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Initial reorganization agreement

in this video we're going to discuss the seven different types of tax-free reorganizations that are listed under section 368 of the US tax code so let's start with a taipei reorganization first off it's called taipei because it's under section 368 a 1 a and a type b reorganization would be section 368 a 1b and so forth so type a is an acquisitive reorganization but what does that mean for b acquisitive well basically a quiz ative means that you've got so the acquiring corporation here let's say that's you and then you've got a target corporation that you want to acquire so what you're gonna do is you're going to transfer you're going to transfer some assets and some of your voting stock some voting stock in exchange for the targets stock right so you're gonna exchange that first to the target stock now this is in contrast to a divisive so you'll hear the term divisive reorganization where the acquiring firm will actually end up creating a second corporation and then transferring some assets to the second corporation and then you'll send some stock back to the acquiring corporation and so forth which we will talk about now getting back to the acquisitive or reorganization which is type a we've got assets and voting stock being given to the target in exchange for the target stock and this is going to qualify as a tax-free reorganization if the following requirements are met so the voting stock that is being given to the target has to be at least 40 percent of the consideration being given what is consideration consideration is just what you're giving to the target right you're giving assets and stock so sixty percent could be cash it could be whatever but at least forty percent has to be voting stock so that's pretty flexible and you'll see as we talked about the different types of reorganizations however the one drawback to the type a is that it has to comply with the state's merger and consolidation loss that could be an issue because it means you're going to probably need approval from the shareholders for the deal to go through another drawback to type a is that you're going to end up having to acquire all of the liabilities of the target which could be a real if there are contingent liabilities outstanding maybe the target was involved with asbestos production or something at some point in the past so that's type a and it's sometimes referred to as an asset for stock acquisition although Bayer mine you still have to give at least 40% of the consideration as voting stock now type C a Type C reorganization is also called assets for stock and it's also acquisitive but there are some differences so you don't need to follow the state merger and consolidation laws and so basically that means you might not need shareholder approval you don't need to get that however it's not as flexible when it comes to consideration being given and so voting sack has to be at least 80% of consideration it's being given so if you're giving a hundred million dollars of consideration to this target to get their stock then 80 million dollars of that better be voting stock otherwise it's not going to qualify as type C another qualification of type C is you have to acquire substantially all of the targets assets and so you might be wondering what does it mean substantially all what is that even what does that even mean so it's been defined as at least 70% of the fair market value of the gross assets of the target and at least 90% of the fair market value of the net assets of the target the good news is that you only have to acquire the liabilities that are specified in the agreement now a type b reorganization differs from both a and C because it's a stock for stock reorganization it's still acquisitive but what is happening is basically you as the acquirer are giving a hundred percent of the voting stock is all the consideration you're not giving cash you're not giving property you are giving your own voting stock in exchange for the stock of the target right so you take some of your stock you give it to the target and then the target gives you their stock and now you don't need shareholder approval but you have to have at least 80% of the control of the target immediately afterwards now that 80% you could get that over time is called creeping acquisitions and so forth and so but when it's all said and done you have to have at least 80% of control immediately afterwards the good news is even though there's a strict requirement about having to do a hundred percent voting stock you do not have to assume the targets liabilities now a type D reorganization can be either acquisitive or divisive and it could be really complicated because you have spin-offs you have split off so you have split ups and I'll make a separate video on this but just to give you an idea let's say that you you have your company here and let's say it's called Smith Smith corporation and you don't know you you make furniture and then you happen to have some people in the office that are really good at trading derivatives and so you say hey these people are trading derivatives they're making money but this is really risky it's a lot more risky than making furniture so I'm gonna spin this off so I'm gonna spin this off and we'll call that high-risk enterprises and so I'm gonna transfer some assets to this spin off and then I'm gonna get some stock back so we'll talk about that more to come there's a lot of different ways that can be done but that's a type D reorganization now type G type G can also be acquisitive or divisive but type G is basically gonna happen through bankruptcy court and what will happen is that the way it could be a quiz atour divisive is that what you could have is you could have a situation where the judge says okay look so let's say your Smith here and you went bankrupt and and you know there's trouble and so the judge the bankruptcy judge says look I could just they could force you to say okay well now you have to give your assets directly to your creditors right if you have to give your assets to your creditors and all the other claimants in bankruptcy or or in this work it'd be divisive potentially they said well look actually what we're gonna do we're gonna have you create a second corporation this will be new corp and you're gonna transfer some of your assets from Smith to new Corp and then the creditors are going to be able to get new Corp and so forth and we'll talk about that more it's a lot more complicated than I just laid out but that typically it's happening type G is happening through bankruptcy type II type of reorganization is actually called commonly a recapitalisation because what you're really doing not so much you know you're not acquiring a corporation or something like that it's neither a Kwas ative nor do offensive what you're doing is you're saying maybe you have a lot of outstanding bonds and you say you know what I don't really want to be capitalized a lot with debt we've got a lot of debt here at the corporation as it is so what we're going to do we've got the bondholders have agreed that we're gonna give them some preferred stock or we're gonna give them some folding stock or something like that in exchange for these bonds so you're going you can give stock for stock you could have a bonds for stock you could have bonds for bonds you know there's several different ways that can call but basically you know you're not acquiring a new company and so you're basically just recapitalizing the firm now type F similar to type II is it's not acquisitive nor divisive you're not going out and in acquiring some other firm or something that's actually what you're doing is you're changing the Corporations name or the place of incorporation or something like that so it's not quite as exciting as the other ones but it does qualify as a tax-free reorganization and just one other thing I should mention is that when we get to type D so it's Section 368 actually governs all of this but but certain like for example type D could also be governed under Section 355 and we'll talk about that when we're in the video on type d reorganizations