Top 10 Corporate Actions Impacting Advisors, Investors

January 30, 2012 10:23 AM

Cyclical -- Or Ripple Effect of 2008?

The number and complexity of corporate events persist, even three years after the 2008 financial crisis. The increase in spin-offs may purely be cyclical, as companies go from an increase in merger activity to more divestments that unlock shareholder value in separate businesses, said John Kareken, senior tax analyst at Wolters Kluwer Financial Services. On the other hand, the number and complexity of corporate events, especially rights offerings, may indicate continued challenges resulting from the 2008 financial crisis, as companies look for ways to raise capital and restructure, or the need to reconfigure their businesses to meet current economic conditions.

General Motors (Bankruptcy)

The old General Motors, on completing its bankruptcy reorganization, distributed stock and two classes of warrants in the new General Motors to debt holders of the old General Motors. There was uncertainty as to the taxability of the receipt of the stock and warrants, and although generally holders treated the distributions as nontaxable, there was still the problem of apportioning the holder's basis in the old General Motors debt to the stock and warrants.

American International Group (Warrant Distribution)

This involved distribution of warrants to holders of common stock in connection with the U.S. receiving warrants in the AIG bailout. Distribution was thought to be taxable but the company held out the possibility for all of 2011 that the distribution could instead be a nontaxable distribution of warrants, similar to a rights offering and requiring allocation of a portion of the basis of the common to the warrants received. At the end of 2011, the company disclosed that the distribution was neither a taxable dividend nor a nontaxable distribution of rights to which basis could be allocated from the common, but a nondividend, nontaxable distribution that, as a return of capital, reduced the basis of the common on which it was distributed.

Motorola (Spin-off of Motorola Mobility Holdings)

This nontaxable spin-off by Motorola of Motorola Mobility Holdings was a nontaxable spin-off. The fact that the stock is widely held and that the spin-off was accompanied by Motorola changing its name to Motorola Solutions and reverse splitting 1-7 created some confusion for corporate actions professionals. An interesting twist is that the new company, Motorola Mobility, is now merging into Google, and one of the requirements of the merger was that a legal opinion be obtained that the merger would not affect the tax-free status of the earlier spin-off.

Genzyme Corp. (Merger Into Sanofi)

Genzyme merged into Sanofi-Aventis, a French company. Shareholders received cash and a contingent value right, entitling the holder to cash payments if milestones met in the production, approval and sales of certain Genzyme products. The treatment of contingent value rights creates much uncertainty for holders, who must pay tax on the current value of the contingent value right and must account for future payments when received. As the rights are expected to remain outstanding until 2020, the holders are faced with almost a decade of uncertainty if they choose to retain the rights.

Alkermes, Inc. (Merger Into Irish Holding Company)

This involved the merger of the company into a new Irish holding company created by Elan Corp. PLC in order to sell Elan's drug technology business to Alkermes. The receipt of stock in the new holding company was a taxable event, resulting in either gain or loss based on the market value of the holding company stock received. The merger raised the possibility of application of rules that tax U.S. companies and shareholders merging with non-U.S. companies and moving their domicile from the U.S.

Alcon (Merger Into Novartis)

Novartis had acquired a 77% interest in Alcon under a 2008 agreement with Nestle. In 2011, Novartis acquired the remaining 23% under the Swiss Merger Act. Alcon shareholders received a combination of Novartis stock and cash. Under Swiss law, the increase in nominal value of the Novartis shares received, over the nominal value of Alcon shares surrendered, resulted in Swiss withholding tax which Novartis agreed to pay on behalf of the shareholders. The merger was fully taxable under U.S. law, but some taxpayers may not realize that the amount of withholding tax paid must be included as part of the overall consideration received and used to compute the gain or loss.

Western Copper (Plan of Arrangement)

Western Copper spun off two companies in October 2011: Copper North Mining and NorthIsle Copper and Gold. While there was some uncertainty about whether the spin-off qualified as a tax-free reorganization, there is good reason to treat the event as taxable. The problem is that all three companies were expected to continue to qualify as passive foreign investment companies (PFICs). When PFIC rules apply, they trump the usual tax treatment.

Brookfield Office Properties (Rights Offering)

Brookfield Office Properties issued rights entitling holders to purchase shares of Brookfield Residential Properties. Rights offerings are typically nontaxable, but in this case the fair market value of the rights received was taxable as a dividend under U.S. and Canadian tax law. This means that, in addition to their U.S. tax liability, for having been "paid" a dividend, U.S. shareholders are also subject to Canadian withholding tax.

New Flyer Industries (Rights Offering)

New Flyer Industries used to trade primarily as income deposit securities (IDS). In response to proposed changes in Canadian tax law, the company decided to change its IDS structure to a traditional common share structure by way of a rights offering. While the rights offering itself was nontaxable, the event created challenges in computing the amount of gain or loss, and proved to be troublesome for firms that had to account for the conversion of IDS into common within their systems.

Telecom Corporation of New Zealand (Demerger of Chorus Ltd.)

The company spun off Chorus Ltd. in a nontaxable spin off. While corporate actions professionals are used to dealing with nontaxable spin-offs, each event of this type generates a certain level of concern over the precise number to use in allocating basis and the need to have that number as quickly as possible. In this case, the company was able to alleviate some of the holiday stress by providing a basis allocation on December 2, two days after the effective date. As an additional gift, Telecom Corporation was one of the few non-U.S. companies in 2011 to publish an issuer statement, required under the new cost basis reporting law.