Using a Cash Merger to Acquire Minority Shares
If the majority shareholders want to buy the shares of the minority shareholders, but it is not feasible to negotiate a separate transaction with each minority shareholder, the following “cash merger” should be considered: a) the majority shareholder(s) of Target form a new corporation “Newco” to which they contribute their Target shares. b) the majority shareholders arrange for the merger of Target into Newco. In the merger, Newco’s name is change to Target’s name and each share of Target is converted into a fraction of a share of Newco, but only whole shares of Newco are issued. The minority shareholders who would receive fractional shares receive cash instead. The conversion ratio is designed to cash …show more content…
No minority shareholder owns more than 4 shares. Big contributes all 50 Target shares to Newco. Target merges into Newco with a 5-to-1 conversion ratio, so that Big’s 50 Target shares convert into 10 Newco shares and each other Target shareholder receives cash in lieu of fractional shares.
The minority shareholders have a right to vote on the merger if they hold more than 10% of Target’s stock. The minority shareholders have a right to challenge the value assigned to their Target stock, but they do not have a right to challenge the terms of the merger, including the conversion ratio. It will usually be advisable to apply for a permit from the California Commissioner of Corporations.
For federal income tax purposes, the transaction is treated as a distribution which might be treated as a sale. The creation of Newco and the merger of Target into Newco are disregarded and Newco uses Target’s federal employer identification number, tax yea and other tax attributes.
For California tax purposes, Newco cannot be ignored, so the transaction is treated as (a) an “F” reorganization (a mere change in form) and (b) a distribution that is tested under the California sale treatment
If the majority shareholders want to buy the shares of the minority shareholders, but it is not feasible to negotiate a separate transaction with each minority shareholder, the following “cash merger” should be considered: a) the majority shareholder(s) of Target form a new corporation “Newco” to which they contribute their Target shares. b) the majority shareholders arrange for the merger of Target into Newco. In the merger, Newco’s name is change to Target’s name and each share of Target is converted into a fraction of a share of Newco, but only whole shares of Newco are issued. The minority shareholders who would receive fractional shares receive cash instead. The conversion ratio is designed to cash …show more content…
No minority shareholder owns more than 4 shares. Big contributes all 50 Target shares to Newco. Target merges into Newco with a 5-to-1 conversion ratio, so that Big’s 50 Target shares convert into 10 Newco shares and each other Target shareholder receives cash in lieu of fractional shares.
The minority shareholders have a right to vote on the merger if they hold more than 10% of Target’s stock. The minority shareholders have a right to challenge the value assigned to their Target stock, but they do not have a right to challenge the terms of the merger, including the conversion ratio. It will usually be advisable to apply for a permit from the California Commissioner of Corporations.
For federal income tax purposes, the transaction is treated as a distribution which might be treated as a sale. The creation of Newco and the merger of Target into Newco are disregarded and Newco uses Target’s federal employer identification number, tax yea and other tax attributes.
For California tax purposes, Newco cannot be ignored, so the transaction is treated as (a) an “F” reorganization (a mere change in form) and (b) a distribution that is tested under the California sale treatment