Legal Definitions - B reorganization

A B reorganization refers to a specific type of corporate acquisition or merger that qualifies for tax-free treatment under U.S. federal income tax law, specifically Section 368(a)(1)(B) of the Internal Revenue Code. In this kind of transaction, one company (the acquiring corporation) obtains control of another company (the target corporation) by exchanging solely its own voting stock (or the voting stock of its parent company) for the target company's stock. Immediately after the exchange, the acquiring company must be in "control" of the target company, meaning it owns at least 80% of the target's total combined voting power and at least 80% of the total number of shares of all other classes of its stock.

The primary benefit of a B reorganization is that it allows the shareholders of the acquired company to exchange their shares for shares in the acquiring company without immediately owing taxes on any gains they might have realized from the exchange.

• Example 1:

  Innovate Solutions Inc., a large publicly traded software company, wishes to acquire DataFlow Analytics LLC, a smaller, privately held firm specializing in data processing. Instead of paying cash, Innovate Solutions Inc. offers its own voting common stock to all DataFlow Analytics LLC shareholders in exchange for 100% of their DataFlow Analytics shares. After the exchange, Innovate Solutions Inc. owns all of DataFlow Analytics LLC's stock.

  Illustration: This transaction qualifies as a B reorganization because Innovate Solutions Inc. acquired DataFlow Analytics LLC's stock solely by exchanging its own voting stock, and immediately after the transaction, Innovate Solutions Inc. had 100% control of DataFlow Analytics LLC.

• Example 2:

  Apex Manufacturing Group, a major industrial producer, seeks to acquire its competitor, Precision Parts Co., to consolidate market share. Apex Manufacturing Group offers its voting preferred stock to all Precision Parts Co. shareholders in exchange for their shares. Through this exchange, Apex Manufacturing Group acquires 95% of Precision Parts Co.'s outstanding stock.

  Illustration: This is a B reorganization because Apex Manufacturing Group used only its voting stock to acquire Precision Parts Co.'s stock, and it achieved control (95% ownership) immediately after the exchange.

• Example 3:

  Global Ventures Holdings already owns 75% of its subsidiary, Local Logistics Corp., but wants to acquire the remaining 25% held by minority shareholders to gain full ownership. Global Ventures Holdings offers its own voting common stock to these minority shareholders in exchange for their shares in Local Logistics Corp. After this exchange, Global Ventures Holdings owns 100% of Local Logistics Corp.

  Illustration: Even though Global Ventures Holdings already owned a majority, acquiring the remaining shares *solely* for its voting stock, and thereby achieving or maintaining control (100% in this case) immediately after the acquisition of the minority shares, allows this to be treated as a B reorganization for the minority shareholders exchanging their stock.