Certificate of Merger: A Reorganization Between Two New York Corporations with Restricted Stock Letter
(NY)

Summary

This template outlines the key tax provisions of a certificate of merger between two New York Corporations in a type "A" reorganization with a restricted stock letter. This template contains practical guidance, drafting notes, and an alternate clause. The template is vital to practitioners consulting on a merger because it outlines the processes concerning shares, merger effective dates, and authorization under Internal Revenue Code § 368(a)(1)(A), which governs "A" reorganizations. Tax practitioners should carefully review the merger agreement and certificate of merger to ensure compliance with the requirements for a tax-free reorganization under Section 368(a)(1)(A) of the Internal Revenue Code, including the continuity of business enterprise and continuity of interest requirements. Particular attention should be paid to the treatment of outstanding shares, conversion ratios, and any cash or other consideration paid in the merger, as these factors can impact the tax treatment of the transaction. Additionally, practitioners should be mindful of the potential application of Rule 145 under the Securities Act of 1933 for affiliates receiving restricted stock in the merger and ensure that appropriate restricted stock letters and legends are in place to comply with securities laws. Careful documentation and adherence to procedural requirements are crucial to achieving the desired tax treatment and avoiding potential challenges from tax authorities. Note that to qualify as a merger under Internal Revenue Code § 368(a)(1)(A) the transaction must be a statutory merger or consolidation, such as a forward or reverse triangular merger. There are no limits on the composition of the purchase price, and no requirement to use the acquirer's voting stock. At least 50% of the purchase price must be in the acquirer's stock. Advantages include the acquirer's ability to issue non-voting stock to target shareholders without diluting control over the combined companies, the option to not acquire all of the target's assets, and the allowance of more cash in the purchase price than Types B and C reorganizations. Disadvantages involve the acquirer assuming all undisclosed liabilities, the potential need for acquirer shareholder approval if new shares are issued or exceed 20% of publicly traded shares, and limitations on asset dispositions within two years of closing. For an example of a direct statutory merger ("A" Reorganization), see below. For checklists concerning mergers, see Preliminary Tax Considerations in Asset Acquisitions Checklist and C Corporations Stock Acquisitions Checklist. For a full listing of key content covering the taxation of C corporations, see C Corporation Taxation Resource Kit. For New York specific mergers and acquisitions information, see Required Approvals in Private M&A Transactions (NY); M&A Resource Kit (NY); Asset Purchases, Stock Purchases, and Mergers (Advantages and Drawbacks) (NY), Acquisition Transaction Closing (NY), and Acquisition Agreement (NY). For detailed information on the tax implications of stock and asset acquisitions, the tax consequences of acquiring a corporate business, asset, and stock purchase agreements, and how to categorize mergers (direct, forward, reverse triangular), see M&A Tax Considerations for C Corporations.