Angel Corporation purchased 15% of Brady Corporation 4 years ago for $150,000. A
ID: 2584793 • Letter: A
Question
Angel Corporation purchased 15% of Brady Corporation 4 years ago for $150,000. Angel acquires 75% more of Brady Corp.'s stock directly from the Brady's shareholders in an exchange for 25% of the Angel's common stock currently outstanding. There is still 10% of the Brady's stock held by its original shareholders as they are not interested in being common shareholders of Angel Corp. This transaction qualifies as what type of reorganization? Please explain in detail. a. “Type A” reorganization. b. “Type B” reorganization. c. “Type C” reorganization. d. Acquisitive “Type D” reorganization. e. A taxable exchange.
Explanation / Answer
The transaction qualifies as "Type B" reorganization. In a Type B reorganization, the target company's stock may be acquired either from the shareholders or from the corporation. After acquisition,the target company becomes the subsidiary of the acquiring company. Atleast 80% of the target company's outstanding stock is to be bought using acquirer's voting stock. Cash cannot exceed 20% of the total consideration.
In the given case,Angel corporation paid cash of $150000 to purchase 15% of stock of Brady Corporation. It later acquired an additional 75% of the stock of Brady using 25% of its own outstanding stock thus making Brady Angel's subsidiary. Of the total acquisition of 90%, for 15% cash has been paid which amounts to 16.67% of the total acquisition. Thus, it satisfies the consition that not more than 20% is to be acquired using cash. The remaining acquisition has been made using 25% of Angel's own outstanding stock.
Thus, the transaction referred to in the question qualifies as "Type B " reorganization.