A Reverse Morris Trust in United States law is a transaction that combines a divisive reorganization with an acquisitive reorganization to allow a tax-free transfer of a subsidiary.
Structure
A Reverse Morris Trust is used when a parent company has a subsidiary that it wants to sell in a tax-efficient manner. The parent company completes a spin-off of a subsidiary to the parent company's shareholders. Under Internal Revenue Code section 355, this could be tax-free if certain criteria are met. The former subsidiary then merges with a target company to create a merged company. Under Internal Revenue Code section 368, this transaction could be largely tax-free if the former subsidiary is considered the "buyer" of the target company. The former subsidiary is the "buyer" if its shareholders own more than 50% of the merged company.
History
The original Morris Trust structure was the result of a favorable ruling by the United States Court of Appeals for the Fourth Circuit in 1966 in the case of Commissioner v. Mary Archer W. Morris Trust. The original Morris Trust structure is similar to the above Reverse Morris Trust structure. Instead of a former subsidiary merging with a target company, however, the parent company would merge with the target company. Following several leveraged Morris Trust transactions similar to the original Morris Trust transaction, but involving cash and bank loans rather than mere stock, Congress enacted Internal Revenue Code Section 355 in 1997. This provision imposes additional taxation on the distribution in the spin-off step whenever a 50% interest in a spun off company is transferred tax-free in the two years following a spin-off.
Examples
wished to sell its access lines to FairPoint Communications, Inc. Rather than simply selling these assets to Fairpoint, however, Verizon created a subsidiary to which it sold these assets. Verizon distributed the shares of this new subsidiary to Verizon's shareholders. The parties then completed a Reverse Morris Trust with Fairpoint, where the original Verizon shareholders had a majority ownership of the newly merged company and the Fairpoint management ran the new company. Verizon was able to divest their access lines in a tax-free manner and continued to focus on higher growth wireless business. Procter & GambleCo. was planning to sell its Pringles line of snacks to Diamond Foods Inc. in a leveraged, reverse Morris Trust split-off. The Pringles business was to be transferred to a separate subsidiary which would assume approximately $850 million of debt. The two companies were unable, however, to finalize the deal and, in February 2012, Procter & Gamble found another buyer in the Kellogg Company. Procter & Gamble used a similar transaction structure when it sold Folgers coffee to J.M. Smucker in 2008. Procter & Gamble used the same transaction structure with the sale of 43 of its beauty brands on July 9, 2015 to Coty, Inc. Lockheed Martin divested a portion of its IS&GS business to Leidos in a $5 billion transaction in early 2016. The transaction included a $1.8 billion one-time special cash payment to Lockheed Martin. Lockheed Martin shareholders received 50.5% equity in Leidos. On February 2, 2017, Entercom announced that it had agreed to acquire CBS Radio. The sale was conducted using a Reverse Morris Trust so that it was tax-free. On April 1, 2017 HPE's enterprise service division acquired CSC to form the new company called DXC.technology.
