Legal Definitions - C reorganization

A C reorganization is a specific type of corporate acquisition recognized under U.S. federal income tax law (Internal Revenue Code Section 368(a)(1)(C)). It allows one corporation to acquire substantially all of the assets of another corporation in a transaction that can be tax-free for the corporations and their shareholders, provided certain strict conditions are met.

Key characteristics of a C reorganization include:

• The acquiring corporation must obtain substantially all of the target corporation's assets. While "substantially all" is not precisely defined by a single percentage, it generally means a very high proportion (e.g., 90% of net assets and 70% of gross assets).
• The consideration given by the acquiring corporation must consist primarily of its own voting stock (or the voting stock of its parent company). A limited amount of cash or other property may be used, but the voting stock requirement is paramount.
• The target corporation must generally liquidate and distribute the stock received from the acquiring corporation to its own shareholders.

This structure is often chosen when a company wants to acquire the operational assets of another business without necessarily taking on its liabilities, or when a stock acquisition (B reorganization) is not feasible due to a large number of shareholders or other complexities.

Here are some examples to illustrate a C reorganization:

• Example 1: Tech Company Acquisition
  Scenario: "InnovateTech Inc.," a large software development company, wants to expand its market share in cloud computing. It decides to acquire "CloudSolutions Corp.," a smaller company known for its innovative cloud infrastructure. InnovateTech Inc. acquires all of CloudSolutions Corp.'s software patents, customer contracts, server farms, and intellectual property. In exchange, InnovateTech Inc. issues a significant amount of its own voting stock to CloudSolutions Corp. CloudSolutions Corp. then liquidates, distributing the InnovateTech Inc. stock to its shareholders.
  Explanation: This is a C reorganization because InnovateTech Inc. acquired "substantially all" of CloudSolutions Corp.'s operational assets (patents, contracts, servers, IP) primarily in exchange for its "voting stock." The subsequent liquidation of CloudSolutions Corp. and distribution of InnovateTech Inc. stock to CloudSolutions' shareholders further aligns with the requirements for this type of tax-free asset acquisition.
• Example 2: Manufacturing Industry Consolidation
  Scenario: "Global Auto Parts Ltd.," a major automotive component manufacturer, seeks to consolidate its position in the engine parts market. It enters into an agreement to acquire "EngineCraft Inc.," a competitor. Global Auto Parts Ltd. acquires all of EngineCraft Inc.'s manufacturing plants, machinery, inventory, raw materials, and existing supply contracts. The consideration for this acquisition is almost entirely newly issued voting shares of Global Auto Parts Ltd. EngineCraft Inc. subsequently dissolves, distributing the Global Auto Parts Ltd. shares to its former owners.
  Explanation: This transaction qualifies as a C reorganization because Global Auto Parts Ltd. acquired "substantially all" of EngineCraft Inc.'s business assets (plants, machinery, inventory, contracts) in exchange for its "voting stock." The asset-focused nature of the acquisition and the use of voting stock as the primary consideration are hallmarks of a C reorganization.
• Example 3: Healthcare System Expansion
  Scenario: "United Health Systems," a large regional hospital network, aims to expand its footprint into a neighboring county. It agrees to acquire "Community Care Hospitals," a smaller, independent hospital system. United Health Systems acquires all of Community Care Hospitals' hospital buildings, medical equipment, patient records, and existing physician employment contracts. In return, United Health Systems issues a substantial block of its voting common stock to Community Care Hospitals, which then distributes these shares to its shareholders before ceasing operations.
  Explanation: This scenario exemplifies a C reorganization as United Health Systems acquired "substantially all" of Community Care Hospitals' operational assets (buildings, equipment, records, contracts) primarily by issuing its "voting stock." The transaction allows for the tax-efficient transfer of the entire operating business from one entity to another through an asset acquisition.