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Strafford Webinar | April 23, 2019
Byron F. Egan
Jackson Walker
Dallas, Texas
William H. Hornberger
Jackson Walker
Dallas, Texas
R. Jason Russell
Morris, Nichols, Arsht & Tunnell LLP
Wilmington, Delaware
Structuring Divisive Mergers Under
the Delaware and Texas Statutes

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Welcome

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Outline
I. Delaware and Texas Divisive Merger statutes:
Structuring alternative to M&A spinoffs and carve-outs
II. Mechanics of a divisive merger
A. Plan of a Divisive Merger: Key terms
B. Approval of Divisive Merger
C. Certificate of division or merger
III. Effect of the Divisive Merger: Allocation of assets, properties,
licenses, debts, liabilities and duties of the dividing entity among
multiple survivors
IV. Federal income tax treatment of Divisive Mergers
V. Concerns for lenders and other counterparties and best practices
going forward

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Delaware and Texas Divisive Merger Statutes:
Structuring alternative to
M&A spinoffs and carve-outs

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Texas Divisive Merger Statute
• Divisive mergers have been permitted under Texas law
since 1989
• Applies to corporations, partnerships and LLCs and can
involve entities organized under the laws of another state
so long as such state permits divisive mergers
• TBOC 1.002(55): Defines “merger” to include “(A) the
division of a domestic entity into two or more new
domestic entities or other organizations or into a
surviving domestic entity and one or more new domestic
or foreign entities or non-code organizations.”

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Texas Divisive Merger Statute
• Mechanics
• Must adopt a plan of merger that provides (1) the manner and basis for
allocating and vesting the property of the parties and (2) the manner and
basis of allocating each liability and obligation of the parties or making
adequate provision for the payment and discharge thereof
• Plan should specifically set forth the mechanism under which contingent assets and
contingent liabilities for the parties are to be allocated and satisfied or provided for
• If properly allocated in the plan, all assets and liabilities of the parties to the merger will be
allocated (subject to existing contracts, liens and encumbrances) among the surviving entities
in the manner provided in the plan, and not to any other party.
• If the plan fails to provide for the allocation or vesting of any particular item of property or
any liability or obligation of any party to the merger, TBOC 10.008(b) provides that “the
unallocated property is owned in undivided interest by, or the liability or obligation is the joint
and several liability and obligation of, each of the surviving and new organizations, pro rata to
the total number of surviving and new organizations resulting from the merger”

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Texas Divisive Merger Statute
• Must file a certificate of merger and certificate of formation for new
entities with Secretary of State of Texas
• Approval
• Approve plan of merger in the same manner as a traditional plan of merger unless
otherwise provided in the governing documents of the entity
• Dissent and Appraisal Rights: Shareholders of Texas corporations are
entitled to assert dissenters rights when objecting to a merger (including
a divisive merger) and seeking to be paid the value of their shares as
determined in a judicial appraisal.
• LLCs and partnerships do not have statutory rights of dissent and appraisal unless the
entity’s governing documents expressly grant these rights
• Rights of creditors may be impaired by a divisive merger when the pool of assets
available to satisfy an obligee’s claims are divided, but creditors’ perfected liens and
rights under fraudulent transfer and similar laws remain intact.

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Delaware Statutory Division
• Methods to Separate Assets and Liabilities
• Internal Division (no separation of liabilities)
• Series
• Protected
• Registered (new and effective as of August 1, 2019)
• New Division Statute (effective as of August 1, 2018)
• Note: Statutory division may be available for limited partnerships effective
August 1, 2019
• How to Effect Division Prior to Statute
• Convert to Pennsylvania or Texas entity, divide pursuant to statute,
then convert back to Delaware
• Form wholly-owned subsidiary and drop-down assets and liabilities

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Delaware Statutory Division
• General: New Section 18-217 enables an LLC to divide into two
or more LLCs, with the dividing LLC either continuing its
existence or terminating as part of the division
• Vocabulary:
• “Dividing company”: the LLC effecting a division
• “Resulting company”: a domestic LLC formed as a
consequence of a division
• “Surviving company”: a dividing company that survives
• “Division company”: a surviving company, if any, and each
resulting company

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Delaware Statutory Division
• Mechanics
• A division is effected by (i) the adoption of a plan of division setting
forth the terms and conditions of the division, including, among
others, the allocation of assets, property, rights, series, debts, liabilities
and duties of the dividing LLC among the resulting LLCs and, if it
survives, the dividing LLC and (ii) the filing with the Delaware
Secretary of State of a certificate of division and a certificate of
formation for each newly formed LLC

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Delaware Statutory Division
• Plan of Division
• How are interests treated: exchanged/converted into cash, property,
rights or securities of, or interests, in, the surviving company or any
resulting company; may remain outstanding
• Is dividing company surviving?
• Name of resulting companies
• Allocation of assets, property, rights, debts, liabilities
• Name and business address of contact person that has a copy of the
plan of division
• Similarities to considerations in a merger
• For example, may amend LLC agreement of surviving company

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Delaware Statutory Division
• Approval
• Division approved as provided in the LLC agreement
• If not specifically addressed and not prohibited, approved in same
manner as for merger or consolidation as set forth in LLC agreement
• If LLC agreement is silent, division must be approved by members
who own more than 50% of the then current percentage or other
interest in the profits of the dividing company
• Fiduciary duties – similar to merger

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Delaware Statutory Division
• Certificate of Division
• Name of the dividing company and whether it survives
• The date of filing of the dividing company’s original certificate of
formation
• The name of each division company
• The name and business address of the contact person
• Effective date
• Division has been approved in accordance with 18-217
• The plan of division is on file and state address
• A copy of the plan of division will be provided to any member of the
dividing company
• Certificate of formation for each resulting company

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Effect of the Divisive Merger
• Delaware 18-217(l)(2): For all purposes of the laws of the State of Delaware, all of the rights,
privileges and powers, and all the property, real, personal and mixed, of the dividing company and
all debts due on whatever account to it, as well as all other things and other causes of action
belonging to it, shall without further action be allocated to and vested in the applicable division
company in such a manner and basis and with such effect as is specified in the plan of division, and
the title to any real property or interest therein allocated to and vested in any division company
shall not revert or be in any way impaired by reason of the division
• If debts and liabilities are not allocated by the plan, they shall be the joint and several debts and liabilities
of all of the division companies.
• Texas 10.008(a): Generally provides that, if properly allocated in the plan, all assets and liabilities
of the parties to the merger will be allocated (subject to existing contracts, liens and encumbrances)
among the surviving entities in the manner provided in the plan, and not to any other party.
• If, however, the plan does not provide for such allocation, the unallocated property is owned in undivided
interest by, or the liability or obligation is the joint and several liability and obligation of, each of the
surviving and new organizations, pro rata to the total number of surviving and new organizations resulting
from the merger
• Transfer: Both Texas and Delaware law expressly provide that the interest in the property of the
LLC shall not be deemed, as a result of the division, to have been assigned or transferred

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Structuring Divisive Mergers Under the Delaware and Texas Statutes
Federal Income Tax Consequences of a Divisive Merger:
One Size Does Not Fit All
Strafford
April 24, 2019
William H. Hornberger
Jackson Walker L.L.P.
2323 Ross Ave., Ste. 600
Dallas, Texas 75201
214-953-5857
© 2019 William H. Hornberger

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USE OF DIVISIVE MERGERS WITH C CORPORATIONS
REV. RUL. 2000-5 (SITUATION 1)
Target
Corporation
(T)
Acquiring
Corporation
(A)
Shareholders Shareholders
Asset
B
Asset
A
Asset B and certain
liabilities pass to A in
divisive merger
Rev. Rul. 2000-5 - Conclusion: The transactions described in Situations (1) and (2) do not qualify as reorganizations under
section 368(a)(1)(A). However, the transactions described in Situations (1) and (2) possibly may qualify for tax-free treatment
under other provisions of the Code.
Cf. Treas. Reg. § 1.368-2, Example 1 (same facts as above), concluding:
(ii) Analysis. The transaction does not satisfy the requirements of paragraph (b)(1)(ii)(A) of this section because all of the assets
and liabilities of Z, the coming entity of the transferor unit, do not become the assets and liabilities of Y, the combining entity and
sole member of the transferee unit. In addition, the transaction does not satisfy the requirements of paragraph (b)(1)(ii)(B) of
this section because the separate legal existence of Z does not cease for all purposes. Accordingly, the transaction does not
qualify as a statutory merger or consolidation under section 368(a)(1)(A). 16

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USE OF DIVISIVE MERGERS WITH C CORPORATIONS
REV. RUL. 2000-5 (SITUATION 2)
Target
Corporation
(T)
Acquiring
Corporation
(A)
Shareholders
Asset B
to A in divisive merger
Step 1: Asset B and certain
liabilities pass to A in
divisive merger
Asset A Asset B
Acquiring
Corporation 2
(A2)
Asset A and certain liabilities pass
to A2 in divisive merger
A1 stock
Rev. Rul. 2000-5 – Conclusion: The transactions described in Situations (1) and (2) do not qualify as reorganizations under
section 368(a)(1)(A). However, the transactions described in Situations (1) and (2) possibly may qualify for tax-free treatment
under other provisions of the Code.

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USE OF DIVISIVE MERGERS WITH C CORPORATIONS
D Corporation
(C Corporation)
Shareholders
Sub
Corporation
(C Corporation)
Substantial
Other Assets
100% of
the Stock
STEP 1: D Corporation
passes group of assets and
liabilities to C Corporation in
exchange for 100% of the
stock of C Corporation in
divisive merger
STEP 2: D Corporation
distributes 100% of stock in
Sub Corporation to
shareholders
Taxable or Nontaxable?
Assets

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USE OF DIVISIVE MERGERS WITH ENTITIES
CLASSIFIED AS DISREGARDED ENTITIES FOR
FEDERAL INCOME TAX PURPOSES
Sub LLC1
(Disregarded
Entity)
Asset A
Sub LLC2
(Disregarded
Entity)
Asset B
Holding
LLC
Asset B and certain
liabilities pass to
SubLLC2 in divisive
merger

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Use of Divisive Mergers With Entities
Classified As Partnerships For Federal
Income Tax Purposes -
Partnership Division Regulations
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• Identify:
– Prior Partnership
– Resulting Partnership
– Divided Partnership
– Recipient Partnership
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• In the division of a partnership into two or more partnerships,
the resulting partnerships (other than any resulting
partnership the members of which had an interest of 50-
percent or less in the capital and profits of the prior
partnership) are considered a continuation of the prior
partnership. Any other resulting partnership is not considered
a continuation of the prior partnership but is considered a new
partnership.
• If none of the members of the resulting partnership owned an
interest of more than 50-percent in the capital and profits of
the prior partnership, the prior partnership is terminated.
• Where members of a partnership that has been divided do not
become members of a resulting partnership that is considered
a continuation of the prior partnership, such partner’s interest
is considered liquidated as of the date of the division.
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General Rules Concerning Form of
Partnership Division
• Assets - Over Form
• Asset - Up Form

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PARTNERSHIP DIVISION REGULATIONS
EXAMPLE
(ASSETS-OVER FORM)

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Selected Partnership Transactions
Falling Outside Divisive Merger
Regulations

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Partnership Division Regulations
Preamble to Final Regulations:
“To have a division at least two members of the prior partnership must
be members of each resulting partnership that exists after the
transaction.”
Thus, the following is not a division:
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Member
A
Member
B
AB, LLC
(Texas LLC)
Property
Pool
X
Property
Pool
Y
A, LLC
(Texas LLC)
Property
Pool
X
B, LLC
(Texas LLC)
Property
Pool
Y
Divisive Merger
Member
A
Member
B
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AB, LLC
(Texas LLC)
Property
Pool
X
Property
Pool
Y
A, LLC
(Texas LLC)
Property
Pool
X
B, LLC
(Texas LLC)
Property
Pool
Y
Divisive Merger
(with Liabilities)
Encumbered
by Liability
Encumbered
by Liability
What is impact on A, LLC?
Member
A
Member
B
Member
A
Member
B
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AB, LLC
(Texas LLC)
Property
Pool
X
Property
Pool
Y
A, LLC
(Texas LLC)
Property
Pool
X
B, LLC
(Out of State LLC)
Property
Pool
Y
(located in
TX)
Divisive Merger
(Out of State)
Member
A
Member
B
Member
A
Member
B
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AB, LLC
(Texas LLC)
Property
Pool
X
Property
Pool
Y
A, LLC
(Texas LLC)
Property
Pool
X
B, LLC
(Out of State LLC)
Property
Pool
Y
(located in
TX)
Divisive Merger
(Out of State with Liabilities)
What is
impact if
Property
Pool Y is
encumbered
by liabilities?
Member
A
Member
B
Member
B
Member
A
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AB, LLC
(Texas LLC)
Property
Pool
X
Property
Pool
Y
A, LLC
(Texas LLC -
formerly AB, LLC)
Property
Pool
X
HOLDCO, LLC
(Out of State LLC)
Property
Pool
Y
(located in
TX)
Divisive Merger Illustration
(with Member)
Holdco,
LLC
Member
A
Member
B
Member
A
Member
B
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Concerns for Lenders & Creditors
• A divisive merger/division may alter and reduce the pool
of assets to which a creditor may look for repayment
• A division could result in moving collateral that secures
a loan to a new entity that is not credit-worthy without
breaching the terms of the credit agreement
• Applies to lenders and all other creditors

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Protections
• Delaware:
• Under Delaware statute, with respect to any LLC formed prior to August 1, 2018 that is party to any written
contract, indenture or other agreement entered into prior to August 1, 2018 that by its terms restricts,
conditions or prohibits such LLC from (x) consummating a merger or consolidation with or into another party
or (y) transferring assets, such restriction shall be deemed to apply to a division as if it were a merger,
consolidation or transfer of assets
• A “division contact” must be specified in the plan of division to be available for 6 years following the
division to advise creditors as to the division company to which such creditor’s claim was allocated
• Any action or proceeding pending against a dividing company may be continued against the surviving
company as if the division did not occur and against any resulting company to which the asset, property, right,
series, debt, liability or duty associated with the action was allocated pursuant to the plan of division
• Each division company is jointly and severally liable for any liabilities if the division would constitute a
fraudulent transfer under applicable law
• Texas: Fraudulent transfer protections and creditor will continue to possess all other
rights otherwise available to it under law and contract, including all security interests in
the property of the debtor securing the payment of the creditor’s claim

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Best Practices for Creditors
• Delaware Note: For LLCs formed after August 1, 2018, the LLC/borrower
might be able to transfer a secured lender’s collateral to a new LLC that is not
credit-worthy without breaching its credit agreement.
• Agreement (such as a credit agreement) could expressly address division
• Consider expanding definitions of assets sales, mergers, reorganizations, etc. to
address divisions
• Consider expanding negative covenants to prohibit divisions without the consent of
the lender in the same manner as asset sales, mergers, reorganizations, etc.
• Consider whether typical SPE covenants in a bankruptcy remote transaction, provide
sufficient protection.

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Q & A