Pharmaceutical giant Bristol-Myers Squibb plans to “split off” its 97.5% interest in Mead-Johnson Nutrition Co., and according to a November 15 press statement, it’s likely that the deal will constitute a stock-for-stock, tax-free transaction for Mead-Johnson shareholders. Indeed, despite the public ownership of Mead-Johnson stock, Bristol-Myers is “in control” (within the meaning of Section 368(c) of the Internal Revenue Code) of Mead-Johnson. That means, once its high-vote stock is converted into low-vote stock, Bristol-Myers will own about 83% of the total combined voting power of Mead-Johnson’s outstanding stock.
As is typical, to encourage Bristol-Myers shareholders to participate in the exchange offer, the company will be offering an incentive. In effect, a shareholder of Bristol-Myers who elects to participate in the exchange will receive (subject to an upper limit) approximately $1.11 in value of Mead-Johnson stock in exchange for each $1.00 in value of Bristol-Myers stock surrendered in the transaction.
Although it seems unlikely, if the exchange offer is not fully subscribed but certain minimum subscription conditions are met, all tendered shares will be accepted for exchange, and Bristol-Myers will then distribute the balance of its Mead-Johnson stock.1
However, for a separation to be tax-free, it is imperative that two conditions are met. First, Bristol-Myers (the distributing corporation) must either distribute all of the stock and securities it owns in the distributed corporation — or at least an amount constituting control of the distributed corporation. And, in the latter case, Bristol-Myers must establish, to the satisfaction of the Internal Revenue Service, that the retention of stock and/or securities in the distributed corporation is not part of a tax-avoidance plan.2
For financial-accounting purposes, Bristol-Myers will recognize a gain with respect to the split-off measured by the excess value between the Bristol-Myers shares retired and the carrying amount of its stake in Mead-Johnson.
Can Mead-Johnson Be Acquired?
The Bristol-Myers press release states that “…The exchange is generally expected to be tax-free to participating shareholders….” But will the transaction be tax-free to Bristol-Myers as well? The press release does not say.
“If [the split-off] is considered part of [a] plan, then the Mead-Johnson stock will not constitute ‘qualified property’…making the distribution of stock to Bristol-Myers taxable.” — Robert Willens
Tax-free treatment, at the Bristol-Myers level, may well depend on whether Mead-Johnson is later acquired and, most importantly, on whether any such acquisition is part of a plan (or series of related transactions) that includes the split-off. If it is considered part of the plan, then the Mead-Johnson stock will not constitute “qualified property” with respect to Bristol-Myers, making the distribution of stock to Bristol-Myers taxable.3
However, as we indicated in a prior report (see “Spin-off Options Abound for Bristol-Myers Squibb“), an acquisition and a prior split-off — or spin-off — will not be seen as parts of a plan if the acquisition was neither agreed to nor substantially negotiated during the two-year period ending on the date of the separation.
Moreover, even if the acquisition was agreed to or negotiated during the prohibited period, the regulations suggest that the acquisition and separation will not be parts of a plan (or series of related transactions) if the following conditions can be demonstrated:
• That the separation was carried out for business reasons other than to facilitate the acquisition; and
• That the separation would have occurred at approximately the same time regardless of whether “the acquisition” (or a similar acquisition) was effected.4
We think that Bristol-Myers would be able to effectively demonstrate that the separation, and any subsequent acquisition of Mead-Johnson, are not parts of a plan. Accordingly, we do not think it wise to rule out an acquisition of Mead-Johnson well within the two-year period following the separation of the company from Bristol-Myers.
Contributing editor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for CFO.com. This extra column was written in response to the recent deal announcement by Bristol-Myers Squibb.
1 Bristol-Myers will exchange the shares with respect to its stock that remains outstanding after the exchange offer is completed.
2 See Section 355(a)(1)(D) of the Internal Revenue Code.
3 See Section 355(e)(1) of the Internal Revenue Code.
4 See generally Regulation Section 1.355-7(b)(2).