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subject to a maximum percentage of the number of target shares to be converted
to cash (e.g., NationsBank’s 1996 acquisition of Boatmen’s);

 complex pricing formulas including a fixed‐exchange‐ratio stock component,
subject to a claw back feature above certain price levels (e.g., BankAmerica’s 1994
acquisition of Continental);

 a fixed exchange ratio for the stock consideration with a cash top‐up feature if the
value of the stock component is below a specified value, subject to a collar (e.g.,
AT&T’s acquisition of MediaOne); and

 a fixed exchange ratio where a portion of the consideration is paid in stock and a
portion is paid in cash in an amount equal to the value of the stock that the
shareholder would have received had the shareholder received all stock (e.g.,
Washington Mutual’s acquisition of Providian, where each share of Providian
stock received consideration having a value equal to 0.45 shares of Washington
Mutual stock, but where the holders received 0.4005 shares of stock (0.45
multiplied by the 89 percent stock component) plus cash equal to the average
trading value prior to closing of 0.0495 shares of Washington Mutual stock (0.45
multiplied by the 11 percent cash component)).

Protecting the Tax‐Free Status of the Acquisition: As if the number of
permutations on combining two separate pricing formulas for the cash and stock
components is not complicated enough, additional complexity may result from the need
to adjust the percentage of target shares that will be converted into buyer stock versus
cash depending upon future events.

While there can be other business reasons for adjusting the aggregate limits on
the percentage of target shares to be exchanged for cash vs. stock consideration,
historically the most common reason has been the desire to preserve the tax‐free status
of the transaction. A part‐cash, part‐stock merger (including a two‐step transaction with
a first step tender or exchange offer followed by a back‐end merger) generally can qualify
as a tax‐free reorganization only if at least a minimum amount of the total value of the
merger consideration consists of acquiror stock. As discussed above, regulations finalized
by the IRS in September 2005 set the minimum amount of stock at 40 percent.

In the past, satisfaction of this requirement was, in all cases, determined by
reference to the fair market value of the acquiror stock issued in the merger (i.e., on the
closing date). Accordingly, a part‐cash, part‐stock merger, particularly with a fixed or
collared exchange ratio, that met this requirement when the deal was signed could fail to
qualify as a tax‐free reorganization if the value of the acquiror’s shares declined before
the closing date. The amount of the decline that could trigger this problem would depend
on the aggregate values of the pools of cash and stock consideration at signing. Absent a
contractual formula to solve this tax issue, each party in essence obtained a price‐based

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