Section 304 does not apply to acquisition with less than 50 percent shareholder overlap

Plain-English summary

A corporate parent used a wholly owned subsidiary to acquire all the stock of a foreign target in exchange for parent stock and cash. Because several institutional investors owned shares in both the parent and target, the parties examined whether the transaction could be treated as a related-corporation redemption under Section 304(a)(1). The parent combined SEC filings, commercial subscription data, transfer-agent records, and officer and director information to identify overlapping shareholders, then estimated overlap for the remaining unidentified shares. That analysis produced a shareholder-overlap percentage below 50 percent. The parent represented that it had used every reasonably available identification method and had no actual knowledge suggesting enough additional overlap to create control under Section 304(c). Based on those facts and representations, the IRS ruled that Section 304 did not apply to any exchange of target stock for parent stock and cash in the acquisition.

Ruling snapshot

• Question: Did overlapping ownership of the parent and target cause the acquisition exchanges to fall under Section 304?
• Outcome: Approved, Section 304 did not apply
• Key authorities: IRC § 304(a)(1) and (c)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 202141005                                              Third Party Communication: None
Release Date: 10/15/2021                                       Date of Communication: Not Applicable
Index Number: 304.00-00
                                                               Person To Contact:
------------------------                                       ----------------------------, ID No. --------------
---------------                                                -----------------
------------------------------------------------------------   Telephone Number:
------                                                         --------------------
-------------------------------------                          Refer Reply To:
                                                               CC:CORP:2
                                                               PLR-109913-20
                                                               Date:
                                                               July 16, 2021




Legend

Parent                                         =       ---------------
                                                       -------------------------------
                                                       -----------------------

Acquiring                                      =       -------------------------------
                                                       -------------------------------
                                                       -----------------------

Target                                         =       ----------------
                                                       -----------------------------------------
                                                       -----------------------

State A                                        =       -------------

Country A                                      =       ---------

Date A                                         =       -------------------

Date B                                         =       --------------- --

Date C                                         =       --------------------------

Date D                                         =       ------------------

a                                              =       ---------

b                                              =       ------------- --
c                                              =       ---------
PLR-109913-20                                 2


d                                     =     ---------

e                                     =     ------

f                                     =     ---

g                                     =     ---

h                                     =     ---------

Subscription Service A                =     ---------------------

Subscription Service B                =     ----------------------------------------

Subscription Service C                =     --------------------

Transfer Agent                        =     --------------------------------


Dear ----------------:

This letter responds to your authorized representative’s letter dated March 27, 2020,
and subsequent information, requesting a ruling on certain federal income tax
consequences of an acquisition (the “Acquisition,” as defined below). The material
information submitted in that request and subsequent correspondence is summarized
below.

The rulings contained in this letter are based upon facts and representations submitted
by the taxpayer and accompanied by a penalties of perjury statement executed by an
appropriate party. The office has not verified any of the materials submitted in support of
the request for rulings. Verification of the information submitted during this ruling
process and the accompanying representations may be required as part of the audit
process.

                                   Summary of Facts

Parent is a State A corporation and the parent of a worldwide group that includes both
domestic and foreign entities (the “Parent Group”). Parent is also the common parent
of an affiliated group of corporations filing a consolidated federal income tax return (the
“Parent U.S. Group”). Parent wholly owns Acquiring, a State A entity that is classified
as a corporation for federal income tax purposes and is a member of the Parent U.S.
Group. Target is a Country A entity that is classified as a corporation for federal income
tax purposes and the parent of a worldwide group that includes both domestic and
foreign entities.
PLR-109913-20                                3

Prior to the Acquisition (defined below), each of Parent and Target had a single class of
common stock outstanding, the shares of which were publicly traded and widely held.

                                    The Acquisition

On Date A, Parent announced that it entered into a binding agreement under which the
Parent Group would acquire all the stock of Target in a stock and cash transaction,
valued at $a per Target share, or approximately $b in total, based on Parent’s then-
current stock price (the “Acquisition”). At the closing of the Acquisition, Target
shareholders received c shares of Parent common stock and $d in cash for each of their
existing Target shares.

In order to effectuate the Acquisition, on Date B, Acquiring acquired 100 percent of the
issued and outstanding stock of Target pursuant to a local court-sanctioned “scheme of
arrangement” and a letter of direction for Parent to deliver Parent stock and cash valued
together at approximately $b to Target shareholders on behalf of Acquiring.

                                  Shareholder Overlap

Several institutional investors owned shares in both Parent and Target through various
mutual funds and exchange-traded funds prior to the Acquisition. As a result, there was
a potential for the Acquisition to be treated as a transaction described in section
304(a)(1).

In order to determine whether section 304 was applicable to the Acquisition, Parent
obtained shareholder information of Parent and Target from several resources and
synthesized the data in a model to identify the shareholder overlap of the two
corporations.

Shareholder Identification Methodology

First, Parent retrieved publicly available shareholder information from the Securities and
Exchange Commission (“SEC”), including Schedules 13D and 13G, Form 13F, Form
10-K, Form 10-Q, Form 3, and Form 4 as of Date C (i.e., the closest point in time
preceding the Acquisition) and Date D (i.e., the closest reporting date after the
Acquisition). However, those documents provided only the following limited information:
(i) the total number of shares issued and outstanding with respect to Parent and Target;
and (ii) the shareholder information of an investor that held greater than a five percent
beneficial interest in Parent or Target, as applicable (such investor, a “5-Percent
Shareholder”). In addition, Parent determined that each 5-Percent Shareholder was an
institutional investor that was not the ultimate beneficial owner (i.e., the holder of the
benefits and burdens of ownership other than legal title) of the stock of Parent or Target,
as applicable. Rather, each 5-Percent Shareholder managed individual funds that were
the ultimate beneficial owners of the stock of Parent, Target, or both corporations, as
applicable. As a result, Parent determined that it was necessary to identify the individual
funds that owned stock in Parent, Target, or both corporations.
PLR-109913-20                                  4

Second, Parent retrieved datasets from Subscription Service A, Subscription Service B,
and Subscription Service C. Based on a comparative analysis of each subscription
service, Parent determined that Subscription Service A provided the most in-depth
shareholder information of Parent and Target. Specifically, Subscription Service A
provided information that identified, as of Date B, the following:

   (i)     the total number of shares issued and outstanding for Parent and Target;

   (ii)    the number of shares of Parent or Target, as applicable, beneficially owned
           by each investment fund managed by an institutional investor; and

   (iii)   the number of shares of Parent or Target, as applicable, beneficially owned
           by each officer and director of Parent or Target, as applicable (each
           investment fund described in (ii) and each officer or director described in (iii),
           an “Original Identified Shareholder”).

However, Subscription Service A reported a total number of shares of each of Parent
and Target that was less than the number of shares issued and outstanding of each
corporation in public filings. Parent was unable to identify the holders of the shares that
represented the difference between the total shares issued and outstanding reported in
public filings of each of Parent and Target, respectively, and the total shares issued and
outstanding according to Subscription Service A (such shares representing the
difference, the “Undisclosed Shares”).

Third, Parent contacted Transfer Agent in an attempt to identify the Undisclosed
Shares. Transfer Agent provided shareholder information with respect to Parent shares
and Target shares that were directly registered with Transfer Agent. An analysis of the
Transfer Agent dataset identified additional shareholders that held an interest in either
Parent, Target, or both corporations (each additional shareholder identified in the
Transfer Agent dataset, a “New Identified Shareholder”). Based on the analysis,
Parent determined that e percent of the Parent shares owned by the New Identified
Shareholders after the Acquisition were owned by a New Identified Shareholder that
held an interest in both corporations immediately prior to the Acquisition.

Fourth, Parent verified whether Subscription Service A appropriately monitored changes
in Parent and Target share ownership with respect to each individual that was an officer
or director of either Parent or Target. Specifically, Parent reviewed share ownership
information provided by each Parent officer and director to Parent’s legal department
(i.e., following Date A, Parent directly inquired with each of its officers and directors on
such officer’s or director’s Parent and Target share ownership) and Target regulatory
filings required by Country A takeover rules (i.e., following Date A and leading up to
Date B, Target was required to report when a Target director or the Target secretary
purchased or sold Parent stock pursuant to Country A takeover rules). Following its
review, Parent determined that the Subscription Service A dataset included (and
correctly identified changes in position of) the shares of the corporation for which an
individual was an officer or director. However, the Subscription Service A dataset did
PLR-109913-20                                5

not include the shares of the corporation for which such individual was not an officer or
director. To fill this gap in the dataset, Parent identified additional shares from the
Undisclosed Shares as shares of Parent or Target, as applicable, that were held by an
individual who was an officer or director of the other corporation (such officers and
directors of Parent or Target, as applicable, that held shares in the other corporation
added together with the Original Identified Shareholders and the New Identified
Shareholders, the “Identified Shareholders”).

However, after exhausting all reasonable methods to identify the remaining Undisclosed
Shares, the total shares issued and outstanding reported in public filings of each of
Parent and Target remained in excess of the Identified Shares. Accordingly,
approximately f percent and g percent of issued and outstanding shares of Parent and
Target, respectively, remained Undisclosed Shares.

Overlap Calculation

Parent used this data to estimate the shareholder overlap percentage (i.e., the post-
closing percentage of Acquiring shares owned indirectly by shareholders who held
Target stock immediately before the Acquisition) as shown below.

First, in order to account for the Parent shares issued to Target shareholders in the
Acquisition, the consolidated data was used to calculate the post-closing ownership of
Parent by the Target shareholders based on the exchange ratio of c shares of Parent
stock received for each share of Target exchanged in the Acquisition. The calculated
ownership represented the percentage of post-closing Parent shares that the Target
shareholders would have owned if none of the Target shareholders had also been a
shareholder of Parent (i.e., if there had been no overlap among the shareholder bases
of the two corporations).

Second, Parent grouped the Identified Shareholders into three categories based on
their pre-closing share ownership: those which owned solely Parent shares, those which
owned solely Target shares, and those which owned shares of both corporations (such
Identified Shareholders that owned shares of both corporations, the “Overlapping
Shareholders”). Parent then calculated the post-closing ownership percentages of the
Overlapping Shareholders in order to account for the number of Parent shares that were
issued in the Acquisition. The calculated ownership represented the percentage of post-
closing Parent shares owned by Overlapping Shareholders by reason of their pre-
Acquisition ownership in Parent and the Parent shares that were issued in the
Acquisition.

Third, Parent extrapolated the e percent overlap in the Parent shares held by the New
Identified Shareholders to the remaining Undisclosed Shares to determine an estimated
overlap for the remaining Undisclosed Shares.

Taking into account the due diligence described above to identify the Identified
Shareholders and the inability to identify the shareholders of the remaining Undisclosed
PLR-109913-20                                  6

Shares, Parent calculated that the shareholder overlap percentage with respect to the
Acquisition was h percent (i.e., an amount less than 50 percent).

                                     Representations

Parent makes the following representations with respect to the Acquisition:

    (1)   Parent has performed all means available by which to identify the
          holders of the Parent Undisclosed Shares and Target Undisclosed
          Shares immediately before the Acquisition (or at the closest point in
          time preceding the closing of the Acquisition for which the relevant
          information is available) that would not be unreasonable, impractical,
          or unduly burdensome to perform.

    (2)   Parent has no actual knowledge that would give it reason to believe
          that there is sufficient overlap in ownership among the holders of the
          Parent Undisclosed Shares and Target Undisclosed Shares that would
          result in an acquisition of control, as defined in section 304(c), of
          Acquiring by virtue of their ownership of Parent stock.

                                          Rulings

Based solely on the information submitted and representations made, we rule as
follows:

   (1)    Section 304 does not apply to any of the exchanges of Target stock for cash
          and Parent stock pursuant to the Acquisition.

                                          Caveats

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Acquisition under any provision of the Code and regulations or the
tax treatment of any condition existing at the time of, or effects resulting from, the
Acquisition that is not specifically covered by the above rulings.

                                  Procedural Statements

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the power of attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
PLR-109913-20                                 7

A copy of this letter must be attached to the federal income tax return to which it is
relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date on and
control number (PLR-109913-20) of this letter ruling.



                                       Sincerely,



                                       ____________________
                                       Douglas C. Bates
                                       Chief, Branch 4
                                       Office of Associate Chief Counsel (Corporate)



cc: