Mergers & Acquisitions 2022 Annual Review

10 MORRISON FOERSTER Corporate M&A dealmakers have been particularly interested in two provisions of the August 2022 Inflation Reduction Act (or IRA): Excise Tax on Corporate Stock Buybacks The IRA imposes a 1% excise tax on stock repurchases by certain publicly traded U.S. corporations and, in some cases, U.S. subsidiaries of non-U.S. corporations. Under a “netting” rule, the excise tax generally does not apply to the extent a corporation also issues stock during the same tax year, including most stock issued in connection with an acquisition or to employees as compensation or pursuant to option exercises, but not including stock dividends or stock splits. The tax goes well beyond conventional share buybacks and must be considered in many common M&A transactions involving public companies. The Department of Treasury has provided some relief from the tax in specific instances, while generally confirming its broad scope. More specifically, under Notice 2023-2: ■ Cash Purchase . The excise tax will apply to a leveraged buyout or other purchase for cash (outside of the “reorganization” context discussed below) to the extent cash used to purchase target shares is sourced to the target, including the proceeds of a loan that is assumed by or deemed made to the target company. ■ “Boot” in Reorganizations . Acquisitive reorganizations, recapitalizations, and other same-company reorganizations are effectively exempted from the tax, but only to the extent that the consideration issued in the transaction consists of stock eligible for nonrecognition treatment. Shares repurchased or deemed repurchased for cash or other property in such a reorganization are potentially subject to the tax, regardless of whether the consideration is appropriately viewed as provided by the target or the acquiror. ■ Relief for SPACs. Most complete liquidations are exempted from the tax, as are redemptions made during the same tax year as an exempt liquidation. This narrowing of the potential scope should provide considerable relief for SPAC market participants. Although other SPAC redemptions are potentially subject to the tax if there has not been a complete liquidation, as a practical matter, many such redemptions may be zeroed out of the excise tax base due to the application of the netting rule to an associated “PIPE” or other equity fundraising during the same tax year. ■ Valuation Timing. Excise tax base computations generally are based on the fair market value of the shares on the date repurchased or (in the case of the netting rule) the issue date. This timing and potential valuation disparity introduces complexity in applying the netting rule, for example, in the case of corporations that repurchase shares to offset the dilutive effect of an acquisition or equity compensation program. The above is a simplified description of certain excise tax provisions of greatest potential relevance to M&A transactions. 3. TAX LAW CHANGES AFFECTING M&A