Replies to post #129074 on Biotech Values

[mouton29]

First, let me address the provision I've been focusing on, 355(e), the anti-Morris Trust provision. An immediate post-spin tax-free merger will not trigger 355(e) if either:

(i) the merger is not in accordance with a plan, which will be true if there were not substantial discussions prior to the spin or other requirements or safe harbors are satisfied or

(ii) if the merger is in accordance with a plan but distributed company shareholders keep at least 50% of the stock. It is this alternative that the Folgers deal relied on, the former P&G shareholders ended up with 53.5% of the acquiror, Smuckers, so in effect, 46.5% of Folgers was acquired.

Beyond 355(e), there are other requirements, the most significant of which that the spin-off have a corporate business purposes. In this context, the point is that the subsequent merger should not contradict the business purpose. I skimmed through the slide set and I can't really tell what the business purpose is -- for 355 purposes, there is a distinction between a CORPORATE business and a shareholder business purpose. The fact that investment bankers and the company believe the spin will increase market capitalization is not by itself a corporate business purpose, it needs to be combined with something at the corporate level, such as, that either the distributing or distributed companies intends to use its stock to fund acquisitions (so-called "acquisition currency" purpose). One of the most common business purposes is known as "fit and focus," meaning, the company thinks that management will perform better if each of the two businesses can focus on its individual business.

So if the subsequent merger is inconsistent with that purpose, it may cast doubt on the original spin. For example, if fit and focus is the purpose and either the distributing or distributed company proceeds to merge with a diversified company, that seems to me to be a bit inconsistent with the purpose. But I would need to research this a bit more to see if there is any authority on point.