation; … and shall not revert or be in any way impaired by reason of this chapter…” (Del. Code § 18-259)

• Vesting Language in California Merger Statute:

“… the surviving corporation shall succeed, without other transfer, to all the

rights and property of each of the disappearing corporations and shall be

subject to all the debts and liabilities of each in the same manner as if the surviving corporation had itself incurred them.” (Cal. Corp. Code § 11.07(a))


MERGERS

17

ASSIGNMENT / TRANSFER BY “OPERATION OF LAW”

• Question: Does an assignment or transfer by operation of law occur when “vesting”

takes place in a merger, triggering anti-transfer or anti-assignment provisions?

• The official comment to the current MBCA provides that “a merger is not a conveyance,

transfer or assignment” and that “it does not give rise to a claim that a contract with a

party to the merger is no longer in effect on the ground of non-assignability, unless the

contract specifically provides that it does not survive a merger;” but not all states have

based their merger statutes on the current MBCA

• The Texas and Georgia merger statutes expressly provide that vesting takes effect

without any transfer or assignment

• The Virginia merger statute expressly provides that vesting takes effect “except to the

extent that assignment would violate a contractual prohibition on assignment by operation

of law”

• The Pennsylvania merger statute does not use “vesting” or “transfer” language but

specifies that each party to the merger plan, except the resulting survivor, ceases to exist

entirely, and the rights, privileges, properties, debts, powers etc. of the prior entities

continues on within the new entity

• Case law is confusing:

Compare PPG Industries, Inc. v. Guardian Industries Corp. (597 F.2d 1090 (6th Cir.

1979)) to TXO Production Co. v. M.D. Mark, Inc. (999 S.W.2d 137 (Tex. App.-

Houston 1999)) and Star Cellular Tel. Co. v. Baton Rouge CGSA, Inc. (1993 WL

294847 (Del. Ch. Aug. 2, 1993)(unpublished opinion))

Compare SQL Solutions, Inc. v. Oracle Corp. (1991 WL 626458 (N.D. Cal.

1991)(unpublished opinion)) to Meso Scale Diagnostics, LLC v. Roche Diagnostics

GMBH (Del. Ch. Feb. 22, 2013)


MERGERS

18

ASSIGNMENT / TRANSFER BY “OPERATION OF LAW” (CONTINUED)

• Practitioners traditionally assume that forward triangular mergers trigger anti-assignment

contractual clauses because the Target Co. does not survive the merger

• Permaglass, Inc. merged with Guardian pursuant to Ohio and Delaware laws. Permaglass listed certain non-exclusive patent licenses granted to it by its competitor, PPG, to be vested with Guardian. PPG filed suit to enforce provisions that (i) specified that the agreement is non-assignable without PPG’s written consent and (ii) terminate the agreement if the majority of Permaglass’ common stock becomes owned/ controlled by an automobile or glass manufacturer.

• The court interpreted the language, “deemed to be transferred to and vested in … without further act or deed,” in the Ohio merger statute, to be a transfer by operation of law (and not an absence of transfer) and thereby held that the merger violated the Permaglass/ PPG contract’s anti-assignment clause.

PPG Industries, Inc. v. Guardian Industries

Corp. (597 F.2d 1090 (6th Cir.

1979))

• TXO, a wholly owned subsidiary of Marathon Oil Co., merged with Marathon, whereupon certain data owned by PGI and held by TXO, was automatically transferred to Marathon. PGI’s contract with TXO prohibited the transfer of such data to third parties.

• The Texas Court of Appeals interpreting the Texas merger statute held that the merger was not an assignment or transfer that would violate contractual prohibitions on data transfer; but the court distinguished this case from other cases on the fact that the merger was with a related company. Note that the Texas merger statute makes no distinction based on related companies.

TXO Production Co. v. M.D. Mark, Inc.

(999 S.W.2d 137 (Tex. App.-Houston 1999))

• Baton Rouge, the general partner of a partnership, merged with Star Cellular Tel. Co., a sister corporation. Other partners refused to recognize the surviving corporation as the general partner relying on a provision that required unanimous approval from the other partners for a transfer or assignment.

• The Delaware Chancery Court looking to the official comment to the Georgia merger statute that provides that a merger is not a conveyance or transfer held that a merger is neither a transfer or assignment and therefore, the anti-assignment provision was not violated and approval was not required.

Star Cellular Tel. Co. v. Baton Rouge CGSA,

Inc. (1993 WL 294847 (Del. Ch. Aug. 2,

1993)(unpublished opinion))


MERGERS

19

ASSIGNMENT / TRANSFER BY “OPERATION OF LAW” (CONTINUED)

• In a reverse triangular merger, D&N Systems, Inc. merged with SybaseSub, Inc., and the surviving entity took the name SQL Solutions, Inc. Oracle Corporation sought to terminate its agreement with D&N Systems, which contained an anti-assignment clause requiring Oracle’s consent for any assignment or transfer of the agreement to a third party.

• The Northern California District Court held that an assignment or transfer of rights had occurred because there was a change in legal form of ownership – the merger of D&N Systems with SybaseSub and on this basis, held that the merger violated the anti-assignment clause in the Oracle/ D&N Systems contract.

SQL Solutions, Inc. v. Oracle Corp.

(1991 WL 626458 (N.D. Cal. 1991)

(unpublished opinion)

• This case involved a reverse triangular merger where the question presented to the court was whether a reverse triangular merger is an assignment by operation of law, in which case the merger would result in a breach of the following anti-assignment clause in a Global Consent agreement at the center of the litigation: “Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties …”

• Initially, the Delaware Chancery Court in 2011 denied Roche’s motion to dismiss Meso’s claim. The court then, finding no Delaware case law on point, declined to rule that a reverse triangular merger does not, as a matter of law, constitute an assignment “by operation of law.” In summary judgment proceedings in 2013, however, the court affirmed that a reverse triangular merger does not constitute an assignment by operation of law or otherwise under Delaware law.

Meso Scale Diagnostics, LLC v. Roche Diagnostics

GMBH (Del. Ch. Feb. 22,

2013)

• Practitioners traditionally assume that reverse triangular mergers do not trigger anti-

assignment contractual clauses (even clauses prohibiting assignments “by operation of law”)

because the Target Co. survives the merger; limited case law on the point


MERGERS

20

DEFAULT ASSIGNMENT RULES

• Contracts are generally assignable without the consent of the other party

• Exceptions:

• Certain IP licenses are not assignable without the licensor’s consent

• Non-exclusive patent and copyright licenses are not assignable or delegable

without the licensor’s express consent. (Perlman v. Catapult Entertainment,

165 F.3d 747 (9th Cir. 1999)(patent context)); (Harris v. Emus Records Corp.,

734 F.2d 1329 (9th Cir. 1984)(copyright context)).

• Trademark licenses are not assignable or delegable without the licensor’s

express consent. (N.C.P. Marketing Group, Inc. v. BG Star Prods. Inc., 279

Fed. Appx. 561 (9th Cir. 2008) & In re XMH Corp., 647 F.3d 690 (7th Cir. 2011)

(trademark context)). For purposes of assignability, courts have not

distinguished between exclusive and non-exclusive trademark licenses.

• Agreements for personal services

• Other :

• Statute, public policy, or contractual clauses prohibit assignment

(Restatement (Second) of Contracts § 317(2)(a) (1981))

• Assignment is ineffective if it materially changes the obligor’s duty, increases

materially the burden or risk imposed on obligor by the contract, or impairs

materially obligor’s chance of obtaining return performance. (U.C.C. § 2-

210(2))


MERGERS

21

TRIANGULAR (SUBSIDIARY) MERGER


MERGERS

TRIANGULAR (SUBSIDIARY)

MERGER

Forward Triangular

Merger

Merger Subsidiary survives

Generally, an assignment or transfer by “operation of law”

Anti-assignment & anti-transfer clauses may be triggered; watch out for contracts

that are silent on assignment but contain IP licenses, relate to personal services, or

otherwise materially change the obligor’s duty

Change of control provisions may be triggered

Reverse Triangular

Merger

Target Co. survives

Traditional practitioners’ view: no assignment. Exception: California-related

reverse triangular merger may trigger anti-assignment and anti-transfer clauses in light

of SQL Solutions v. Oracle

Change of control provisions may be triggered

22

ANTI-ASSIGNMENT CLAUSES: GARDEN VARIETY


MERGERS

1. “[Target] may not assign its rights or obligations under this Agreement, in whole or in part.”

2. “[Target] may not assign its rights or obligations under this Agreement, in whole or in part,

without [the other party’s] prior written consent.”

3. “[Target] may not assign its rights or obligations under this Agreement, in whole or in part,

without [the other party’s] prior written consent (not to be unreasonably withheld or

delayed).”

4. “[Target] may not assign or transfer its rights or obligations under this Agreement, in whole

or in part, without [the other party’s] prior written consent.”


or in part, whether by operation of law or otherwise, without [the other party’s] prior

written consent.”


or in part, without [the other party’s] prior written consent. A change of control of [Target]

will be deemed an “assignment” by [Target].”


or in part, without [the other party’s] prior written consent, and any attempted assignment

without such consent shall be void and without effect.”

23

ANTI-ASSIGNMENT CLAUSES: GARDEN VARIETY EXCEPTIONS


MERGERS

1. “[Target] may not assign its rights or obligations under this Agreement, in whole

or in part, without [the other party’s] prior written consent, except that it may,

without such consent, assign this Agreement to its parent or subsidiary,

or to any successor in interest by consolidation, reorganization, merger or

acquisition of substantially all of its assets.”

2. “[Target] may not assign its rights or obligations under this Agreement, in whole

or in part, without [the other party’s] prior written consent, except that it may,

without such consent, assign this Agreement to its parent or subsidiary, or to any

successor in interest by consolidation, reorganization, merger or acquisition of

substantially all of its assets related to this Agreement.”

24

OTHER CLAUSES TRIGGERED BY A MERGER / ACQUISITION


MERGERS

• Change of control

• Termination

• License restrictions (e.g., non-transferability, enterprise

restrictions, etc.)

• Springing rights

25

PRACTITIONER’S TIPS


MERGERS

• Understand the transaction structure

• Carefully review Target’s commercial agreements:

are there anti-assignment or anti-transfer clauses?

does the agreement include any IP license grants to the Target

Co. that will require consent for transfer purposes?

is the agreement for the personal services of the Target Co. that

will require consent for transfer purposes?

does the assignment materially change the obligor’s duty?

are there other clauses that would be triggered by a change of

control?

• As part of your analysis, consider the state merger statute that would be

applicable to the merger and the governing law of the commercial

agreement

26


Roger Royse Royse Law Firm, PC

[email protected]

@rroyse00

III. Tax

Aspects


27

TRIANGULAR OR SUBSIDIARY MERGERS


MERGERS

Acquiror

Tax Consequences

• No gain to Acquiror or Target

• No gain to Target

Shareholders except to extent

of boot received

• Transferee takes carryover

basis in assets

• Target Shareholders take

basis in Acquiror stock equal

to basis in Target stock

Forward Subsidiary Merger

Reverse Subsidiary Merger

Target

Acquiror

Merger Sub

Target

Merger Sub

Merger Sub

28



MERGERS

Target Shareholders

Tax Consequences

• Merger Sub takes Target’s

basis in assets increased

by gain recognized by

Target

• Acquiror takes “drop

down” basis in stock of

Merger Sub (same as

asset basis)

Acquiror

Merger Sub

Target

Merger Sub

— Statutory merger of Target into Merger Sub

(at least 80% owned by Merger Sub)

— Substantially all of Target’s assets acquired

by Merger Sub

— Would have been a good Type A merger if

Target had merged into Merger Sub

Section 368(a)(2)(D)

Forward Triangular Merger

80%

29



MERGERS

80%

Tax Consequences

• Non-taxable to Target and

carryover basis

• No gain to Acquiror and

Merger Sub under Sections

1032 and 361

• No gain to Target

Shareholders except to the

extent of boot

• Acquiror’s basis in Target

stock generally is the asset

basis, but Acquiror can

choose to take Target

Shareholders’ basis in stock

(if it is also a B)

• If transaction is also a 351,

Acquiror can use Target

Shareholders’ basis plus gain

Acquiror

Merger Sub

Target

Merger Sub

• Merger of Merger Sub into Target where

– (i) Target shareholders surrender

control (80% of voting and nonvoting

classes of stock) for Acquiror voting

stock and

– (ii) Target holds substantially all the

assets of Target and Merger Sub

Target Shareholders

Section 368(a)(2)(E)

Reverse Triangular Merger

30

TRIANGULAR TYPE B REORGANIZATION


MERGERS

80%

Tax Consequences

• Acquiror’s basis in Target stock is the same as the Shareholders’

• Solely for voting stock - No Boot in a B

• Reorganization Expenses – distinguish between Target expenses and Target Shareholder expenses (Rev. Rul. 73-54)

• Creeping B – old and cold stock purchased for cash should not be integrated with stock exchange

Acquiror

Merger Sub

Target

Merger Sub

• Acquisition of stock of Target, by Acquiror, in

exchange for Acquiror voting stock

• Acquiror needs control of Target immediately

after the acquisition

• Control = 80% by vote and 80% of each

class

Section 368(a)(1)(B)

Type B Reorganization

Target Shareholders

31

TRIANGULAR TYPE C REORGANIZATION


MERGERS

Section 368(a)(1)(C)

Stock for Assets

• Acquisition of substantially all of the assets of Target, by

Sub, in exchange for Acquiror voting stock

• “Substantially All” = at least 90% of FMV of Net Assets and

at least 70% of FMV of Gross Assets

• Target must liquidate in the reorganization

• 20% Boot Exception – Acquiror can pay boot (non-stock)

for Target assets, up to 20% of total consideration; liabilities

assumed are not considered boot unless other boot exists

Parent

Merger Sub

Target

Merger Sub

Target Shareholders

Acquiror Stock

Acquiror Stock

Tax Consequences

• Reorganization Expenses

– Acquiror may assume

expenses (Rev. Rul. 73-

54)

• Assumption of stock

options not boot

• Bridge loans by Acquiror

are boot

• Redemptions and

Dividends – who pays and

source of funds

32

TAXABLE STOCK PURCHASES


MERGERS

Cash Reverse Triangular

Merger

• Treated as Stock Sale

• Shareholders have gain

or loss

• Acquiror takes cost

basis in Target shares

Acquiror

Merger Sub

Target

Merger Sub

Target Shareholders

33

S CORPORATIONS AND 338(H)(10)


MERGERS

• Character difference –

ordinary income assets

• California 1.5% tax on S

corporations

• All Target shareholders must

consent on Form 8023

• Deemed 338 election for

subsidiaries

• 1374 – BIG Tax

• Minority shareholders in

rollover

• Hidden tax in liquidation or

deemed liquidation in

installment sale

Acquiror

Merger Sub

T (S Corp.)

Merger Sub

Target Shareholders

34

SECTION 336(E)


MERGERS

Acquiror

Target Shareholder

$

Target Stock

Basic Model (for stock sales): Target is treated as selling all of its assets to an

unrelated person while owned by its former shareholders and then reacquiring same

upon acquisition by Acquiror. (Unlike 338(h)(10), no need for corporate acquiror)

$

$ Assets

Assets

= Actual Component = Deemed Component

Acquiror Shareholder

Target Target 3rd Party

35

SECTION 336(E) DETAILS


MERGERS

Tax Consequences

• Old target recognizes gain or loss from the deemed asset and then is deemed to liquidate into seller

• New target is treated as a new corporation for federal income tax purposes but remains liable for the tax liabilities of old target

• Seller does not recognize gain or loss on the disposition of target stock

• No effect upon a purchaser

• No effect upon minority shareholders, or shareholders other than seller, except in the case of S corporation targets

Section 336(e)

Basic Model

• Old target is treated as selling all of its assets

to an unrelated person in exchange for the

“aggregate deemed asset disposition price”

(ADADP)

• New target is treated as acquiring all of the

assets from an unrelated for an amount

equal to the “adjusted grossed up basis”

(AGUB)

• After the deemed asset disposition, but

before the close of the disposition date, while

owned by seller(s), old target is treated as

transferring to seller all of the consideration

deemed received from new target, generally

in complete liquidation of old target

• For dispositions involving a distribution, seller

is treated as acquiring the stock of new target

from an unrelated person and distributing the

new target stock, immediately after the

deemed liquidation of old target

36

CASH FORWARD MERGER


MERGERS

Acquiror Target

Target Shareholders

Merger Acquiror Survives

Variation with Merger Sub

Acquiror

Merger Sub

Target

Merger Sub

Target Shareholders

Asset Sale Followed by

Liquidation of Target

• Target has gain on sale

• Target Shareholders have

gain on liquidation

(unless 332 applies)

• Acquiror takes cost basis

in Target assets

37

DOUBLE MERGER (REV. RUL. 2001-46)


MERGERS

Step 2: A-type Forward Merger Step 1: Reverse Triangular Merger

Tax Benefit: A taxable reverse merger has just one tax on the shareholders, while a

taxable forward merger has two taxes (one on shareholders and one on

corporation). The first step of this double merger disregarded so the transaction is a

tax-free A-type merger (where 20% boot limitation does not exist). If the transaction

fails to qualify, the tax is incurred on the first step (reverse merger) and avoids

corporate level tax.

Acquiror Target

Sub 1

Target

Shareholders

Acquiror T + Sub 1

Sub 2

80%

Target

Shareholders

38

DOUBLE MERGER (REV. RUL. 2001-46)


MERGERS

Step 2: A-type Forward Merger Step 1: Reverse Triangular

Merger

Mergers of corporation into single-member LLC may qualify as A

reorganizations. Treas. Reg. § 1.368-2(b)(1).

Wholly Owned LLC

Scenario

Acquiror Target

Merger Sub

Target

Shareholders

Acquiror T + Sub

80%

Target

Shareholders

LLC

39

HORIZONTAL DOUBLE DUMMY


MERGERS

• Employs with two interim (‘dummy’) subsidiaries, which participate in reverse

triangular mergers to create final structure.

• Each side potentially qualifies for §§368(a)(1)(B) (due to subsidiary being

ignored) or (a)(2)(E).

• Special feature: Shareholders of Acquiror and Target control Holdco under

§368(c); overall transaction therefore generally a good Code §351 exchange,

allowing for very high amounts of boot for some and nonrecognition for others.

Target Acquiror

Merger Sub

New Holdco

Merger Sub

Merger Acquiror survives

Merger Target Survives

Acquiror Shareholder

Target Shareholder

Target Stock

New Holdco Stock + $

New Holdco Stock

Acquiror Stock

40

USE OF WHOLLY OWNED LLC


MERGERS

Merger of Corporation

into LLC

• Reg. 1.368-2(b)(1) –

by operation of law, all

assets and liabilities of

Target become those

of LLC, and Target

ceases legal existence

• A-Type Reorganization

LLC

Target Shareholders

Acquiror Target

41

USE OF WHOLLY OWNED LLC


MERGERS

Merger of Corporation

with LLC where

Corporation Survives

• Reg. 1.368-2(b)(1) –

does not qualify as a

statutory merger

because Target does

not cease to exist

• Possible Type B, C or

D Reorganization or

351 transaction

LLC

Target Shareholders

Acquiror Target

42

LLC TECHNIQUES


MERGERS

Step 2 Step

1

Acquiror

Target

$

Target

Former Target Shareholders

LLC

LLC

Target Shareholders

Target

43


Alan Haus Royse Law Firm, PC

[email protected]

IV. Employment

Law


The lead employment lawyer’s role in advising about Reverse

vs. Forward triangular mergers is a combination of easy,

impossible and irrelevant. Plan in advance about where to turn

for support.

44

DUE DILIGENCE


MERGERS

• Some documents to gather during Due Diligence:

• Employee handbooks / personnel policies

• Personnel files

• Contracts with employees, including intellectual property assignment

agreements and covenants not to compete

• Contracts with independent contractor service providers

• Health and retirement plan documents (as amended) and summary

plan descriptions

• Executive compensation agreements and plans

• Files re: recent or pending lawsuits or claims with agencies

• Labor union related documents

• EPL, workers compensation and related insurance certificates and

policies

• Request an employee census showing job title, nationality or

immigrant work authorization, compensation levels, FLSA

exemptions, etc.

45

HOT BUTTON ISSUES FOR CONSIDERATION IN BOTH FORMS OF MERGER


MERGERS

• WARN Act Notifications (State and federal)

• Nonqualified Deferred Compensation: the seller’s dormant 409A errors

can be costly

• HIPAA Privacy and Security Concerns:

• Seller may be asked to provide claims data (including participant

names) from its medical plan to the buyer

• Privacy and security rules do not allow seller to transfer information

directly to the buyer

• Can the seller disclose? Since participant authorizations are usually

impractical, request only anonymized protected health information

• Structure as a Plan to Plan Transfer:

• Privacy Rules allow the medical plan to disclose PHI for its own

health care operations.

• Thus, disclose data from one plan administrator to the other (or

via a Business Associate) to ensure that the buyer, in its role as

employer, does not have access to the data (to avoid a

reportable breach)

46

HOT BUTTON ISSUES FOR CONSIDERATION IN BOTH FORMS OF MERGER


MERGERS

• Nondiscrimination: buyer should determine the potential impact of

including or excluding the employees of the acquired business in its

benefit plans, its ADA compliance, its gender and other wage parity

decisions, etc.

• COBRA definition of “M&A qualified beneficiary” is different as between

Reverse and Forward triangular mergers

• Misclassification: employee or independent contractor, exempt or non-

exempt

• Consider requiring pre-closing resolution of some issues (e.g. correction

of 409A errors, settlement of some (e.g., non-EEOC) potential or

pending claims etc.)

• Whether personnel policies and practices have created a legally

enforceable right to severance payments

• Are non-competition and non-solicitation agreements enforceable?

• Union Issues: the NLRA applies to union and non-union employers

• Immigration matters

• Foreign operations of seller

• Whether the transaction itself might be creating employee claims, e.g.,

whistleblower retaliation claims under the Sarbanes-Oxley act 47


MERGERS

• The employee benefits and compensation plans that receive the most

attention during the due diligence process are:

• Health plans

• Qualified retirement plans

• Executive compensation plans

PLANNING FOR EMPLOYEE BENEFITS EFFECTS

48


MERGERS

Reverse Forward

• Benefit plans and employees remain

undisturbed in the deal – no change in

the “employer”

• Buyer thus assumes all liabilities

relating to Seller’s benefit plans

• This greater risk requires higher level of

due diligence and stronger contract

provisions (representations, warranties

and indemnification)

• Has potential for “seamless” integration

of employees and benefit plans

• Even though integration is less

complicated legally in a Reverse,

challenges of integrating corporate

cultures remain

• Employees will have a change in their

“employer”

• Buyer does not normally assume

Seller’s benefit plans or plan liabilities

• Buyer may agree to assume benefit

plans as part of union negotiations or for

other reasons

• Risk is lower if benefit plans are not

assumed:

• Buyer may still have to provide

COBRA

• Risk of “successor employer”

liability for unpaid contributions to

multiemployer plans

• Employee and benefits integration may

be more complicated

49


MERGERS

Reverse Forward

• Collective bargaining agreements

may restrict changes to benefit plans

• Collective bargaining agreements

may be assumed; likely requirement

to bargain in good faith as successor

employer

• Typical transition services:

• Payroll administration

• Continued participation in

Seller’s benefit plans: • Multiple employer plan issues –

amendment and testing

• Insurers may refuse coverage if

advance consent not obtained

• Employee leasing: • Seller continues to employ

employees during a transition

period

• Issue of who is the common

law employer

50


MERGERS

Reverse Forward

• Severance benefits may be payable

as a result of the transaction (even if

employees are rehired by the buyer)

• Buyer and seller can specify whether

employees who transfer to buyer will

be deemed separated from service:

• All employees must be treated

consistently

• Must be arms’ length transaction

• Must state in writing

• Have to look at facts to determine

whether separation from service will

occur for all purposes

• Notwithstanding general rule that

liabilities are not assumed by a buyer

of assets, the 7th Circuit has found

successor liability for FLSA violations

in an asset deal (and thus

presumably in a forward triangular

merger)

51


MERGERS

Reverse Forward

• Retiree Benefits – Medical, Dental, Life

Insurance:

• Absent a specific carve-out of

liabilities to another seller-related

entity, acquiring entity will become

responsible for the liabilities

• Contractual Limitations on

Termination:

• Generally retiree health plans

are not subject to typical

“vesting” provisions even for

retirees who have already

retired

• Buyer should review

documents to make sure

reservation of rights language

is contained in the plan

documents, since courts have

held that retiree benefits can

contractually vest and cannot

be terminated

• Retiree Benefits – Medical, Dental, Life Insurance:

• Buyer rarely will agree to a transfer of the seller’s retiree healthcare obligations, especially with respect to employees who retired prior to the sale

• With respect to active employees, buyers may be more willing to accept the transfer of such obligations; can be made subject to a purchase price adjustment to reflect cost of providing coverage

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53

PALO ALTO

1717 Embarcadero

Road

Palo Alto, CA 94303

LOS ANGELES

11150 Santa Monica Blvd.

Suite 1200

Los Angeles, CA 90025

SAN FRANCISCO

135 Main Street

12th Floor

San Francisco, CA 94105

Palo Alto Office: 650-813-9700

CONTACT US

www.rroyselaw.co

m

@RoyseLaw

MENLO PARK

149 Commonwealth Drive,

Suite 1001

Menlo Park, CA 94025

LOS ANGELES

445 S Figueroa St

31st Floor

Los Angeles, CA 90071

SAN FRANCISCO

135 Main Street

12th Floor

San Francisco, CA 94105

Menlo Park Office: 650-813-9700

CONTACT US

www.rroyselaw.com

@RoyseLaw

53

structuring reverse and forward triangular mergers:...

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