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Case Study: Tax Efficiency in Mergers & Acquisitions

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Putting together a deal for one company to purchase another is always a complex proposition. Balancing sale terms so that risk and reward meet each party’s expectations and completing the necessary legal transactions require careful attention to detail, comprehensive knowledge of the applicable law, and a deep understanding of the goals of the acquiring company so the deal can be structured to facilitate the ongoing growth and development of the enterprise. However, this isn’t all the right M&A law firm can accomplish for their client. Recently, we had the opportunity to put together an acquisition deal in way that took full advantage of tax efficient opportunities for all parties to bring added value to the transaction.

The Scenario

Our client, operating in the vape and e-liquid space, had a goal of acquiring another company. Bringing that organization into their group would result in an enterprise value of approximately $35 million. Our process always starts with putting together a slide deck that outlines the steps to take in negotiating and structuring the deal. Essential in this explanation is how we work to maximize tax efficiency for all parties, which is something that not all attorneys have the capacity to do as part of an M&A deal. However, this aspect was the most important piece of preparing the deal. Understanding how efficient tax restructuring needed to work laid out all the challenges in a way that made them clear for both our client and the potential target company. The slide deck walked them through the stages to accomplish our goal of tax efficiency in a pictorial format that ensured mutual understanding.

The Plan

We put in place the plan to merge and restructure five companies through this deal. Here’s how we used this process to minimize tax liability and to set the group up for future success:

We used § 351, § 368, and § 721 of the U.S. tax code to accomplish the merger and restructuring in a completely tax-free manner. In general, § 351 provides “provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control (as defined in § 368(c)) of the corporation.” The additional provisions in § 368 and § 721 further define terms related to corporate reorganizations and clarify nonrecognition of gain or loss on contribution, providing guidance on how to accomplish our ends without triggering tax liability.

We then used the restructuring to set up the business for qualified small business stock (QSBS) treatment under §1202. Basically, Section 1202 provides that every taxpayer enjoys a minimum $10 million exclusion at the Federal level, for gain triggered by the sale of a particular corporation’s stock. The same taxpayer can also have a gain exclusion cap that exceeds $10 million if the taxpayer paid cash or contributed property in exchange for the QSBS.
Using partnership rules, we were able to achieve the unique flexibility that the new partners needed in the holding company to provide for varying distribution and management rights.

This attention to the goals of the transaction and the opportunities to accomplish the client’s ends with significant tax savings resulted in two significant accomplishments. First, the group successfully brought in a new business partner. Second, the group has been set up for a more attractive and efficient tax exit in the event of a sale in the future.

M&A Expertise

If you’re contemplating a merger or acquisition, the structure of your deal can have a profound effect on your ultimate tax liability. Bridge Law LLP has the expertise to not only craft an M&A deal that sets your enterprise up for success, but also minimize your tax liability in the process. Our expert legal team has experience in both domestic and international transactions, and we pride ourselves on providing the highest quality legal services in the M&A market. To learn more about how we can protect your interests and assist your business at every stage, contact us here to schedule a consultation.

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