The facts about … Reverse Morris Trusts

Article Excerpt

A U.S. company may opt for a Reverse Morris Trust when it wants to spin off unwanted assets yet allow that spinoff to quickly enter a pre-arranged merger. Selling the assets directly to an identified buyer usually can saddle the parent company with a sizable tax bill. However, under IRS regulations, just spinning off the assets has the potential to block any merger for a prescribed period of time. The Reverse Morris allows the parent company to spin off the assets and then quickly merge that new business with the identified buyer’s. First, the parent company must spin off the unwanted assets and distribute shares in the new firm to investors. That spinoff company is then free to merge with the identified buyer, although shareholders of the initial spinoff must retain a majority stake in the merged firm. At the end of this complicated process, shareholders of the initial spinoff now have holdings in a larger and more-viable company. The parent company also benefits through…