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CORPORATE REORGANIZATIONS: "F" reorganization--change in state of organization--merger agreement

by Stephen E. Pigott

The sixth type of reorganization listed in the Internal Revenue Code, an "F" reorganization, is defined as "a mere change in identity, form, or place of organization of one corporation, however effected." No further explanation is given either in the statute or in the Regulations. This type of reorganization was rarely invoked for many years. It is obvious that an "F" reorganization encompasses corporate changes which, from the viewpoint of the tax law, can be classified as merely technical. Historically, it was felt that changes that affect the name of a corporation, its form, or its state of incorporation plainly do not disturb either the continuity of the corporate enterprise or the continuity of the interest of the shareholders in that enterprise. Apart from such instances, this provision remained mysterious. In recent years, the Commissioner and taxpayers have argued, with varying degrees of success, that certain substantial transactions involving more than one corporation qualify as "F" reorganizations. However, the Tax Equity and Fiscal Responsibility Act of 1982 explicitly narrowed the general scope of the "F" definition to technical changes in a single corporation. The committee reports for the 1982 Act indicate that the only instance in which more than one corporation may be used to accomplish an "F" reorganization is where there is only one operating corporation involved, as, for example, where an operating company is merged into a newly formed shell corporation organized in another state.

This form illustrates a transaction involving a change in the state of incorporation. There can be many reasons why such a change is made. The corporate laws of one state may be more suitable than those of another. The difference in corporate statutes may relate to substantive rights as well as procedural matters. A change in domicile may effect savings in state franchise taxes, especially if those taxes are predicated in whole or in part on assets or business outside the state. In some situations a corporation may want to escape escheat statutes under which unclaimed dividends, interest, and wages may be taken into custody by the state.

The usual technique for accomplishing a change in corporate domicile is to have the original corporation organize a new wholly owned subsidiary in the desired state with a nominal amount of capital, and then to arrange for a merger of the original corporation into the newly organized subsidiary. Under the merger agreement, several results areachieved: (a) the assets of the old corporation, subject to liabilities, become the assets of the new corporation; (b) the rights of all shareholders and security holders are converted automatically into similar rights against the new corporation; and (c) the provisions of the certificate of incorporation and of the bylaws of the old corporation are carried forward to the new corporation, with such changes as may be required by the laws of the new state and as may be desired by the shareholders of the old corporation. No gain or loss is recognized as to either corporation or as to any shareholders or security holders, and the tax bases of all assets, stock, and securities remain unchanged.

It should be noted that under the merger agreement the shareholder need not exchange his stock certificates. The old certificates are recognized as valid outstanding certificates of the new corporation. The new corporation, however, is required to make the exchange if any shareholder so desires.

Despite the fact that the changes in a reincorporation may be relatively insignificant from the viewpoint of the shareholder, the laws of the state of original domicile may grant dissenting shareholders the right to demand payment for their shares at an appraised value (see comment on Form 16.18A).

FORM

AGREEMENT OF MERGER made [date], between Powell Products Company, a Delaware corporation, hereinafter called the Delaware Company, and a majority of the directors thereof, and Powell Products Company, a New Jersey corporation, hereinafter called the New Jersey Company, and a majority of the directors thereof.

Whereas the Delaware Company has an authorized capital stock consisting of 1,500,000 shares of Common Stock, par value $1 per share, of which 1,000 shares have been duly issued and are now outstanding, and

Whereas the principal office of the Delaware Company in the State of Delaware is located at 100 State Street, City of Dover and County of Kent, and Registrar and Transfer Company is the agent in charge thereof upon whom process against the Delaware Company may be served within the State of Delaware, and

Whereas the New Jersey Company has an authorized capital stock consisting of 1,500,000 shares of Common Stock, par value $1 per share, of which as of [date], 1,100,000 shares were duly issued and outstanding, 26,000 shares were reserved for issuance upon exercise of options granted pursuant to the Restricted Stock Option Plan for Key Executive Employees, and 2,000 shares were held in the Treasury, and

Whereas the principal office of the New Jersey Company in the State of New Jersey is located at 15 Exchange Place, City of Jersey City and County of Hudson, and Registrar and Transfer Company is the agent in charge thereof upon whom process against the New Jersey Company may be served within the State of New Jersey, and

Whereas the Boards of Directors of the Delaware Company and of the New Jersey Company, respectively, deem it advisable and generally to the advantage and welfare of the two corporate parties and their respective shareholders that the New Jersey Company merge with the Delaware Company under and pursuant to the provisions of Subchapter IX of the General Corporation Law of Delaware and of Chapter 10 of Title 14A of the New Jersey Business Corporation Act.

Now, therefore, in consideration of the premises and of the mutual agreements herein contained and of the mutual benefits hereby provided, it is agreed by and between the parties hereto as follows:

1. Merger. The New Jersey Company shall be and it hereby is merged into the Delaware Company.

2. Effective date. This Agreement of Merger shall become effective immediately upon compliance with the laws of the States of Delaware and New Jersey, the time of such effectiveness being hereinafter called the Effective Date.

3. Surviving corporation. The Delaware Company shall survive the merger herein contemplated and shall continue to be governed by the laws of the State of Delaware, but the separate corporate existence of the New Jersey Company shall cease forthwith upon the Effective Date.

4. Authorized capital. The authorized capital stock of the Delaware Company following the Effective Date shall be 1,500,000 shares of Common Stock, par value $1 per share, unless and until the same shall be changed in accordance with the laws of the State of Delaware.

5. Certificate of incorporation. The Certificate of Incorporation set forth as Appendix A hereto shall be the Certificate of Incorporation of the Delaware Company following the Effective Date unless and until the same shall be amended or repealed in accordance with the provisions thereof, which power to amend or repeal is hereby expressly reserved, and all rights or powers of whatsoever nature conferred in such Certificate of Incorporation or herein upon any shareholder or director or officer of the Delaware Company or upon any other person whomsoever are subject to this reserve power. Such Certificate of Incorporation shall constitute the Certificate of Incorporation of the Delaware Company separate and apart from this Agreement of Merger and may be separately certified as the Certificate of Incorporation of the Delaware Company.

6. Bylaws. The Bylaws set forth as Appendix B hereto shall be the Bylaws of the Delaware Company following the Effective Date unless and until the same shall be amended or repealed in accordance with the provisions thereof.

7. Further assurance of title. If at any time the Delaware Company shall consider or be advised that any acknowledgments or assurances in law or other similar actions are necessary or desirable in order to acknowledge or confirm in and to the Delaware Company any right, title, or interest of the New Jersey Company held immediately prior to the Effective Date, the New Jersey Company and its proper officers and directors shall and will execute and deliver all such acknowledgments or assurances in law and do all things necessary or proper to acknowledge or confirm such right, title, or interest in the Delaware Company as shall be necessary to carry out the purposes of this Agreement of Merger, and the Delaware Company and the proper officers and directors thereof are fully authorized to take any and all such action in the name of the New Jersey Company or otherwise.

8. Outstanding debentures. Forthwith upon the Effective Date, all of the presently outstanding 5% Subordinated Debentures of the New Jersey Company due ____________________[date], shall be and become obligations of the Delaware Company in the same manner and to the same extent as the same constituted obligations of the New Jersey Company immediately prior to the Effective Date under the terms of the Indenture dated October 1, 1989, and entered into by and between the New Jersey Company and First Trust Company, as Trustee.

9. Retirement of organization stock. Forthwith upon the Effective Date, each of the 1,000 shares of the Common Stock of the Delaware Company presently issued and outstanding shall be retired, and no shares of Common Stock or other securities of the Delaware Company shall be issued in respect thereof.

10. Conversion of outstanding stock. Forthwith upon the Effective Date, each of the issued and outstanding shares of Common Stock of the New Jersey Company and all rights in respect thereof shall be converted into one full paid and nonassessable share of Common Stock of the Delaware Company, and each certificate nominally representing shares of Common Stock of the New Jersey Company shall for all purposes be deemed to evidence the ownership of a like number of shares of Common Stock of the Delaware Company. The holders of such certificates shall not be required immediately to surrender the same in exchange for certificates of Common Stock of the Delaware Company but, as certificates nominally representing shares of Common Stock of the New Jersey Company are surrendered for transfer, the Delaware Company will cause to be issued certificates representing shares of Common Stock of the Delaware Company and, at any time upon surrender by any holder of certificates nominally representing shares of Common Stock of the New Jersey Company, the Delaware Company will cause to be issued therefor certificates for a like number of shares of Common Stock of the Delaware Company.

11. Retirement of treasury stock. Forthwith upon the Effective Date, 980 shares of Common Stock of the New Jersey Company held in the Treasury of the New Jersey Company on the Effective Date shall be retired and no shares of Common Stock or any other securities of the Delaware Company shall be issued in respect thereof.

12. Employee stock options. Forthwith upon the Effective Date, each outstanding option to purchase shares of Common Stock of the New Jersey Company granted under its Restricted Stock Option Plan For Key Executive Employees shall be converted into and become an option to purchase the same number of shares of Common Stock of the Delaware Company, upon the same terms and subject to the same conditions as set forth in such Plan. The same number of shares of Common Stock of the Delaware Company shall be reserved for issuance upon the exercise of restricted stock options as were so reserved for issuance by the New Jersey Company immediately prior to the Effective Date.

13. Book entries. The merger contemplated hereby shall be treated as a pooling of interests and as of the Effective Date entries shall be made upon the books of the Delaware Company in accordance with the following:

(a) The assets and liabilities of the New Jersey Company shall be recorded at the amounts at which they are carried on the books of the New Jersey Company immediately prior to the Effective Date with appropriate adjustment to reflect the retirement of the 1,000 shares of Common Stock of the Delaware Company presently issued and outstanding.

(b) There shall be credited to Capital Account the aggregate amount of the par value per share of all of the Common Stock of the Delaware Company resulting from the conversion of the outstanding Common Shares of the New Jersey Company.

(c) There shall be credited to Capital Surplus Account an amount equal to that carried on the Capital Surplus Account of the New Jersey Company immediately prior to the Effective Date.

(d) There shall be credited to Earned Surplus Account an amount equal to that carried on the Earned Surplus Account of the New Jersey Company immediately prior to the Effective Date.

14. Directors. The names and post office addresses of the first directors of the Delaware Company following the Effective Date, who shall be five in number and who shall hold office from the Effective Date until the annual meeting of shareholders of the Delaware Company held in [year] and until their successorsshall be elected and shall qualify, are as follows:

|Name |Post Office Address |

|William Peter |17 Battery Place |

|New York, New York | |

| ..................... | |

|Frank Sand |201 North Wells Street |

|Chicago, Illinois | |

| ..................... | |

|Mitchell Williams |1700 Broadway |

|New York, New York | |

| ..................... | |

|Harvey Davids |260 Ninth Avenue |

|New York, New York | |

| ..................... | |

|Harold Holt |23 Wall Street |

|New York, New York | |

15. Officers. The names and post office addresses of the first officers of the Delaware Company following the Effective Date, who shall be five in number and who shall hold office from the Effective Date until their successors shall be appointed and shall qualify or until they shall resign or be removed from office, are as follows:

|Name |Offices |Post Office Address |

|William Peter |President |17 Battery Place |

|New York, New York | | |

|Frank Sand |Vice President |201 North Wells Street |

|Chicago, Illinois | | |

|Harold Walker |Comptroller |17 Battery Place |

|New York, New York | | |

|Sam Tryler |Treasurer |17 Battery Place |

|New York, New York | | |

|William Baker |Secretary |17 Battery Place |

|New York, New York | | |

16. Vacancies. If, upon the Effective Date, a vacancy shall exist in the Board of Directors or in any of the offices of the Delaware Company as the same are specified above, such vacancy shall thereafter be filled in the manner provided by law and the Bylaws of the Delaware Company.

17. Termination. This Agreement of Merger may be terminated and abandoned by action of the Board of Directors of the New Jersey Company at any time prior to the Effective Date, whether before or after approval by the shareholders of the two corporate parties hereto.

In witness whereof each of the corporate parties hereto, pursuant to authority duly granted by the Board of Directors, has caused this Agreement of Merger to be executed by a majority of its directors and its corporate seal to be hereunto affixed.

|Powell Products Company | |

|(Delaware) | |

|Corporate Seal |by ______________________ |

| ______________________ | |

| ______________________ | |

| ______________________ | |

|(A Majority of Its Board | |

|of Directors) | |

|Powell Products Company | |

|(New Jersey) | |

|Corporate Seal |by ______________________ |

| ______________________ | |

| ______________________ | |

|(A Majority of Its Board | |

|of Directors) | |

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