¶2204 Purchase of Subsidiary Out of Consolidated Group
Sample acquisition agreements 2201 (the pro-buyer stock purchase agreement), 2202 (the pro-seller stock purchase agreement), and 2203 (the neutral stock purchase agreement) assume that (prior to P’s purchase of T’s stock) T was not filing a consolidated federal income tax return with Bigco (i.e., prior to P’s purchase of T’s stock, either (1) T was not a Bigco subsidiary or (2) if T was a Bigco subsidiary, Bigco and T were not filing consolidated federal income tax returns).
This 2204 contains additional contractual provisions that should be used (or at least considered) in tandem with any of sample acquisition agreements 2201, 2202, or 2203 if T was filing a consolidated return with Bigco before P purchased T’s stock. See ¶210 and ¶212 for a discussion of certain tax issues that may arise if T and Bigco were filing consolidated returns.
Except when explicitly stated in 2204, these contractual provisions deal only with the federal income tax issues arising out of filing a consolidated federal income tax return and not with the many state income tax issues arising out of filing consolidated or separate state income tax returns. The state income tax consequences turn, of course, on the varying income tax laws of the 50 states.
¶2204.8	Contractual Provisions
Where Bigco is parent of the consolidated group that includes Target and Bigco owns 100% of Target’s stock, (1) ‘‘Seller’’ should be substituted for ‘‘Sellers’’ throughout stock purchase agreement 2201, 2202, or 2203 and (2) ‘‘Seller’’ should be substituted for both ‘‘Sellers’’ and ‘‘Bigco’’ in this 2204. The term ‘‘Seller’’ then serves to identify Bigco in its capacity as seller of all Target’s stock as parent of the consolidated group.
Where Bigco is the parent of the consolidated group that includes Target but a Bigco subsidiary (or several Bigco subsidiaries) owns 100% of Target’s stock, (1) ‘‘Seller’’ or ‘‘Sellers’’ should be used throughout stock purchase agreements 2201, 2202, and 2203 as well as this 2204 (depending on whether there are 1 or more sellers), (2) ‘‘Bigco,’’ although not selling any Target stock, should be made a party to the agreement, and (3) ‘‘Bigco’’ should be used throughout this 2204 to denominate the consolidated group’s parent.
Where Target has minority shareholders not members of the Bigco group who are selling Target stock to P (along with Bigco and/or its subsidiaries that are selling 80% or more of Target’s stock to P), (1) ‘‘Sellers’’ should be used to identify the persons selling Target stock to P and (2) ‘‘Bigco’’ (which should be a party to the agreement even if not a seller of Target stock) should be used to identify the consolidated group parent.
I. Substitute the following for §2(c) of the pro-seller stock purchase agreement (2202):
(c) Cash Dividend to Sellers. Immediately prior to the Closing, Sellers will cause Target to pay Sellers in proportion to their respective holdings of Target Shares an aggregate amount (and may cause each Subsidiary of Target to pay to Target any necessary component thereof) equal to Sellers’ good faith estimate of the consolidated Cash of Target and its Subsidiaries as of the Closing. Sellers may cause (A) Target to make any such payment to them in the form of a dividend or a redemption and (B) any Subsidiary of Target to make any such payment to Target in the form of a dividend, a redemption, or an intercompany loan.
II. Substitute the following for the last sentence of §4(k)(v) of the pro-buyer stock purchase agreement (2201), for §4(j)(v) of the pro-seller stock purchase agreement (2202), and for the last sentence of §4(k)(iv) of the neutral stock purchase agreement (2203):
Neither Target nor any of Subsidiaries has been a member of an Affiliated Group filing a consolidated federal income Tax Return other than a group the common parent of which is Bigco. [Bigco has filed a consolidated federal income Tax Return with Target and its Subsidiaries for the taxable year immediately preceding the current taxable year and is eligible to make a Code §338(h)(10)] [§336(e)] election.]
III. Add the following to §4(k) of the pro-buyer stock purchase agreement (2201) and §4(k) of the neutral stock purchase agreement (2203):
( ) Each Affiliated Group has filed all [material] income Tax Returns that it was required to file for each taxable period during which any of Target and its Subsidiaries was a member of the group. [Alternative 1: All such Tax Returns were correct and complete in all respects.] [Alternative 2: All such Tax Returns were correct and complete (A) in all respects in so far as they relate to Target or any of its Subsidiaries and (B) in all material respects in so far as they do not relate to Target and its Subsidiaries.] All [material] income Taxes owed by any Affiliated Group (whether or not shown on any Tax Return) have been paid for each taxable period during which any of Target and its Subsidiaries was a member of the group.
( ) No Seller or director or officer (or employee responsible for Tax matters) of any of Bigco and its Subsidiaries expects any authority to assess any additional [material] income Taxes against any Affiliated Group for any taxable period during which any of Target and its Subsidiaries was a member of the group. There is no dispute or claim concerning any [material] income [Income] Tax Liability of any Affiliated Group for any taxable period during which Target or any of its Subsidiaries was a member of the group either (A) claimed or raised by any authority in writing or (B) as to which any Seller and the directors and officers (and employees responsible for Tax matters) of any of Bigco and its Subsidiaries has Knowledge based upon personal contact with any agent of such authority. Except as disclosed on §4(k) of the Disclosure Schedule, no Affiliated Group has waived any statute of limitations in respect of any [material] income Taxes or agreed to any extension of time with respect to a [material] income Tax assessment or deficiency for any taxable period during which any of Target and its Subsidiaries was a member of the group.
( ) Neither Target nor any of its Subsidiaries has any liability for the Taxes of any Person other than Target and its Subsidiaries (A) under Reg. §1.1502-6 (or any similar provision of state, local, or non-U.S. law), (B) as a transferee or successor, (C) by contract, or (D) otherwise.
IV. Add the following to §4(j) of the pro-seller stock purchase agreement (2202):
(vi) Each Affiliated Group has filed all Tax Returns that it was required to file for each taxable period during which any of Target and its Subsidiaries was a member of the group, and has paid all Taxes shown thereon as owing, except where a failure to file or pay Taxes would not have a Material Adverse Effect.
(vii) Neither Target nor any of its Subsidiaries has any liability for the Taxes of any Person other than Target and its Subsidiaries under Reg. §1.1502-6 (or any similar provision of state, local, or non-U.S. law).
V. Add the following new Section 8A (Tax Matters) to the pro-seller (2202) stock purchase agreement:
8A. Tax Matters.
(a) Tax-Sharing Agreements. Any tax-sharing agreement between Bigco and any of Target and its Subsidiaries is terminated as of the Closing Date and shall have no further effect for any taxable year (whether the current year, a future year, or a past year).
(b) Taxes of Other Persons. Each Seller agrees to indemnify Buyer from and against his, her, or its Allocable Portion of any Adverse Consequences Buyer may suffer resulting from, arising out of, relating to, in the nature of, or caused by any Liability of any of Target and its Subsidiaries for Taxes of any Person other than any of Target and its Subsidiaries under Reg. §1.1502-6 (or any similar provision of state, local, or non-U.S. law).
(c) Returns for Periods Through the Closing Date. Bigco shall include the income of Target and its Subsidiaries (including any deferred items triggered into income by Reg. §1.1502-13 and any excess loss account taken into income under Reg. §1.1502-19) on Bigco’s consolidated federal Income Tax Returns for all periods through the end of the Closing Date and pay any federal Income Taxes attributable to such income. Target and its Subsidiaries shall furnish Tax information to Bigco for inclusion in Bigco’s federal consolidated Income Tax Return for the period that includes the Closing Date in accordance with Target’s past custom and practice. The income of Target and its Subsidiaries shall be apportioned to the period up to and including the Closing Date and the period after the Closing Date by closing the books of Target and its Subsidiaries as of the end of the Closing Date.
(d) Audits. Bigco shall not settle any audit of a Bigco consolidated federal income Tax Return to the extent that such return relates to Target and its Subsidiaries in a manner that would adversely affect Target and its Subsidiaries after the Closing Date unless such settlement would be reasonable in the case of a Person that owned Target and its Subsidiaries both before and after the Closing Date. [Alternative: Bigco shall not settle any such audit in a manner that would adversely affect Target and its Subsidiaries after the Closing Date without the prior written consent of Buyer, which consent shall not be unreasonably withheld.]
(e) Post-Closing Elections. At Bigco’s request, Buyer shall cause any of Target and its Subsidiaries to make and/or join with Bigco in making [specify elections] after Closing. At Bigco’s request, Buyer shall cause any of Target and its Subsidiaries to make or join with Bigco in making any other election if the making of such election does not have [an] [a material] adverse impact on Buyer (or any of Target and its Subsidiaries) for any post-acquisition Tax period.
(f) Code §338(h)(10) Election. [At Bigco/Buyer’s option,] Bigco and Buyer shall join in making an election under Code §338(h)(10) (and any corresponding elections under state, local, or non-U.S. tax law) (collectively, a ‘‘§338(h)(10) Election’’) with respect to the purchase and sale of the stock of Target and any of its Subsidiaries hereunder.
[Alternative (f): Code §336(e) Election. [At Bigco/Buyers’ option,] Bigco and Target shall join in making an election under Code §336(e) (and any corresponding elections under state, local, or non-U.S. tax law) (collectively, a ‘‘§336(e) Election’’) with respect to the acquisition and disposition of the stock of Target and any of its Subsidiaries hereunder.]
[Alternative (f): No Code §336(e) Election. Bigco shall not make an election under Code §336(e) with respect to the transactions contemplated by this Agreement.]
(g) Indemnification for Post-Closing Transactions. Buyer agrees to indemnify Bigco for any additional tax owed by Bigco (including tax owed by Bigco due to this indemnification payment) resulting from any transaction engaged in by Target or its Subsidiaries not in the ordinary course of business occurring on the Closing Date after Buyer’s purchase of Target’s stock.
(h) Post-Closing Transactions not in Ordinary Course. Buyer and Bigco agree to report all transactions not in the ordinary course of business occurring on the Closing Date after Buyer’s purchase of Target’s stock on Buyer’s [alternatively: on Bigco’s] federal Income Tax Return to the extent permitted by Reg. §1.1502-76(b)(1)(ii)(B).
(i) Tax Adjustment. As a condition precedent to Bigco making a §338(h)(10) Election, Buyer shall pay to Bigco, in cash, the amount of additional consideration necessary to cause Bigco’s after-Tax net proceeds from the sale of Target’s stock with the §338(h)(10) [or §336(e)] Election to be equal to the after-Tax net proceeds that Bigco would have received had the §338(h)(10) [or §336(e)] Election not been made, taking into account all appropriate state, federal and local Tax implications (the ‘‘Tax Adjustment’’). The amount of the Tax Adjustment shall be paid to Bigco at least ten (10) days prior to the due date (without extensions) for Bigco to file its federal income tax return for its taxable year that includes the Closing Date. Bigco shall provide Buyer with a schedule computing the amount of the Tax Adjustment within 20 days after the Parties have agreed to the allocation of the Purchase Price. In making such calculations, the highest corporate federal and state tax rates to which Bigco is subject shall be used and any other items of income, deduction, gain, loss, or credits of Bigco shall be ignored.
VI. Replace §9(c) of the pro-buyer (2201) and neutral (2203) stock purchase agreements with the following:
(c) Responsibility for Filing Tax Returns for Periods through Closing Date. Bigco shall include the income of Target and its Subsidiaries (including any deferred items triggered into income by Reg. §1.1502-13 and any excess loss account taken into income under Reg. §1.1502-19) on Bigco’s consolidated federal income Tax Returns for all periods through the Closing Date and pay any federal income Taxes attributable to such income. For all taxable periods ending on or before the Closing Date, Bigco shall cause Target and its Subsidiaries to join in Bigco’s consolidated federal income tax return and, in jurisdictions requiring separate reporting from Bigco, to file separate company state and local income tax returns. All such Tax Returns shall be prepared and filed in a manner consistent with prior practice, except as required by a change in applicable law. [Buyer shall have the right to review and comment on any such Tax Returns prepared by Bigco.] Buyer shall cause Target and its Subsidiaries to furnish information to Bigco as reasonably requested by Bigco to allow Bigco to satisfy its obligations under this section in accordance with past custom and practice. Target and its Subsidiaries and Buyer shall consult and cooperate with Bigco as to any elections to be made on returns of Target and its Subsidiaries for periods ending on or before the Closing Date. Buyer shall cause Target and its Subsidiaries to file income Tax Returns [or shall include Target and its Subsidiaries in its combined or consolidated income Tax Returns,] for all periods other than periods ending on or before the Closing Date.
VII. Add the following provisions to the end of §9 of the pro-buyer (2201) and neutral (2203) stock purchase agreements:
( ) Audits. Bigco shall allow Target and its counsel to participate [at Target’s expense] in any audit of Bigco’s consolidated federal income Tax Returns to the extent that such returns relate to Target and its Subsidiaries. [Alternative 1: Bigco shall not settle any such audit in a manner that would adversely affect Target and its Subsidiaries after the Closing Date [unless such settlement would be reasonable in the case of a Person that owned Target and its Subsidiaries both before and after the Closing Date].] [Alternative 2: Bigco shall not settle any such audit in a manner that would adversely affect Target and its Subsidiaries after the Closing Date without the prior written consent of Buyer, which consent shall not be unreasonably withheld.]
( ) Carrybacks. Bigco shall immediately pay to Buyer any Tax refund (or reduction in Tax liability) resulting from a carryback of a post-acquisition Tax attribute of any of Target and its Subsidiaries into the Bigco consolidated Tax Return, when such refund (or reduction) is realized by Bigco’s group. At Buyer’s request, Bigco will cooperate with Target and its Subsidiaries in obtaining such refund (or reduction), including through the filing of amended Tax Returns or refund claims. Buyer agrees to indemnify Bigco for any Taxes resulting from the disallowance of such post-acquisition Tax attribute on audit or otherwise.
( ) Retention of Carryovers. Bigco shall not elect to retain any net operating loss carryovers or capital loss carryovers of Target and its Subsidiaries.
( ) Prior Ownership Change. Bigco shall file a timely election under Reg. §1.1502-95(f) to apportion [$______] of the Bigco group’s annual consolidated Code §382 limitation from [identify the previous ownership change while any of Target and its Subsidiaries was a member of the Bigco group] to Target and its Subsidiaries. At Bigco’s request, Buyer shall cause any of Target and its Subsidiaries to join with Bigco in making any election required under Reg. §1.1502-95(f).
( ) Post-Closing Elections. At Bigco’s request, Buyer shall cause any of Target and its Subsidiaries to make and/or join with Bigco in making [specify elections] after Closing. At Bigco’s request, Buyer will cause any of Target and its Subsidiaries to make or join with Bigco in making any other election if the making of such election does not have [an] [a material] adverse impact on Buyer (or any of Target and its Subsidiaries) for any post-acquisition Tax period.
( ) §338(h)(10) Election. [At Buyer’s/Bigco’s option,] Bigco and Buyer shall join in making an election under Code §338(h)(10) (and any corresponding elections under state, local, or non-U.S. tax law) (collectively a ‘‘§338(h)(10) Election’’) with respect to the purchase and sale of the stock of Target and any of its Subsidiaries hereunder. Bigco will pay any Tax attributable to the making of the §338(h)(10) Election and will indemnify Buyer, Target, and its Subsidiaries against any Adverse Consequences arising out of any failure to pay such Tax. [Alternative: Code §336(e) Election. [At Buyers’/Bigco’s option,] Bigco and Target shall join in making an election under Code §336(e) (and any corresponding elections under state, local, or non-U.S. tax law) (collectively, a ‘‘§336(e) Election’’) with respect to the acquisition and disposition of the stock of Target and any of its Subsidiaries hereunder. Bigco will pay any Tax attributable to the making of the §336(e) Election and will indemnify Buyers, Target, and its Subsidiaries against any Adverse Consequences arising out of a failure to pay such Tax.] [Bigco will also pay any state, local, or non-U.S. Tax (and indemnify Buyer, Target, and its Subsidiaries against any Adverse Consequences arising out of any failure to pay such Tax) attributable to an election under state, local, or non-U.S. law similar to the election available under Code §338(g) (or that results from the making of an election under Code §338(g)) with respect to the purchase and sale of the stock of Target and any of its Subsidiaries hereunder.]
VIII. Consider adding the following to §10 of the pro-buyer (2201), pro-seller (2202), and neutral (2203) stock purchase agreements if a Code §338(h)(10) or a Code §336(e) election is to be made:
( ) Allocation of Purchase Price. The Parties agree that the Purchase Price and the liabilities of Target and its Subsidiaries (plus other relevant items) will be allocated to the assets of Target and its Subsidiaries for all purposes (including Tax and financial accounting purposes) [as shown on the Allocation Schedule attached hereto] [in a manner consistent with Code §338 and §1060 and the regulations thereunder]. Buyer, Target and its Subsidiaries, and Bigco shall file all Tax Returns (including amended returns and claims for refund) and information reports in a manner consistent with [such allocation] [such values].
IX. Consider adding the following to §10 of the pro-buyer (2201) stock purchase agreement if Buyer(s) do not want a Code §336(e) election to be made:
( ) No Code §336(e) Election. Bigco shall not make an election under Code §336(e) with respect to the transactions contemplated by this Agreement.