THE M&A TAX REPORT Will M&A Get Hot in 2013? By Brian Beck • Wood LLP • San Francisco

As 2012 limps to a close and many look forward That issue, in its real-life iteration, has been to a more robust 2013, it’s time to review what recently litigated. [See United States v. Norris, happened and to prepare for the future. A 722 FSupp 2d 632 (E.D. Pa. 2010), aff’d, 2011 U.S. practical update for the current state of affairs App. LEXIS 5946 (CA-3 2011).] In Norris, the is PLI’s “Hot Topics in Mergers & Acquisitions CEO made statements to the outside counsel. 2012.” It was held September 6, 2012, in New York The outside counsel later testified against the and is now available as a webcast. Co-chaired CEO. The district court and the Third Circuit by R. Scott Falk (Kirkland & Ellis) and Sarkis both held that the communication was not Jebejian (Cravath, Swaine & Moore LLP), the protected by attorney-client privilege. program features a range of perspectives from A panel on activists and proxy advisors key figures in the M&A legal world. was helmed by Daniel H. Burch (MacKenzie Partners, Inc.), Phillip R. Mills (Davis Polk Smorgasboord LLP) and Chris Young (Credit Suisse Securities An overview of the current M&A landscape LLC). Mr. Burch and Mr. Young discussed how revealed year-over-year activity that was activism is becoming increasingly important in mostly stagnant despite a recent uptick. the M&A landscape. On one hand, the actual LBOs were slow to recover, and hostile bids number of activist fights has been declining. have generally been unsuccessful. However, On the other hand, the relative value of each many companies appear to be cash-rich and fight is increasing. A recent trend has been to underleveraged, which could indicate the avoid protracted struggle by settling. possibility of more deals on the horizon. Anne Foster (Richards, Layton & Finger, Dodd-Frank and More P.A.) and Melissa Sawyer (Sullivan A number of failed votes relate to Say-on- & Cromwell LLP) led a session on Deal Pay, a provision of the Dodd–Frank Wall Street Protection, the course materials for which Reform and Consumer Protection Act. [See 15 provide especially useful synopses of recent U.S.C. § 78n-1 (2011).] Under Say-on-Pay, at updates and changes. The materials also least once every three years shareholders of include a very effective summary and public companies are entitled to an advisory checklist for drafting alternatives. vote to approve compensation packages for After a panel on anti-trust developments, John top executives. Not surprisingly, the general C. Koski (SNR Denton US LLP) provided an trend has been that shareholders are more entertaining and educational review of ethics, likely to use these votes to hold management based in part on the classic movie The Godfather. accountable for poor stock performance. Mr. Koski analyzed the Corleone family Companies with well-performing stock tend consigliore Tom Hagen, whose calm demeanor to obtain approval more easily. and constant updates to his client, Michael Another recent development is that Corleone, are in some ways a depiction of what protestors, loosely organized as “the 99%,” effective representation should look like. have been interfering with shareholder Mr. Koski also discussed the more recent Michael meetings. Often they will buy one share to Clayton. The 2007 thriller starring Tilda Swinton gain access to a meeting as a way to interrupt and George Clooney raised some issues relevant it with shouting and chanting. to all lawyers, Mr. Koski noted. Clooney, as outside Daniel F. Duchovny (SEC), William B. counsel, elicited and recorded incriminating Sorabella (Kirkland & Ellis LLP) and Ann statements from Swinton, who played a general Beth Stebbins (Skadden, Arps, Slate, Meagher counsel for a large multi-national company. An & Flom LLP) led the discussion on SEC issue cited by Mr. Koski was the ambiguity as to developments. Mr. Sorabella is spearheading whether Clooney was actually representing the Kirkland’s effort at establishing the “Burger general counsel or the firm. King structure,” an up-and-coming mainstay

6 THE M&A TAX REPORT of private equity. The Burger King structure is Divestiture Fest a variation of a tender offer. Arguably saving the best for last, PLI’s Of course, tender offers typically occur in final presentation topic was led by Carmen two steps. The first is the initial tender, and M. Molinos (Morgan Stanley), Eric L. the second is the squeeze-out of the remaining Schiele (Cravath, Swaine & Moore LLP) shares. If the acquirer has control (90-percent and Paul J. Shim (Cleary Gottlieb Steen & ownership in Delaware) after the tender, the Hamilton LLP) on corporate divestitures. squeeze-out does not require the long-form Impressively, a record 43 percent of M&A merger with its extensive SEC filings and a volume occurred in corporate separations. proxy statement. On the other hand, if after the Given the current state of the market and conclusion of the tender the acquirer does not the levels of shareholder activism, spinoffs meet the control threshold, it may be necessary and break-ups will surely continue to play undergo the long-form merger to consummate a major role in the M&A landscape in the the requisite squeeze-out. foreseeable future. In some cases, the time to complete the Five main types of divestitures were second step may be materially detrimental to discussed (beyond these, other potential obtaining financing or other deal conditions. divestiture strategies include a sub-IPO, In a Burger King structure, the tender is set a structured sale, a joint venture and a to a relatively high percentage ownership. If strategic sale): the tender is successful, the acquirer is offered • Spin-off. A spin-off structure entails the newly issued shares to satisfy the 90-percent transfer of a subsidiary’s (S) stock to the control requirement, thus obviating the parent’s (P) shareholders. S is no longer second step. a subsidiary of P, and the historic P An advantage of the Burger King structure shareholders control both P and S. is its tandem, rather than two-step, approach. • Sponsored Spin-off. In a sponsored spin- From the start, the acquirer begins the off, a third-party sponsor (3S) acquires process of obtaining approval for the long- an interest in S for consideration. P form merger. If the tender does not result shareholders remain in control of P, and both in sufficient ownership and a long-form P shareholders and 3S own the outstanding merger is required, the acquirer has already stock of S. eliminated much of the wait by beginning the • Split-off. In a split-off, some P shareholders long-form merger process. exchange their shares for S stock. This kind of structure may be soon accepted Nonexchanging P shareholders own P but as the new normal, having already been not S. Exchanging P shareholders own S used at least 15 times. However, as the but not P. transaction is still relatively new, there is • Equity Carve-Out. In an equity carve-out, little formal SEC guidance. The SEC may S makes a public offering. P shareholders’ inquire into the effects Rule 14e-5 of the ownership of P is unchanged. S is now Exchange Act (regarding forward looking owned by P and public shareholders. statements during a tender offer). Given • Reverse Morris Trust. In a Reverse Morris this uncertainty, care is recommended in Trust structure, there are two steps. The establishing timing triggers. first step involves a spin-off. In the second Ms. Stebbins also discussed the 2012 proxy step, P shareholders exchange S shares with season and made forecasts for the 2013 season. a counterparty (C) in a standard merger. The new Rule 14a-11 was vacated the U.S. P shareholders own P and also have an Court of Appeals for the D.C. Circuit. [See interest in C. C owns the stock of S. Business Roundtable v. SEC, 647 F3d 1144 (CA- The presenters also discussed the board DC 2011).] Amendments to Rule 14a-8, relating considerations—something tax professionals to proxy access, were not discussed. More often do not stop to consider. Board members than 20 companies voted on proxy access are protected by the business judgment rule. procedures in 2012. In 2013, similar votes on However, they are also bound by the duty of proxy access are expected. care and the duty of loyalty.

7 THE M&A TAX REPORT

In the case of bankruptcy and insolvency, Code Sec. 355, either to the parent company or directors should be careful not make fraudulent the parent’s shareholders. conveyances in corporate divestitures. In a Of course, many complicated issues can situation where the transferor incurs debts arise between the parent and the spun-off beyond its ability to pay, the spun-off entity company. They could have been integrated or the parent may be subject to the historic so that they shared space. They could have creditors. Moreover, the directors may be overlapping payroll and IT contracts. Spin-offs subject to derivative claims for breach of may trigger change of control and other events fiduciary duty. Consequently, it is customary— under debt agreements. Moreover, ownership and advisable—for solvency opinions to be of intellectual property, including trademarks, obtained by counsel in divestitures. can lead to complications. Tax consequences are paramount to tax As lawyers, accountants, bankers and professionals, and the tax consequences of executives look towards 2013, PLI’s divestitures can literally make or break the seminar, “Mergers & Acquisitions 2013: deals. Generally, a tax opinion will be obtained Trends and Developments,” scheduled in addition to a solvency opinion. The days of for January 17, 2013, is worth considering. private letter rulings for every spinoff may be For details, you can visit the PLI website gone, but that is not the case for tax opinions. at www.pli.edu/Content/Seminar/Mergers_ The goal, of course, is for the distribution of Acquisitions_2013_Trends_and_Developments/_/N- stock not to incur recognition of income under 4kZ1z12p5z?No=25&ID=157099.

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