The following article is adapted and reprinted from the M&A Tax Report, Vol. 9, No. 11, June 2001, Panel Publishers, New York, NY.
NO CHANGE IN OWNERSHIP
by Robert W. Wood
The "change in ownership" phrase has a variety of meanings under
the tax law, particularly in the context of merger or acquisition transactions.
In almost all cases, it is a negative concept. Consider the net operating
loss rules, where it is certainly something to be avoided. The same applies
for the golden parachute rules. Under the golden parachute rules, "excess
parachute payments" are nondeductible to a paying corporation, plus subject
to a 20% excise tax imposed by Section 4999(a). The rules apply only to
excess parachute payments. A parachute payment is any compensatory payment
to or for the benefit of a disqualified person (officer, shareholder, key
employee or highly-compensated person performing personal services for
the corporation) under the following circumstances:
the payment is contingent on a change in the ownership or effective
control of the corporation or a substantial portion of its assets, and
the aggregate present value of the compensatory payments equal or exceed
three times the base amount; or the payment is made pursuant to an agreement that violates any generally
enforced securities laws or regulations. Thus, the change in ownership or effective control is the lynchpin of
the golden parachute payment rules. All of the concern about formulas,
base amounts, savings clauses, the acceleration of options, etc., simply
don't come into play if there is no payment contingent on a change in ownership
or effective control.
Merger Okayed
A recent letter ruling concludes that the merger of two corporations
will not result in a change of ownership and effective control of the target,
nor will it trigger the golden parachute rules of Section 280G. Predictably,
the ruling goes on to state that the excise tax of Section 4999 will not
apply to payments to current or former employees of the target that are
contingent on the merger.
The facts of Letter Ruling 200108008, Tax Analysts Doc. No. 2001-5448,
2001 TNT 38-24, are fairly straightforward. A wholly-owned subsidiary of
the acquiring company ("Acquiring Sub") will merge with and into the target.
The target will survive, then becoming the acquiring company's wholly-owned
subsidiary. A second wholly-owned subsidiary of Acquiring Sub, Acquiring
Sub2, will also merge with and into the company, with the company surviving
as Acquiring Sub's wholly-owned subsidiary. Interestingly, the favorable ruling (no change in ownership) is premised
on the proviso that after the merger, company shareholders do not act in
a concerted way to control the management and policies of the acquiring
company.
No Change in Ownership, Vol. 9, No. 11, The M&A Tax Report
(June 2001), p. 1.