Santa Clara Valley Chapter: Mergers and Acquisitions, Software Get the Focus.

Mergers and Acquisitions

The monthly meeting for April highlighted the different aspects of mergers and acquisitions (M&A) for high tech companies. The key areas were compensation issues related to M&A transactions and the use of limited liability companies (LLCs) in corporate transactions. The speakers were Charles Purcell of Preston Gates & Ellis LLP and Mark Silverman of Steptoe & Johnson, LLP.

In the high technology company world, one of the main avenues of compensation in M&A transactions is compensatory stock options. Stock options may be cashed out, vested, or exchanged at the time of the merger or acquisition. If a compensatory option is cashed out the issuing company repurchases it, and the company should be allowed a deduction with respect to the payment to the employee. In the case of vesting, any unvested compensatory options held by the employees under a stock option plan will generally vest at the time of the merger. In this case, the acceleration of vesting raises issues under the "golden parachute" rules of section 280G of the Internal Revenue Code. Employees can also exchange the target company options for options of the acquiring company. Generally, this type of transaction is taxfree, whether the options are qualified or non-qualified.

There are several advantages and disadvantages to using LLCs in merger and acquisition transactions. The advantages include treating the LLC as a division with limited liability for state tax purposes, getting consolidated treatment without complying with the consolidated return regulations, and using "grandparent" stock in triangular reorganizations. The disadvantages include the inability of certain LLCs to be parties of tax-free reorganizations, the inability to conduct IPOs, and the loss in a corporate subsidiary if converted into an LLC.

Software Day III

On May 4, the chapter and Baker & McKenzie hosted the third Software Day (the chapter holds a Software Day every 18 months). The aim of the day was to discuss developments in the unique or critical tax issues facing the software industry. Many attendees were from companies not traditionally thought of to be software companies -- more and more industries are finding that software is now a key component of their business. More than 150 people attended the seminar, some from as far away as Massachusetts and Texas. The chapter was delighted to welcome these tax professionals.

Gary Sprague of Baker & McKenzie in Palo Alto lead a team of Baker & McKenzie lawyers in discussing a range of software tax subjects. The morning session focused on base company planning, software revenue characterization -- from both the U.S. and international jurisdiction perspectives -- and state and local software tax issues. After a good lunch and a chance to network the session continued with the topics of electronic commerce, section 197 aspects of acquiring software technology, emerging litigation issues, and international aspects of stock options. For the emerging litigation issues session, trial lawyers in the Microsoft FSC case flew down from Seattle to give us an up-to-the-minute briefing on the case; it was exciting to get news so "hot off the press."

Baker & McKenzie provided a binder of excellent material covering all the topics--a great reference for the coming year.

Upcoming Tax School

On June 9-11, the Santa Clara Valley Chapter is hosting a tax school, which is open to all TEI members. This 2.5 day school featuring nationally renowned tax experts will cover domestic, state, and international aspects of tax, focusing on the high-technology industry. Concurrent sessions will be held to cover issues at all levels of experience. Participants can chose to attend all 2.5 days at a cost of $200 or only one day at a cost of $100. In addition, participants from the same company can "share a seat." For more information, please contact either Tim Takeda at [e-mail] or [phone], or Debbie Wittick at [e-mail] or [phone].

Board Activities

The board continues to be very active, convening for a two-hour breakfast meeting every six weeks. Much of the focus of the board continues to be on providing top quality seminars on topics relevant to the Santa Clara industry base. The board's goal is to hold one half-day or full-day technical seminar and one breakfast roundtable meeting each month; additional meetings are held if important developments arise. These seminars and breakfasts give tax professionals the opportunity to keep current in high technology taxation and to network. Membership of the chapter has risen to approximately 200.

Chapter Website

The Santa Clara Chapter has an extensive Web site located at http:// www.geocities.com/CapitolHill/Congress/1661/teim/.

The web site contains terrific information about the chapter, upcoming events, and tax positions open at member companies. Access the site and you may learn something!