Invesco Ltd., a Bermuda corporation, entered into a definitive agreement to acquire Morgan Stanley’s retail investment business, Van Kampen Investments, on October 19. The consideration for the acquisition consists of some $500 million in cash and an amount of Invesco common stock that can equal not more than 4.9% of Invesco’s total common stock.
Any difference between the amount of stock that New York–based Morgan Stanley can receive in accordance with the “common-stock cap” and the amount of stock to which it would otherwise be entitled will be represented by shares of Invesco’s newly created, nonvoting convertible preferred stock. This latter stock will automatically convert to common stock once it is transferred by Morgan Stanley to a person who is not an affiliate of the New York investment house.
In a nutshell, Invesco agreed to purchase from Morgan Stanley — and Morgan Stanley agreed to sell to Invesco — the “purchased assets.” In addition, Invesco agreed to take on the “assumed liabilities.” As a result, the merger may be structured as follows: Invesco will pay the “asset consideration” of $500 million in cash. The Morgan Stanley subsidiary, Van Kampen Investments, will be merged with and into a newly created Delaware subsidiary of Invesco (AlphaSub, we’ll call it for illustrative purposes). The merger consideration will consist solely of Invesco’s stock, as described above, and the asset consideration will consist solely of cash, according to the agreement.
It is intended that the merger qualify as a “tax-free reorganization,” meaning that the transaction will result in an “A” reorganization under the tax code by reason of Section 368(a)(2)(D). The transaction qualifies for tax-free status because it meets several key criteria, including:
• Van Kampen will be merged with and into AlphaSub;
• AlphaSub is a corporation controlled by Invesco (AlphaSub will be a first-tier subsidiary of Invesco);
• AlphaSub will be acquiring “substantially all” of the assets of Van Kampen;
• No stock of AlphaSub will be used in the transaction; and
• The transaction exhibits continuity of interest (the sole consideration to be conveyed in the merger to Morgan Stanley is Invesco stock, with the result that a substantial part of the value of the proprietary interests in Van Kampen will be preserved).
The transaction exhibits continuity of business enterprise (AlphaSub will be continuing Van Kampen’s historic business). As a result, the transaction “would have qualified” as an “A” reorganization even if the merger had been effected directly into the controlling corporation.
“Because Invesco is a foreign corporation, additional requirements must be complied with to maintain the transaction’s tax-free status.” — Robert Willens
However, because Invesco is a foreign corporation, additional requirements must be complied with to maintain the transaction’s tax-free status. Indeed, Morgan Stanley’s exchange of Van Kampen stock for Invesco stock would constitute a taxable exchange unless an exception applies. That’s because a taxable transaction is triggered if a transfer of stock or securities is made by a U.S. person (Morgan Stanley) to a foreign corporation under the tax code; specifically, Section 354 that is subject to Section 367(a)(1).