Page 348 - מיזוגים ורכישות - פרופ' אהוד קמר תשפב

with a fractional voting right in order to preserve tax-free treatment. In addition, Target
must hold substantially all of its assets and substantially all of Merger Corporation’s assets
after the merger.

Because of the requirement that Acquiror acquire control of Target "in the
transaction," it was unclear until 2001 whether Acquiror could acquire Target in a two-
step reverse triangular merger (i.e., a tender or exchange offer followed by a back-end
merger). In Rev. Rul. 2001-26, the IRS made it clear that a two-step reverse triangular
merger is permissible, provided that the two steps occur pursuant to an integrated plan
and the "control for voting stock" requirement is met in the overall transaction. In 2001,
the IRS also made it clear that the requirement that Target "hold" substantially all of its
assets and substantially all of Merger Corporation’s assets after the merger is not violated
where Target sells assets following the merger if Target retains the sales proceeds (and
does not, for example, distribute them to its new parent, Acquiror).

Also in 2001, the IRS ruled in Rev. Rul. 2001-46 that a transaction that in form is a
reverse triangular merger will be tested for tax-free status under the more flexible rules
described above for direct mergers (rather than the more demanding requirements for
reverse triangular mergers) if, pursuant to an integrated plan, Target is merged into
Acquiror following the reverse triangular merger. Under the rationale of Rev. Rul. 2001-
46 and the 2006 final regulations described above, a reverse triangular merger followed
by a merger of the surviving corporation into a disregarded entity of the Acquiror (such
as a single member limited liability company that has not elected to be treated as a
corporation) pursuant to an integrated plan, similarly, should be treated as a direct
merger of Target into Acquiror.

4. Section 351 Transaction

An alternative, less frequently used structure, is for both Acquiror and Target to
be acquired by a new holding company, H, in a transaction intended to qualify as a tax-
free exchange under Section 351 of the Internal Revenue Code. As a corporate matter,
this typically would be achieved by H creating two subsidiaries, one of which would merge
with Acquiror and the other with Target in two simultaneous reverse triangular mergers.
Shareholders of Acquiror and Target would receive tax-free treatment to the extent that
they received H stock, which may be common or preferred (other than Nonqualified
Preferred Stock), voting or nonvoting, provided that the shareholders of Acquiror and
Target own at least 80 percent of the voting stock and 80 percent of each other class of
stock of H immediately after the transaction. Unlike the other forms of transactions
described above, there is no limit on the amount of cash that may be used in this type of
transaction as long as the 80 percent ownership test is satisfied. Cash and Nonqualified
Preferred Stock received by a shareholder of Acquiror or Target will be taxable up to the
amount of gain realized in the transaction.

344