Vodafone AirTouch: A global merger

Practical Law UK Articles 7-101-0373 (Approx. 19 pages)

Vodafone AirTouch: A global merger

by David Cheyne and Clodagh Hayes, Linklaters & Alliance

Structure

Vodafone (renamed Vodafone AirTouch) is the parent company of

the new group. AirTouch shareholders were offered ordinary shares

in the UK parent in the form of Vodafone AirTouch American

Depositary Receipts (ADRs) plus $9 in cash for each of their

shares. As a consequence, Vodafone shareholders owned just over

50%, and AirTouch shareholders just under 50%, of the enlarged

equity share capital of Vodafone AirTouch immediately following

the merger. As indicated below, it was important for US tax

purposes that former AirTouch shareholders (which were US

persons) did not hold more than 50% of the merged company

immediately following the merger.

US tax

In the US, target shareholders incur a taxable gain when

accepting an offer for their shares unless certain exceptions

apply (see inset box "US tax and mergers"). These

exceptions generally relate to certain types of reorganisation

(as defined in section 368, US Internal Revenue Code

1986) and require:

The target shareholders to retain equity participation in the
acquiring or surviving company.
There to be a continuity in the business interest of the
target company.

In some cases one company must also control the other (defined

as a 80% ownership (section 368(c), US Internal Revenue Code

1986)). A number of techniques have been established that

take advantage of these exceptions (see inset box "US tax and

mergers").

The Vodafone AirTouch merger used one of these techniques,

known as a reverse triangular merger. The steps involved in this

were as follows:

Vodafone established a wholly owned US subsidiary (Merger
Sub).
Merger Sub merged with AirTouch under the provisions of
Delaware law.
Merger Sub ceased to exist on the merger becoming effective;
AirTouch remained as the surviving corporation.
The existing shares of common stock in AirTouch were
cancelled and converted into the right to receive ordinary shares
in Vodafone plus $9 in cash.
AirTouch (as the surviving corporation) issued an equivalent
number of shares to Vodafone as were cancelled.
Vodafone (now Vodafone AirTouch) issued Vodafone AirTouch
shares (through the ADR facility) to the holders of the cancelled
AirTouch shares.

(See inset box "Structure of the merger")

This effectively allowed the US shareholder to defer taxable

gains arising on the share element of the offer until they sell

the offer shares (sections 354, 356, 368(a)(1)(A) and

368(a)(2)(E), US Internal Revenue Code 1986). They still had

to pay any taxable gains to the extent that they received

cash.

Whilst the reverse triangular structure is relatively common

in the US, there were additional complications that had to be

addressed in this case: the enfranchisement of non-voting

AirTouch preferred stock, the foreign corporation rules and UK

legal and tax issues.

AirTouch's preferred stock. Prior to the

merger becoming effective, AirTouch undertook an internal

reorganisation which amended its certificate of incorporation to

satisfy requirements to permit the merger to be tax free to US

holders of AirTouch shares, except with respect to cash received

in the merger. The effect of the internal reorganisation was to

give voting rights to certain classes of preferred shares and to

increase the dividends payable on certain other classes.

Foreign corporations. As a general rule, if

there is a foreign buyer the transaction cannot benefit from the

reorganisation exemptions the transaction remains a

taxable exchange (section 367a, US Internal Revenue Code

1986). These provisions are designed to prevent US assets

being moved outside of the US tax jurisdiction. However,

cross-border transactions which would otherwise qualify can

benefit from the exemptions (section 367(a)(2), US Inland

Revenue Code and Treasury Regulations issued in 1996 and

clarified in 1998) if certain further conditions are

satisfied. These include the target satisfying certain

information reporting requirements, and the merger not resulting

in more than 50% of the shares in the new foreign parent being

held by former target shareholders who are US persons. All of the

target's shareholders are presumed to be US persons unless they

swear an affidavit to the contrary. In addition, target

shareholders that own 5% or more of the stock will only qualify

for non-recognition if they enter into a gain recognition

agreement (by which the shareholder effectively agrees to pay tax

on any gain if it sells the buyer's shares before the end of the

fifth tax year of the transfer).

In particular, the "active trade or business test" must be

satisfied so that, amongst other things, the fair market value of

the bidder must be at least equal to the fair market value of the

target at the time of the merger (that is, completion). In this

case, a private letter ruling from the Internal Revenue was

obtained confirming that Vodafone would be "substantially in

compliance" with the active business test at completion. The

merger agreement provided for the consideration to be adjusted if

either the private letter ruling was not obtained and/or the 50%

test was not satisfied. Such adjustments included the cash part

of the price being increased and the share part reduced so that

the merger would fall within the published regulations (see

"Merger agreement" below).

UK legal and tax issues. The reverse

triangular structure potentially raised a number of UK legal and

tax issues:

Merger relief. If shares are issued at a
premium a sum equal to the premium must be transferred to share
premium account (section 130, Companies Act 1985).
However, there is an exemption for mergers (section 131)
where the company issuing shares (in this case Vodafone) has
acquired 90% of each class of equity shares in the other company
(AirTouch) in pursuance of an arrangement where the consideration
for the issue of the shares by Vodafone is the issue or transfer
by AirTouch of equity shares or the cancellation of such
shares.

In this case merger relief was not available because AirTouch

had an outstanding class of convertible preference shares which

were not being acquired by Vodafone. These shares are considered

to be equity shares for the purposes of the Companies Act so

Vodafone could not acquire 90% of each class of equity share

capital.

Valuations of non-cash consideration. Where
non-cash consideration is paid for the issue of shares, the
company's auditors must prepare a valuation report unless an
exemption applies (section 103, Companies Act 1985). A
report is not required where there is an arrangement for an
allotment of shares by the company on terms that the whole or
part of the consideration for the shares allotted is to be
provided by the transfer to the company (or the cancellation) of
all or some of the shares in another company (section
103(3)). This was satisfied, as part of the consideration
for the allotment of Vodafone shares was the cancellation by the
AirTouch shareholders of the AirTouch shares.
Treasury consent. It is unlawful for a UK
company to cause or permit a non-UK resident company which it
controls to create or issue shares or transfer or cause or permit
the transfer of shares or debentures in a non-UK resident company
without the consent of the Treasury (section 765, Income and
corporation Taxes Act 1998). This provision is designed to
stop assets being removed from the UK tax jurisdiction to avoid
tax but can catch other transactions such as this one, so
obtaining Treasury consent to the merger was made a condition of
the transaction (see "UK/US mergers", PLC, 1998, IX(2), 17
for a more detailed discussion).

Other tax structures

As mentioned there are other tax-efficient structures (see

inset box "US tax and mergers"). However, the reverse

triangular structure was preferable because:

A simple statutory merger was not possible cross border.
The forward triangular merger would have been possible but
would have involved AirTouch dissolving and its assets being
transferred to Merger Sub. This is less satisfactory from a legal
point of view. Given that the cash element was relatively small
(less than 20% of the total consideration), the parties did not
need to use the forward triangular merger structure.
The share for share exemption with no cash element was not
possible because, amongst other things, former AirTouch
shareholders which were US persons had to hold less than 50% of
the shares following the merger to satisfy the foreign company
tax issues discussed above.

Appraisal rights

Under Delaware law shareholders involved in certain mergers

have the right to apply to the court to have the offer price

reviewed and to be paid the fair value of their shares

(section 262, Delaware General Corporation Law). This

can delay the offer and, in complicated offers like this one,

affect the percentages upon which the tax and accounting

treatment depends. In this offer, AirTouch shareholders had

appraisal rights.

ADRs

In UK/US mergers the acquiring UK company typically issues

equity consideration in the form of ADRs. For US investors, ADRs

have the advantages of being transferable without a charge to UK

stamp duty or stamp duty reserve tax (SDRT) and of being in large

denominations similar to US equity securities (for example, one

Vodafone AirTouch ADR represents 10 Vodafone AirTouch ordinary

shares). (For further information on ADRs and GDRs see also

"Buying into the American dream", EC, 1997, II(7), 43

and "GDRs: Reaching international investors", PLC, 1995, VI(2), 31.)

Using ADRs raised two issues:

SDRT. The consequence of issuing new shares

to an ADR depository is a 1.5% charge to SDRT payable by the

issuer (section 93, Finance Act 1986) unless the offer

can be structured in such a way as to fall within certain

exceptions. The Vodafone AirTouch merger was structured in such a

way as to avoid SDRT (see inset box "ADRs and SDRT").

Amongst other things this structure required Vodafone AirTouch's

shares to be redenominated in dollars.

Enfranchisement of ADR holders. The

consequence of ADRs is that the ADR holder cannot vote directly

the ADR holder has to act through the depositary or the

depositary's proxy. Prior to the merger, the rights of proxies to

speak and vote at general meetings were restricted (as is usually

the case with UK public companies) to demanding and voting only

on a poll, which would have affected the ADR holders.

As a result of the merger, Vodafone altered the voting and

other rights of proxies in general and more particularly, as they

relate to ADR holders. The Articles of Association of Vodafone

AirTouch were amended to provide as follows:

Proxies would have the right to attend, vote and speak at
general meetings of the company. The depositary could therefore
appoint the ADR holder as its proxy so that the holder could
attend the meeting.
Proxies appointed by approved depositaries would have the
right to appoint others as their proxies (whether the depository
or third parties), in effect putting ADR holders in the same
place on the appointment of proxies as ordinary
shareholders.
Special and extraordinary resolutions would only be approved
on a poll. This was required as multiple proxies are not regarded
as separate members. Thus proxies voting on a show of hands would
not be effective for the purpose of section 378(1) of the
Companies Act 1985 which provides that three quarters of members
have to approve an extraordinary resolution. Section 378(2)
provides that the same restrictions also apply to special
resolutions. If multiple proxies were allowed to vote on a show
of hands, it would not be possible to determine whether three
quarters of members had approved the resolution.

Redenomination

It was agreed to redenominate Vodafone AirTouch's ordinary

share capital into US dollars. This was proposed because a

significant proportion of Vodafone AirTouch ordinary shareholders

will be resident in the US, a substantial part of the company's

assets will be US dollar assets and a significant proportion of

its revenues will be in US dollars. In addition, as a consequence

of this redenomination, the merger could be structured in a

manner likely to eliminate the potential SDRT charge on the issue

of shares to AirTouch shareholders, resulting in a saving of over

£450 million.

The steps involved in the redenomination were as follows:

A reduction of capital (section 135, Companies Act
1985) whereupon all the issued ordinary shares of 5p each in
Vodafone were cancelled. This reduction required approval by the
shareholders and the High Court.
The sum arising as a result of the cancellation was credited
to a special reserve and converted into US dollars at a
prescribed exchange rate.
The reserve was then applied in paying up newly created
dollar shares of US$0.10.
To the extent the reserve was insufficient to pay up the
dollar shares, the share premium account was to be capitalised to
pay up the necessary amount.

There is a potential issue for UK companies redenominating

their share capital into a currency other than sterling. UK

public limited companies must have a minimum share capital of at

least £50,000 (section 117, Companies Act 1985).

Vodafone therefore needed to create a new class of shares with an

aggregate nominal value of £50,000 to fulfil this

requirement. These shares were issued to one of the company's

bankers.

(See also "Foreign currency share capital", PLC, 1993, IV(10), 23)

Merger agreement and deal protection

The merger was initiated by a merger agreement between the two

companies which was subject to US law (a copy of the agreement

appears in Appendix A of the AirTouch proxy statement).

The merger agreement set out the main terms of the merger and

the detailed procedures to be followed in implementing the

reverse triangular merger and the internal reorganisations. It

also contained representations and warranties given by each party

to the other and provisions designed to protect the deal by

imposing break fees if the agreement was terminated.

Although such agreements are a feature of US transactions,

they are uncommon in UK public bids, where neither party would

typically receive any representations and warranties nor have

termination rights or break fees.

Termination rights. This agreement provided

that either company could terminate the merger agreement in

certain circumstances including if:

The merger had not been completed by 1st March, 2000.
A government order had permanently prevented the merger.
The approval of the shareholders of either company was not
received.
The other party entered into negotiations with another person
in relation to an acquisition offer by that person or that
party's board recommended such a proposal.
The board or the other party withdrew or adversely modified
its recommendation of the merger.
There was a material breach of covenant or warranty by the
other party.

Termination payments. In addition to the

right to terminate the transaction, Vodafone and AirTouch agreed

that termination payments would be payable by the parties in

certain circumstances. The purpose of this was to secure the

transaction and discourage either party from entering into

negotiations with a third party.

In essence, AirTouch agreed to make a payment to Vodafone of

up to US$1 billion if the merger agreement was terminated in the

following circumstances:

AirTouch failed to obtain shareholder approval of the merger
at a time when a third party had made an alternative
proposal.
The directors of AirTouch withdrew or adversely amended their
approval of the merger or failed to confirm such recommendation
when so requested.
AirTouch recommended to its shareholders an alternative
proposal by a third party.

In the event of a termination based on the failure to obtain

shareholder approval in other circumstances, the termination

payment would have been limited to US$225 million, with an

additional US$775 million payable to Vodafone only if AirTouch

entered into an agreement for an alternative transaction within

one year of the termination.

Similarly, Vodafone agreed to make a payment to AirTouch of up

to US$225 million if the transaction had been terminated for

identical reasons relating to Vodafone and in the same

circumstances. However, Vodafone would also have had to make this

payment if its shareholders had failed to approve the merger at

its EGM.

Termination fees are fairly common in mergers between US

corporations but are less usual in transactions relating to UK

companies. They raise a number of issues under English company

law, including whether the directors are acting in breach of

their fiduciary duties or fettering their powers by agreeing to

the payment, and whether the agreement to pay such fees

constitutes financial assistance. (For detailed article see

"Break fees: keeping the parties at the table" PLC, 1998, IX(11), 9). In addition, the Takeover Panel has recently issued

a statement (1999/10) requiring such fees to be de

minimis (normally less than 1% of the offer value) in bids

subject to the Takeover Code (see Bulletin, Mergers and

Acquisitions, this issue, page 82).

Care must also be taken to ensure the size of the break fee

does not result in the agreement to pay it constituting a Class I

transaction, thereby requiring shareholder consent to entering

into the agreement.

Other key features

Management. The parties agreed that the new

Vodafone AirTouch would have a board of 14 directors, seven from

Vodafone and seven from AirTouch. There were to be six executive

directors, four from Vodafone and two from AirTouch, with the

chief executive being Chris Gent. In addition, a number of key

officers were agreed at the time of announcement of the

transaction.

Accounting for the merger. Vodafone will

account for the merger using the acquisition method of accounting

under UK accounting rules. This will result in a goodwill

amortisation charge of approximately £2 billion per annum

for a number of years after the merger, thereby reducing the

reported consolidated profit of Vodafone AirTouch.

Vodafone has to account for the merger in this way because it

did not satisfy the merger accounting requirements under UK

rules. In particular, the fact that AirTouch shareholders would

receive some cash meant that Vodafone could not comply with the

requirement that the fair value of any consideration other than

equity shares given pursuant to the arrangement by the parent

company and its subsidiary undertakings should not exceed 10% of

the nominal value of the equity shares issued (paragraph

10(1)(c), Schedule 4A, Companies Act, 1985). Vodafone's

existing ordinary shares had a nominal value of only 5p and the

cash amount payable to AirTouch shareholders greatly exceeded 10%

of the nominal value of all the ordinary shares issued to Air

Touch shareholders. (For further information see "Accounting

for acquisitions", PLC, 1999, X(2), 7.)

Dividends. It was agreed that Vodafone

AirTouch would continue to announce dividends on Vodafone

AirTouch ordinary shares in sterling. Vodafone AirTouch ordinary

shareholders will continue to be paid their dividends in sterling

whereas Vodafone AirTouch ADS holders will receive their

dividends in dollars. Vodafone has historically paid an interim

and final dividend while AirTouch had never paid a dividend.

Financing. In order to finance the cash

portion of the consideration, Vodafone entered into a $10.5

billion term and revolving credit facility.

Implementing the merger

Shareholder approvals. The merger was a class

1 transaction for Vodafone under London Stock Exchange (LSE)

Listing Rules and consequently required shareholder approval by

an ordinary resolution. In addition, special resolutions were

required to approve the redenomination, the change of name of

Vodafone to Vodafone AirTouch and to amend the Articles of

Association. A class 1 circular and listing particulars were

prepared and sent to all Vodafone shareholders.

The merger also required approval by AirTouch shareholders by

a simple majority. A proxy statement (under section 14A,

Securities and Exchange Act 1934) was sent to all AirTouch

shareholders. The proxy statement is a detailed statement of the

terms of the merger (much like a prospectus) with a proxy card

asking the shareholder to vote to approve the merger. This proxy

statement was included in the Form F-4 Registration Statement.

This document was confidentially pre-filed with the SEC. The SEC

has recently implemented a plain English campaign and now

requires such registration statements to be written in plain

English.

Summary listing particulars for Vodafone AirTouch were also

included in the Form F-4 and sent to AirTouch shareholders as

required by the LSE Listing Rules (Rule 8.15). Separate

meetings of some of the preferred stockholders also had to be

held to approve the internal reorganisation, requiring their own

proxy statement.

Timetable. As mentioned above, the merger was

completed over five months after signing. The sequence of events

to be satisfied prior to closing was particularly complicated. As

well as ensuring that documents to shareholders were distributed

at the same time after regulatory approval processes of differing

lengths with the Securities and Exchange Commission (SEC) and

LSE, shareholder meetings had to be arranged, dates booked with

the High Court for the reduction of capital and antitrust

approvals sought.

Consents. A number of consents were required

and were made conditions to the merger proceeding, including:

Antitrust. The approval of the Federal
Communications Commission of the US (FCC) under the
Communications Act and the European Commission under the EC
Merger Regulation were required before the merger went ahead. The
Commission approved the merger after a Phase 1 Investigation.
Undertakings were given to divest certain operations in Germany,
the only country where Vodafone's and AirTouch's operations
overlapped. The FCC process took longer, with the merger
receiving approval on 22nd June, 1999.
Shareholders approvals. The approvals
mentioned above being successfully obtained.
Treasury consent. Treasury approval was
required as part of the reverse triangular merger (see
above).
Listing. Listing of the new Vodafone
AirTouch ordinary shares on the LSE and the effectiveness of
filings with the SEC.
US State approvals. Various US state
regulations approvals or notifications were required from state
public commissions.
US tax opinions. Opinions having been
received that the merger satisfied the conditions required to
obtain tax-free status.

David Cheyne and Clodagh Hayes, Linklaters &

Alliance.

Vodafone's in house legal team on the transaction, led by

Stephen Scott, Company Secretary, included Nick Godwin, Legal

Director - Europe and Helen Drake, Senior Solicitor. Vodafone

were advised as to English and German law by Linklaters &

Alliance, with David Cheyne, Sarah Wiggins and Clodagh Hayes in

corporate, Conor Hurley in Tax, Clare Moulder in banking, Robyn

Durie in telecoms, Tony Morris and Sonya McNulty in competition,

Graham Rowlands-Hempel in share schemes and Uli Wolff from

Oppenhoff & Rädler. Vodafone were advised as to US law

by Sullivan & Cromwell, with Ben Stapleton, George Sampas and

Kathryn Campbell in corporate and Willard Taylor and Ron Creamer

in Tax.

AirTouch's in house legal team on the transaction, led by

Margaret Gill, Senior Vice President, Legal and External Affairs

and Secretary, included Sharon Le Duy, Senior Counsel and Megan

Pierson. AirTouch were advised as to US law by Fried Frank,

Harris Shriver & Jacobson, with Charles Nathan and Steve

Steinman in corporate and Alan Kaden in tax. AirTouch were

advised as to English law by Freshfields, with Will Lawes, Jamie

Barr and Hugh Corroon in corporate.

US tax and mergers

In the US, a sale of shares in or assets of a company is

generally a chargeable transfer that will result in a tax charge

on any capital gain realised. But if the acquisition is

structured as a tax-free reorganisation then:

Target shareholders do not recognise a gain or loss on
receiving shares in the buyer in exchange for their shares
(section 354 and section 355, US Internal Revenue Code
1986) but generally have the same tax base in the new shares
as in their surrendered shares. This effectively defers tax on
the share portion of the offer until they sell the buyer's
shares. The target shareholder will be taxed (either as a capital
gain or as dividend income in some cases)on any gain on the
shares to the extent that it receives cash or other property
under the offer.
The corporations involved will generally not recognise a gain
or loss on any assets or shares transferred under the arrangement
(sections 361 and 362, US Internal Revenue Code 1986).
The buyer will generally take any assets or stock at the target's
historic base cost.

The tax-free reorganisations (defined in sections 368, 361

and section 362, US Internal Revenue Code 1986) generally

require there to be a continuity of interest between the old and

new companies:

The target shareholders must retain equity stock in the
acquiring or surviving company usually representing 40-50%
of the price (US Treasury Regulations: Regs. Sec. 1.368-1(b);
Prop. Reg. Sec. 1.3688-2(e)(1996)).
The business of the company must continue or its assets
continue to be used (US Treasury Regulations: Regs. Sec.
1.368-1(d)(1996)).

In some cases one company must also control the other (defined

as a 80% ownership (section 368(c), US Internal Revenue Code

1986).

The most typical forms of reorganisation used to gain this

beneficial tax treatment are as follows:

Share for share exchanges

(Reorganisation under section 368(a)(1)(B), US Internal

Revenue Code 1986)

Target shareholders exchange their shares for voting shares in

the buyer (or the buyer's 80% parent). No cash or non-voting

shares may be offered. This requirement is strict and the

exchange can lose the exemption if there are pre-arranged

dividends occurring at the time of the merger, if there are

previous cash acquisitions or if fractional entitlements are not

handled properly.

But it can be used by foreign buyers, or where the buyer holds

over 20% of the target already so would not qualify for the

reverse triangular structure. Buyers with over 80% of the company

can also use it to make creeping acquisitions (there is no

requirement to surrender control as with the reverse triangular

merger).

Statutory merger

(Reorganisation under section 368(a)(1)(A), US Internal

Revenue Code 1986)

The target merges into the buyer using the procedures in

applicable state law (in Delaware this would be section 251,

Delaware General Corporation Law). Thus foreign mergers do

not qualify. Buyer stock must be a significant proportion of the

offer price (generally 40-50% of the offer to satisfy the

continuity of interest requirement) but it can be non-voting or

preferred stock so long as it is not redeemable.

The merger is effectively treated like an asset sale from the

target the advantage is that the transfer of assets takes

place in bulk under statute rather than requiring individual

transfers. The target's tax group ceases, which may create some

difficulties.

Forward triangular merger

(Reorganisation under section 368(a)(1)(A) and section

368(a)(2)(D), US Internal Revenue Code 1986)

The target is merged into a new US subsidiary using the

statutory merger procedures and ceases to exist following the

merger. Shares in the target are cancelled, with shareholders

receiving a right to shares in the buyer in return. In exchange

for issuing these shares, the buyer is issued more shares in the

new target.

The merger must qualify for tax-free status as a

straightforward statutory merger, and the same considerations

apply as to such a merger. The buyer also has to:

Own 80% or more of the new subsidiary and shareholders cannot
get shares in that subsidiary, which means that preference shares
will have to be redeemed or reissued by the buyer.
Acquire substantially all of the assets of the business,
which can cause problems if a disposal is planned immediately
following the acquisition.
There can also be technical difficulties where the buyer owns
shares in the target before the reorganisation.

The advantage with this type of reorganisation is that 50-60%

of the consideration can be in cash, as in the case with the

statutory merger, but a parent's shares can be offered as

consideration, which includes a foreign buyer if it satisfies the

foreign company requirements (see below).

Reverse triangular merger

(Reorganisation under section 368(a)(1)(A) and section

238(a)(2)(E), US Internal Revenue Code 1986)

Here the new subsidiary is dissolved as part of the merger

this means that the target continues to exist.

Once again, the statutory merger requirements have to be

satisfied and the target has to retain substantially all of its

assets. But each class of target shareholders also has to give up

control (80%) in exchange only for the buyer's voting shares.

Thus:

The buyer has to acquire 80% or more of the company if it
offers only shares.
A maximum of 20% of the consideration can be in cash or
generally in anything other than voting shares.
Non-voting preferred shares have to be redeemed or exchanged
for voting shares.

The advantage with this structure is that the target continues

to exist. By using a US subsidiary a foreign party can also take

advantage of these type of reorganisation if it meets the foreign

company requirements.

Other

Other techniques are available to achieve tax-free

mergers:

A new holding company for both buyer and target can be
created (using the reorganisation provisions in section 351,
US Internal Revenue Code 1986).
Dual listed company structures can be used by foreign buyers
in cross-border businesses by retaining the former parent company
in each jurisdiction but effectively merging them together at
subsidiary level (see "US/UK mergers: Structures and tax", PLC, 1998, IX(2), 17, and "When two heads are better than one", EC, 1999, IV(5), 25).

There is an asset for voting shares tax-free reorganisation,

either by the buyer acquiring the assets directly or in a

triangular structure by using a subsidiary (section

368(a)(1)(C), US Internal Revenue Code 1986).

Unlike the usual statutory merger reorganisation, a foreign

company can acquire the assets in exchange for its shares. But

the cash element is limited (usually less than 20% because

liabilities are regarded as other property) and there needs to be

an asset purchase which is more difficult practically.

Various elections are possible where there are private

acquisitions which affect the tax position of the parties

(see "Cross border acquisitions: structuring the deal to

reduce your US tax bill", EC, 1998, III(10), 35).

Foreign companies

As pointed out in the main article (see "US tax"),

the general rule is that a transaction involving a foreign

corporation cannot benefit from the tax-free reorganisation

provisions (section 367a, US Internal Revenue Code

1986). But a transaction involving a foreign corporation,

which would otherwise qualify as a reorganisation can still do so

in certain circumstances, as outlined in the article (US

Treasury Regulations: Regs. Sec. 1.367-a(2) (1996 and confirmed

in 1998)).

This effectively adds an extra set of conditions that need to

be satisfied where there is a non-US buyer

ADRs and SDRT

The share consideration payable to AirTouch shareholders was

agreed to be paid in ADRs. The placing of underlying shares in an

ADR depository was structured so as to fall outside the charge to

stamp duty reserve tax (SDRT).

The SDRT charge

SDRT was introduced to ensure that transfers of securities are

liable to duty even where there is no instrument of transfer that

would attract a stamp duty charge. SDRT at the rate of 0.5% is

payable in relation to agreements to transfer chargeable

securities where there is no instrument of transfer which is

stampable. Special rules apply where securities are transferred

into or issued to a depository receipt scheme. In these

circumstances SDRT is charged at 1.5% (section 93, Finance

Act 1986).

The exceptions

Until January 1999, the issue or transfer of certain bearer

instruments (including bearer shares issued by a UK company) into

a depository scheme did not bear duty unless the instrument was a

short term renouncable letter of allotment. Instead, the issue of

a bearer instrument was liable to a separate duty of 1.5%.

But the bearer instrument duty does not apply where such

shares are denominated in a non-UK currency (section 30,

Finance Act 1967). Thus a company transferring shares to a

depository could avoid both the SDRT and bearer instrument charge

by redenominating its share capital into a foreign currency and

by issuing the consideration shares to the ADR depository in

bearer form (see also "Foreign currency share capital", PLC, 1993, IV(10), 23).

In January 1999, the Inland Revenue announced that this

exemption was no longer to be available in connection with a

takeover or a merger except where the issue of the bearer shares

gave effect to an agreement for a company merger or takeover

entered into in writing before 30th January, 1999 (PLC, 1999, X(2), 12 and PLC, 1999, X(2), 85). As Vodafone entered into its merger agreement on

15th January, it was still able to take advantage of this

provision by redenominating its shares into dollars and issuing

them to the depositary in bearer form.

Further diagrams

The following diagrams are available in the PDF version of this article:

Structure of the merger

Web site links

AirTouch proxy statement

Securities and Exchange Commission

Link to site (
www.sec.gov
)
Link to document

FreeEdgar database

Link to site -
www.freeedgar.com
Link to document

Internal Revenue Code

Office of the Law Revision counsel (US House of Representatives

Site)

Link to site -
http://uscode.house.gov
Link to document
(In a raw text format
which is difficult to use)

Legal Information Institute of the University of Cornell

Link to site
http://www.law.cornell.edu/
Link to Code

Treasury regulations

Inland Revenue Service

Link to site -
http://www.irs.ustreas.gov/
Link to Treasury Regulations download service
(You need to use an ftp link to download these
Regulations.)

Vodafone AirTouch: A global merger | Practical Law