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2. Forward Triangular Merger

Target merges with and into a direct subsidiary of Acquiror that is at least 80
percent owned (and usually wholly‐owned) by Acquiror (Merger Corporation). The
requirements for tax‐free treatment and the taxation of non‐stock consideration
(including Nonqualified Preferred Stock) are generally the same as with a direct merger.
However, in order for the merger to be tax‐free, there are two additional requirements.

First, no stock of Merger Corporation can be issued in the transaction. Thus,
preferred stock of Target may not be assumed by Merger Corporation in the merger but
must be reissued at the Acquiror level or redeemed prior to the merger. In addition, this
requirement raises certain technical issues in circumstances in which Acquiror already
owns Target stock.

Second, Merger Corporation must acquire "substantially all" of the assets of
Target, generally 90 percent of net assets and 70 percent of gross assets. This requirement
must be taken into account when considering asset dispositions or bad bank spin‐offs
before or soon after a merger or a redemption of Target stock prior to the merger.

Because of the requirement that Merger Corporation be at least 80 percent
owned by Acquiror, it was unclear until 2001 whether the stock of the Merger Corporation
could be contributed to another 80 percent‐owned subsidiary of Acquiror following the
merger without causing the transaction to be taxable. In Rev. Rul. 2001‐24, the IRS made
it clear that Acquiror may undertake such a "drop down" without causing the transaction
to be taxable. In October 2007, the IRS issued final regulations which confirm this result
and generally provide greater flexibility with respect to post‐reorganization asset
transfers. The ability to transfer the Merger Corporation stock to another subsidiary is
perhaps most useful for foreign buyers, as it permits them to combine Target with the
rest of Acquiror’s U.S. operations by contributing the stock of Merger Corporation to an
existing U.S. subsidiary of Acquiror immediately after the merger. This structure was
reportedly used in HSBC’s acquisition of Household in 2003.

3. Reverse Triangular Merger

Merger Corporation merges with and into Target. In order for this transaction to
be tax‐free, Acquiror must acquire, in the transaction, at least 80 percent of all of Target’s
voting stock and 80 percent of each other class of Target stock in exchange for its voting
stock. Thus, nonvoting preferred stock of Target must either be given a vote at the Target
level and left outstanding at that level, exchanged for Acquiror voting stock or redeemed
prior to the merger. Bank of America/Merrill Lynch is a notable recent transaction in
which nonvoting preferred stock of Target was exchanged for Acquiror "mirror" preferred
with a fractional voting right in order to preserve tax‐free treatment. In addition, Target

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