Type D Reorganization (Assets for Shares)

posted Jun 3, 2013, 8:14 AM by John Ye   [ updated Jul 9, 2013, 12:44 PM ]

A Type D reorganization is an acquisition of a Target’s assets and liabilities in exchange for Buyer shares that is described in paragraph D of Section 368(a)(1) of the Internal Revenue Code.  A Type D reorganization is very similar to a Type C reorganization, except that the Buyer transfers assets to the Target in exchange for shares.

In general, there are two types of Type D reorganizations – acquisitive and divisive.

In an acquisitive Type D reorganization, the Buyer must transfer “substantially all” of its assets to the Target.  “Substantially all” means 90% of the Buyer’s net assets or 70% of its gross assets.

The Buyer must obtain at least 50% of the voting stock of the Target, thereby achieving control in the course of the transaction.  The Target’s shares must be distributed to the Buyer’s shareholders.

The Buyer must liquidate itself at the conclusion of a Type D reorganization.

In a divisive Type D reorganization, the Buyer is divided into two or more pieces.  New corporations are created to receive the assets of the Buyer.  The Buyer must receive at least 80% of the stock of the new corporations.  The shares of the new corporations are distributed to the stockholders of the Buyer.

There are three types of divisive Type D reorganizations – spin-offs, split-offs and split-ups.

A spin-off is a transaction in which the Buyer’s shareholders receive Target shares in exchange for Buyer assets contributed to the Target.

 

(For a larger view, click on the graphic)

 

A split-off is a transaction in which the Buyer’s shareholders receive Target shares in exchange for Buyer assets which they contribute to the Target and Buyer shares which they surrender to the Buyer.

 

 

(For a larger view, click on the graphic)

 

A split-up is a transaction in which the Buyer is split into multiple new Targets and the Buyer shareholders receive shares in the Targets in exchange for their shares in the Buyer.

(For a larger view, click on the graphic)

 

Advantages

  • Corporation may be divided without tax consequences to the shareholders

Disadvantages

  • Complex
  • In some cases requires that the Buyer be liquidated

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