Seagram and Dupont: exploring continuity.Seagram The Seagram Company Ltd. was a large corporation headquartered in Montreal, Quebec, Canada that was the largest distiller of alcoholic beverages in the world. Toward the end of its independent existence it also controlled various entertainment and other business ventures. purchased 32% of Conoco's stock in an attempt to acquire the Delaware Delaware, state, United States Delaware (dĕl`əwâr, –wər), one of the Middle Atlantic states of the United States, the country's second smallest state (after Rhode Island). oil and gas company. DuPont purchased 46% of Conoco's stock and acquired the remaining 54% - including Seagram's 32% - in exchange for DuPont's stock in an integrated tender offer and merger. In Seagram v. Commissioner, Seagram sought to deduct de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. $530 million it lost in the exchange with DuPont. The Tax Court said the deduction deduction, in logic, form of inference such that the conclusion must be true if the premises are true. For example, if we know that all men have two legs and that John is a man, it is then logical to deduce that John has two legs. was improper
Seagram argued that the reorganization lacked "Continuity of interest" because 78% of Conoco's stock was acquired for cash after the date of the DuPont-Conoco agreement. Seagram's concept of continuity required identifying shareholders immediately before inception of the series of integrated transactions. The court disagreed. It said continuity is determined by what the shares represented when the reorganization was complete, not by the identity of the shareholders. Continuity was met because a majority (54%) of the old Conoco shares were converted into DuPont stock. Continuity would have been destroyed if 1) Seagram and DuPont were acting in concert and Seagram's cash purchases were attributed to DuPont or 2) there was an arrangement for the post-merger disposal of newly acquired DuPont shares. The court said Seagram's concept of continuity would eliminate the possibility of a tax-free reorganization (due to arbitrage arbitrage: see foreign exchange. arbitrage Business operation involving the purchase of foreign currency, gold, financial securities, or commodities in one market and their almost simultaneous sale in another market, in order to profit from price activity) for any corporation with actively traded stock. Requiring shareholders' identity to be tracked in order to satisfy some minimal percentage receiving stock would be unrealistic and unnecessary. Observation. The court's rejection of an "identity of shareholders" test for continuity is very significant. |
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