A merger is the most frequently referred type in M & A.3 Such a merger
2. Contradictory opinions exist, however, in Taiwan, such as Supreme Court Decision, case no.
1974 Tai-Shang Tzu 965 and Supreme Court Decision, case no. 1991 Tai-Shang Tzu 434. For a related analysis, see infra.
3. It is perhaps at this point worth mentioning a line of thought that differs from the U.S. view.
The U.K.’s Companies Act 1985 is unlike its counterpart in the U.S. where the Corporation Acts for each state include a complete set of regulations for merger procedures. On the contrary, in the U.K. the relevant laws are scattered among its Companies Act 1985, §§ 425-427A (Eng.), and its Insolvency Act 1986, §§ 110-111 (Eng.). The key feature of these laws is whether or not they are approved by the courts, and the appraisal rights are also not essential. On this, see PAUL L.DAVIES, GOWER AND DAVIES’ PRINCIPLE OF MODERN COMPANY LAW 793-803 (7th ed.2003).
can either take the form of a newly-established merged entity or else a consolidation (whereby one or more entities absorb another entity or entities). Regardless of which approach is adopted, the natural outcome of the merger is that one or more companies cease to exist. What does result, however, is that the shareholders of the dissolved company become the shareholders of the surviving or newly-established company. Conceptually, for the shareholders of the dissolved company, that does not mean the end of their investments, but rather that there is substantial continuity of their ownership interest in the surviving company.4
On the contrary, “the transfer of all or a substantial part of the business or assets”5 in terms of the original concept refers to selling behavior. The acquired companies (in actual fact it is the companies whose assets have been acquired) are in most cases dissolved following the sale of the whole or a substantial part of the business or assets.6 The result is that the shareholders in the end entirely disinvest from their prior indirect claim on the assets and earnings of the acquired company).7 That is, when the company engages in the transfer of all or a substantial part of its business or assets, the consideration involved is concerned with the amount of cash to be received,8 and not with shares.
Now let us consider the situation where the consideration involves shares. In the case where the acquired company is dissolved and the principal method adopted is to use shares to compensate for the investment, the original shareholders will be in a similar plight to the shareholders of the company that has been dissolved because of the merger, i.e., the shareholders of the acquired company will prolong their former investment but in the
4. ROBERT C. CLARK, CORPORATE LAW 407 (1986).
5. Although the transfer of the business or assets of a company is one type of merger or acquisition method, in the U.K. the vast majority of mergers and acquisitions take place through public takeovers, and very few are the result of the business or assets of the company in question being transferred. There are two principle reasons for this. The first is that such a transfer involves the rights and interests of third parties and creditors. As for the former, when the transfer takes place, legally there is the power to terminate the contract or stipulate different conditions, and the U.K. Companies Act does not proscribe or restrict the exercise of such powers. In relation to the latter, appeals to the court for compensation or to obtain more safeguards for the company can also be anticipated. For this reason, making the arrangements for the transfer of a business or its assets will entail many additional costs and inconveniences. A further reason is that if the company engaging in such activity involves a public company, many information disclosures and expert opinions will be bundled together to conform to the Third and Sixth Council Directive of the European Union concerned with corporate mergers and split-ups, something that companies are also not keen to see. See DAVIES, supra note 3, at 799-800.
6. Assets are interpreted here to include tangible assets and intangible assets. However, intangible assets refer to paperless assets that have independent economic value, as clearly stated in Article 19 of the Regulation on Business Entity Accounting Handling. See Minstry of Economic Affairs (MOEA) Letter No. 09302069760 (2004) (in Chinese).
7. CLARK, supra note 4, at 403.
8. See Arndt Stengel, The New German Business Transformation Act, 6(3) INT’L.COMPANY COM.L.REV. 86, 89 (1995).
form of another investment. This differs from the original concept which is based on trading taking place.
When looked at from the point of view of the acquiror, the consideration provided by the acquiring company in the event of the merger taking place consists primarily of the shares of the acquiring company itself or of another company. Strictly speaking, for this type of approach where shares form the basis of the consideration, the company in reality has not paid any assets.
When looked at the other way round, if the same company wishes to use cash to acquire another company’s business or assets, then that company needs to pay an appropriate price.
From the point of view of the taxation laws, the distinction between a merger and “the transfer of all or a substantial part of the business or assets”
of a company is even more meaningful/significant. When discussed in terms of the economic reality, following the merger, the shareholders of the dissolved company have only changed the content of their investment, but have not terminated their investment. That is, the exchange of the originally-held shares cannot be seen as involving the realization of capital gains, and so the result will be that taxes are deferred.9 On the contrary, since “the transfer of all or a substantial part of the business or assets” by definition involves trading, the seller must first pay tax on the benefits generated by this transfer. Afterwards, following the dissolution of the company, because of the benefits received from the investment the shareholders will probably once again pay personal consolidated income tax, which will certainly not be advantageous for them. If we take the U.S.
federal tax regulations as an example, if the company when it sells its principal assets plans to dissolve the company within the next 12 months, part of the profits obtained from the sale of such assets will be exempt from tax.10
From this we can learn that, if the consideration given in exchange for the transfer of a business or assets is in the form of shares, then the transfer of the acquired company (and its shareholders) in so far as it relates to the tax law should be closer to a merger and should not constitute a sale. This should be the reason for Article 39, Paragraph 1 of the Business Mergers and Acquisitions Law, which states: “If the shares with voting rights acquired by a company as a result of the transfer of its entire or substantial part of business or assets to another company is not less than 80% of the consideration of the entire transaction, and all the shares so acquired have been transferred to the shareholders, then any proceeds generated from the transfer of the business or assets are exempted from profit-seeking enterprise
9. See Internal Revenue Code (I.R.C.) § 368.
10. See id. § 337.
income tax; and any loss incurred is prevented from deduction from the income.” The income from the sale of the company’s business or assets that is directly allotted to the shareholders is an exchange in terms of the content of the shareholders’ investment and a reduction in the company’s capital, and so it is not appropriate to tax this as corporate income tax.
If we extend this argument and draw further inferences, in both the Company Law and the Business Mergers and Acquisitions Law, the consideration involved in “the transfer of all or a substantial part of the business or assets” obviously includes property and shares in addition to cash. As to whether any differences exist between a consideration that consists of cash or property apart from cash and that which exists where shares are used, an attempt will be made to explain this in the paragraphs that follow.