Corporate reorganization refers to the process of making substantial changes regarding the structure of a business. Corporate reorganization is meant to improve the entity’s efficiency, profitability, and strategic position in the marketplace. Companies may reorganize to adapt to the changing market, increase cost-efficiency, integrate a newly acquired company, meet evolving regulatory requirements, or for many other reasons. Some of the most common reorganizations are type A, B, and C reorganizations — the A, B, C’s of corporate transactions.
What is a Type A Reorganization?
A type A reorganization is referred to as a “statutory merger or consolidation.” A merger is a joining of two or more corporations where one entity continues to keep its existence while absorbing the other. A consolidation occurs when a new company is created and replaces two or more corporations. These reorganizations are typically used to expand business operations and increase profitability for the long-term.
This form of reorganization comes with several advantages, including flexibility and the ability to transfer money without disqualifying the transaction if the “continuity of interest” requirement is satisfied — this means at least fifty percent (50%) of the consideration must be acquirer stock. One of the disadvantages to consider is that the acquiring entity must assume all the liabilities of the target company.
Type A reorganizations are usually tax-free for the target company and the acquiring corporation. The target shareholders might have the right to recognize gain up to the amount of boot they have received. Boot is the money or property received under a reorganization, apart from the stock permitted to be received without recognizing gain or loss.
What is a Type B Reorganization?
A type B reorganization is a stock-for-stock transaction. In these reorganizations, the acquiring corporation takes eighty percent (80%) of the stock of the target corporation. While the target stock need not be acquired all at once, the acquiring company must own eighty percent (80%) upon completion of the acquisition process. Only voting stock can be used in the transaction. No boot is allowed — except for small amounts that can be paid for fractional shares.
With this reorganization, the target company survives as a subsidiary of the acquiring company, protecting the acquiring company from the liabilities of the target company. Buyers may prefer this structure when the shareholders of the target company will accept acquirer stock in the transaction as consideration. This structure can avoid triggering built-in capital gains when a stock sale is made for cash. A type B reorganization can also be beneficial if the acquiring company does not want to pay out substantial cash to fund the transaction.
What is a Type C Reorganization?
A type C reorganization is an asset-for-stock exchange where the assets, but not the liabilities of the target company are transferred to the acquiring corporation by statute. The acquiring company exchanges its voting common stock for substantially all of the target company’s assets. Any consideration that is paid other than voting common or preferred stock — boot — cannot be over twenty percent (20%) of the fair value of the target company’s pre-transaction assets.
One of the major advantages of using this structure is that the acquiring company can be selective when choosing the liabilities the acquirer assumes in the transaction. However, type C reorganizations are complex and costly. They are also inflexible regarding the form of consideration that can be used.
Contact an Experienced New York Business Attorney
If you are considering reorganization, it’s important to understand the different structures and tax implications involved. An experienced business attorney can provide you with the guidance you need and help ensure your interests are protected. Brinen & Associates provides reliable representation to businesses, shareholders, and corporate owners for a wide variety of corporate matters. Call (212) 330-8151 or send us a message to schedule a consultation.