After Indopco: the nature of a takeover.

The Tax Court's December 1992 ruling in Victory Markets, Inc. is its first decision on deductibility of expenses incurred in a takeover since Indopco (which, in March 1992, concluded expenses incurred in a friendly deal had to be capitalized). Victory Markets differs from Indopco because it explores whether a takeover is hostile or friendly.

Hostile or friendly? Victory received an unsolicited offer from a large, privately held Australian conglomerate. Initially, Victory's board rejected the offer and adopted (but did not activate) a "poison pill" rights plan. Later, the offer was increased and the board promptly accepted it.

The court concluded this was not a hostile takeover attempt. The offer, which was submitted subject to the approval of Victory's board, signaled a desire to proceed in a friendly manner and the suitor at no time attempted to circumvent the board by making a tender offer.

The court minimized the significance of the rights plan's adoption. The fact it was never activated suggested it was adopted as a "bargaining enhancement."

Thus, a takeover attempt apparently is not hostile unless the suitor proceeds with a tender offer.

Long-term benefits. Having found a friendly takeover, the court easily recounted an array of longterm benefits necessary to support its finding that the expenses should be capitalized. In Victory's press release announcing the merger, the company said the merger would position it for expansion (in fact, after the merger Victory did undergo considerable expansion).

Moreover, as in Indopco (where the acquirer was Unilever), the court found the very availability of the buyer's resources to be a longterm benefit because it "broadens opportunities."

Finally, the court found a longterm benefit in Victory's transformation from a publicly traded corporation to a wholly owned subsidiary, avoiding expenses relating to shareholder relations.

Observation: This last benefit is clearly available in any takeover and suggests the finding that a takeover is friendly inevitably will lead to a conclusion that takeover expenses cannot be deducted.