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Full Opinion
*28 In 1998, Times Mirror's investment subsidiary, TMD, divested
itself of a legal publishing business through the Bender
transaction. The transaction was intended and designed to
qualify as a tax-free reorganization under
determined that the transaction was a taxable sale by TMD to
Reed. Held: The primary consideration received in the
transaction was control over $ 1.375 billion paid by Reed.
Held, further, the Bender transaction did not
qualify as a tax-free reorganization because the terms and
provisions of the contractual documents, as interpreted and
implemented by Times Mirror and Reed, effected a sale.
*112 CONTENTS
FINDINGS OF FACT
Background
*29 A. Times Mirror
B. Changes in the Legal Publishing Landscape
Events Leading Up to the Bender Transaction
A. November 7, 1997, GS Presentation
B. November 17, 1997, Special Meeting of Times Mirror's Board of
Directors
C. Times Mirror's Announcement Sparks Interest by Reed and
Wolters Kluwer
D. February 5, 1998, Regular Meeting of Times Mirror's Board of
Directors
E. March 5, 1998, Regular Meeting of Times Mirror's Board of
Directors
F. Reed and Wolters Kluwer Call Off Merger
G. Melone, Sigler, and Walker Gain Access to the "Domestic
Sandwich" Structure
H. Reed and Wolters Kluwer Submit Preliminary Interest Letters
to Times Mirror
I. The Corporate Joint Venture Structure Is Tabbed as the
Structure of Choice for the Bender Transaction
J. April 14, 1998, Regular Meeting of Reed's Board of Directors
K. Wolters Kluwer and Reed Attend Times Mirror's Presentations
Regarding Bender
L. Wolters Kluwer and Reed Submit Offers to Times Mirror
M. Times Mirror*30 Responds to Wolters Kluwer's Offer
N. April 24, 1998, Special Meeting of Times Mirror's Board of
Directors
O. Organization of CBM Acquisition Parent Co. and CBM MergerSub
Corp.
P. Adoption of the Merger Agreement
Q. GS Prepares "Fairness Package" for Bender Transaction
R. Melone Drafts Memorandum Regarding the Bender Transaction for
E& Y's Files
S. May 7, 1998, Regular Meeting of Times Mirror's Board of
Directors
T. May 7, 1998, Annual Meeting of Times Mirror's Shareholders
U. Organization of Liberty Bell I
V. July 9, 1998, Regular Meeting of Times Mirror's Board of
Directors
W. Execution of the LBI Limited Liability Company Agreement (the
management authority)
X. Execution of MB Parent Stockholders Agreement and the
MergerSub Shareholders Agreement
Y. Filing of the Restated Certificates of Incorporation for MB
Parent and MergerSub
The Mechanics of the Bender Transaction
A. Capitalization of MergerSub and MB Parent
B. Merger of MergerSub and Bender
*31 C. Capitalization of LBI (the LLC)
D. Closing
Times Mirror's Management of LBI and the Development of Times
Mirror's Investment Strategy Following the Closing of the Bender
Transaction
Summary of the LLC's Investment Activity During 1999
Times Mirror's and MB Parent's Income Tax Returns for 1998
Times Mirror's Financial Reporting Following the Close of the Bender
Transaction
The LLC's Financial Statements for the Fiscal Years Ended December
31, 1999 and 1998
IRS Determinations
ULTIMATE FINDINGS OF FACT
OPINION
Factual Analysis of the Bender Transaction
Times Mirror's View of the Bender Transaction
Fiduciary Obligations Among the Parties
Consideration for the Transfer of Bender to Reed
Valuation of MB Parent Common Stock
Pertinent Precedents
Evidentiary Matters
COHEN, Judge: Respondent determined a deficiency of $ 551,510,819 with respect to petitioner's Federal income tax for 1998. The notice of deficiency recharacterized as taxable two transactions treated by petitioner as tax-free reorganizations. This opinion addresses the so-called Bender transaction only. The principal issues for*32 decision are:
(1) Whether the Bender transaction qualifies as a reorganization under either
(2) whether
*113 Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the year in issue.
FINDINGS OF FACT
Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference. Petitioner's principal place of business was in Chicago, Illinois, at the time that the petition was filed. Petitioner is a party to this case solely in its capacity as agent and successor of The Times Mirror Co., Inc. (Times Mirror).
Background
A. Times Mirror
Before its merger with petitioner, Times Mirror was a Los Angeles-based news and information company. In June 1995, Times Mirror hired Mark H. Willes (Willes) to serve as its president and chief executive officer. Willes became chairman of Times Mirror's board of directors in January 1996. Willes's business philosophy favored a streamlined operation that concentrated on "core" businesses.
After June 1995, Times*33 Mirror embarked on a program of restructuring its businesses, which included focusing on newspaper publishing. In late 1996, Times Mirror undertook a series of transactions that resulted in its owning 50 percent of the Shepard's McGraw-Hill legal publishing unit (Shepard's) in a joint venture with Reed Elsevier (Reed), a publishing and information enterprise not itself a legal entity but rather a collective reference to Reed Elsevier plc, a United Kingdom entity, and Reed Elsevier NV, a Dutch entity. Times Mirror held its 50-percent interest in Shepard's through one of its subsidiaries, Matthew Bender & Co., Inc. (Bender), a legal publishing company.
As of December 31, 1997, Times Mirror comprised three business segments: Newspaper publishing, professional information, and magazine publishing. The professional information business segment included Bender and Mosby, Inc. (Mosby), a health sciences publishing company.
Times Mirror engaged in the legal publishing business through Bender. TMD, Inc. (TMD), a wholly owned subsidiary *114 of Times Mirror, owned the only class of issued and outstanding stock of Bender until July 31, 1998.
B. Changes in the Legal Publishing Landscape
*34 Between 1980 and 1997, the legal publishing industry experienced significant consolidation. During that period, the legal publishing market contracted from 20 companies to 5: Reed; Wolters Kluwer NV (Wolters Kluwer), a Dutch publishing and information company; West-Thomson; Bender; and the Bureau of National Affairs.
On October 13, 1997, Reed and Wolters Kluwer announced a plan to merge. At the time of the announcement, Reed's holdings included Lexis-Nexis (Lexis), and Wolters Kluwer's holdings included Commerce Clearing House.
Shortly after the Reed-Wolters Kluwer announcement, Times Mirror's management analyzed Bender's competitive position in the legal publishing market. Based upon its analysis, Times Mirror's management concluded that continued participation in the legal publishing market was not the most effective use of Times Mirror's assets. Accordingly, Times Mirror decided to divest itself of Bender.
The law firm of Gibson, Dunn & Crutcher LLP (GD& C) acted as outside legal counsel for Times Mirror, TMD, and Bender in connection with the transaction pursuant to which Times Mirror divested itself of Bender (Bender transaction). Ernst & Young LLP (E& Y), which served as*35 independent auditor of Times Mirror's financial statements during 1994 through 1999, reviewed the tax and accounting treatment and reporting of the Bender transaction for Times Mirror. Sometime before November 7, 1997, Times Mirror engaged Goldman, Sachs & Co. (GS) as a financial adviser and facilitator for the Bender transaction.
Events Leading Up to the Bender Transaction
A. November 7, 1997, GS Presentation
GS prepared a document, dated November 7, 1997, entitled "Monetization of Medical/Publishing Assets", in connection with a presentation to Times Mirror's management regarding the Bender transaction (November 7, 1997, GS presentation). The following statements were included in the November 7, 1997, GS presentation:
o *115 Given the dramatic change in the competitive landscape of the
professional information publishing sector, this may be an
opportune time for TMC [Times Mirror] to monetize its * * *
legal [publishing] assets
o Monetization of the * * * legal publishing assets can be
executed through a simple, taxable sale for cash or through a
number of tax-advantaged structures
*36 o The ultimate structure utilized will be a function of the type
of buyer (ie. Strategic or financial) as well as the
nationality of the buyer (ie. Domestic or foreign) as well as
the amount of cash proceeds TMC would like to receive upfront
The November 7, 1997, GS presentation provided a summary of Bender's potential buyers as well as descriptions of several of GS's proprietary "tax-advantaged" structures for the Bender transaction. None of the tax-advantaged structures set forth in the November 7, 1997, GS presentation were ultimately recommended by Times Mirror's management or approved by Times Mirror's board of directors for the Bender transaction.
B. November 17, 1997, Special Meeting of Times Mirror's Board
of Directors
A special meeting of Times Mirror's board of directors was convened on November 17, 1997. In connection with this special meeting, a document entitled "Briefing Packet On Mosby Matthew Bender" (November 17, 1997, briefing packet) was prepared. A memorandum dated November 14, 1997, from Willes to the board of directors was part of the November 17, 1997, briefing packet. The section of the November 17, 1997, briefing*37 packet entitled "Executive Summary" contained the following statements:
The major strategic alternatives, or some combination thereof,
that are open to Times Mirror are the following:
1. Hold
2. Divest
3. Swap
* * * * * * *
A key issue in any decision to divest or swap will be the
potentially large tax liability on the gain on the sale due to
our low basis in Matthew Bender. Our preliminary work indicates
that there may be a variety of transaction structures which
allow us to minimize this tax expense.
* * * * * * *
*116 Our preliminary analysis shows that with the very high premiums
currently being offered for legal * * * publishing operations,
more after-tax value could be created through divestiture than
by keeping these companies. This value is enhanced considerably
if the divestiture could be accomplished through a tax-
advantaged structure.
* * * * * * *
*38 The decision to explore strategic alternatives for Mosby Matthew
Bender is not easy nor a happy one. * * * However, the facts are
that the competitive environment for * * * legal * * *
publishing has changed dramatically * * *. Matthew Bender is a
very distant third in U.S. legal publishing with a weakening
future competitive position. * * *
Considering these recent developments, we recommend to the Board
that it authorize the exploration of the divestiture of Matthew
Bender, including Shepard's * * *
Willes opened the special meeting of the board of directors by noting that market consolidation in legal publishing presented immediate strategic questions that needed to be evaluated fully. Willes and Kathryn M. Downing, a corporate officer of Times Mirror, then presented a lengthy review of the situation and the issues to be addressed. Following this presentation, there was a substantive discussion among the board of directors. At the conclusion of this discussion, the board of directors unanimously instructed Times Mirror's management to proceed with a formal review of the company's options with respect to its ownership*39 of Bender and its joint ownership of Shepard's.
C. Times Mirror's Announcement Sparks Interest by Reed and
Wolters Kluwer
On November 24, 1997, Times Mirror released a statement to the public that announced the company's decision to explore strategic alternatives with respect to its ownership of Bender and its joint ownership of Shepard's. After Times Mirror made this announcement, Reed, Wolters Kluwer, and many others expressed an interest in acquiring Bender.
Parties that indicated an interest in Bender were initially sent a standard confidentiality agreement. These confidentiality agreements set out the ground rules for obtaining confidential information in connection with a possible sale or other disposition of Bender. On December 26, 1997, Times Mirror and Reed executed a confidentiality agreement. On *117 January 9, 1998, GS sent a confidentiality agreement to Wolters Kluwer.
On February 2, 1998, Reed signed an addendum to the confidentiality agreement that it had executed with Times Mirror and delivered that addendum to Times Mirror. The addendum expressed the desire of Reed and Times Mirror that Wolters Kluwer and Reed would jointly investigate and prepare*40 a bid for Bender and/or Mosby.
D. February 5, 1998, Regular Meeting of Times Mirror's Board
of Directors
A regular meeting of Times Mirror's board of directors was convened on February 5, 1998. At this meeting, the board of directors reviewed and discussed, among other topics, Times Mirror's strategic business plan for 1998 through 2000 and the company's financial structure. These matters were also presented to the board of directors in the form of a written report. In particular, the section entitled "Strategic Three-Year Plan" contained the following statements:
Mosby Matthew Bender Process
* * * * * * *
Divestiture Process and Strategy
On November 17, 1997, the Board held a study session that
explored the changed strategic situation for Matthew Bender
legal publishing, including Shepard's, and Mosby health sciences
publishing. * * *
* * * * * * *
Following the study session with the Board, we began the
divestiture process. Since that time, Mosby Matthew*41 Bender
management and Times Mirror staff have been actively working
with Goldman Sachs to prepare financial statements and the
offering memorandum and to identify potential buyers.
In this process, we have adopted the following strategy:
* * * * * * *
o Acquaint all interested parties with our desire for a tax-
efficient result and explore the appropriate alternatives in
detail in advance of definitive bids with each party, because
different forms of transactions work with different bidders.
o Since it could be the case that a leveraged spin-off would
generate the same level of after-tax cash proceeds as an asset
sale, establish "straw-man" *118 values of a cash-for-assets sale
and a leveraged spin-off (much like our cable transaction) to
set a "floor" on the auction at a high level.
* * * * * * *
Alternative Structures
The specific structure for the divestiture will depend largely
on the financial and operating*42 profile of the likely purchaser.
With the assistance and advice of Goldman Sachs, Ernst & Young,
and Gibson, Dunn & Crutcher, this process is being integrated
with the overall sale process to deliver the highest after-tax
value to Times Mirror and its shareholders. * * *
* * * * * * *
Planning Issues
Since we are early in the process, it is not clear what the
impact of this divestiture will be on Times Mirror's financial
results. * * * The preferred tax-efficient structures we will
explore with potential buyers would significantly lessen any
potential dilution. * * * [I]t is important to remember that the
model we developed for 10% or greater growth in earnings per
share did not anticipate continuing contributions from Mosby
Matthew Bender, and the proceeds will give us a large body of
resources to invest to accelerate the Company's growth.
* * * * * * *
CAPITALIZATION
Introduction
The*43 new three year plan has five principal capitalization
policies:
1) Continue an active share repurchase plan, buying shares
when repurchase is the best investment of our financial
resources
* * * * * * *
5) Invest our cash flow and other capital resources
according to the following priorities:
o Internally in products and services that build our
established operations
o Attractive acquisitions that add to or are complimentary
[sic] to existing businesses
o Opportunistically in common stock repurchase
o Dividends
Our plan provides sufficient cash flow and other resources to
cover all of these applications. In practice (and in the absence
of a Mosby-Matthew Bender transaction) for the plan period, the
application of these policies is expected to result in the
following actions:
o Repurchases of * * * 4 million in 1998 and 3 million in each
of 1999 and*44 2000 for an aggregate of $ 570 million
o We expect to borrow approximately $ 250 million to use with our
free cash flow to finance internal development, acquisitions,
and share repurchase
o *119 Our common dividend will increase by 20% and then
approximately 10% per year
o We will maintain a reserve of borrowing capacity and cash flow
generation sufficient to fund our internal investment and
acquisition programs
If the form of the Mosby-Bender transaction is a cash sale, we
would undoubtedly increase the amount of the share repurchase
target and not borrow additional funds during the plan period.
* * * * * * *
Our plan going forward, unless the Mosby-Bender transaction
produces an unanticipated result, is to continue our repurchase
activity in the same manner [as pursued from 1995 through 1997].
* * *
Following the Mosby-Bender transaction we will, once again, look
at our repurchase volume target in light of what could be
significantly enhanced resources*45 for investment, and weigh the
same factors to guide our program. * * *
E. March 5, 1998, Regular Meeting of Times Mirror's Board of
Directors
A regular meeting of Times Mirror's board of directors was convened on March 5, 1998. At this meeting, Thomas Unterman (Unterman), executive vice president and chief financial officer of Times Mirror, with the assistance of several GS representatives, reported on the status of the strategic review regarding Bender. These matters were also presented to the board of directors in a written report. In particular, the section entitled "Structural Alternatives" contained the following statements:
o Structuring Goals
o Maximize after-tax value to Times Mirror and its
shareholders
o Integrate structural considerations into sale process
o Achieve desired accounting results at time of sale (and
possibly on an ongoing basis)
F. Reed and Wolters Kluwer Call Off Merger
On March 9, 1998, Reed and Wolters Kluwer called off their previously announced merger. On March 18, 1998, Wolters Kluwer faxed to GS an executed*46 confidentiality agreement regarding Bender.
*120 G. Melone, Sigler, and Walker Gain Access to the "Domestic
Sandwich" Structure
On March 24, 1998, three members of E& Y, Martin R. Melone (Melone), Mary Ann Sigler (Sigler), and Kenneth M. Walker (Walker), entered into an agreement entitled "Nondisclosure and Confidentiality Agreement" with Price Waterhouse LLP (PW). At the time that they entered into the Nondisclosure and Confidentiality Agreement with PW, Melone was the "Partner-in-Charge" of E& Y's audit of Times Mirror, Sigler was a tax partner at E& Y, and Walker was an engagement partner at E& Y. The Nondisclosure and Confidentiality Agreement pertained to the following:
PW has in the course of its business developed a technique for
restructuring a corporate group (known within PW as the
"Domestic Sandwich") that is confidential to PW and has
substantial pecuniary value to PW (the "Proprietary Technique"),
which is the subject of this agreement.
PW desires to provide to Individuals [Sigler, Melone, and
Walker], and Individuals desire to obtain from PW, a full and
complete description of the*47 Proprietary Technique to enable
Individuals to review the Proprietary Technique and determine
whether it [sic] wishes to use the Proprietary Technique.
As a result of entering into the Nondisclosure and Confidentiality Agreement with PW, Melone, Sigler, and Walker gained access to PW's "Domestic Sandwich" structure.
H. Reed and Wolters Kluwer Submit Preliminary Interest
Letters to Times Mirror
On April 7, 1998, Wolters Kluwer submitted a letter to Times Mirror that indicated Wolters Kluwer's preliminary interest in acquiring Bender and Times Mirror's 50-percent interest in Shepard's. In its preliminary interest letter, Wolters Kluwer made the following statement regarding the offer price and form of consideration for this acquisition: "Wolters Kluwer is prepared to acquire all of the outstanding stock of the Company [Bender and Times Mirror's 50- percent interest in Shepard's] for cash consideration of U.S. $ 1.5 billion."
Reed also submitted a letter to Times Mirror on April 7, 1998, that indicated Reed's preliminary interest in acquiring Bender, Mosby, and Times Mirror's 50-percent interest in Shepard's. In its preliminary interest letter, *48 Reed made the *121 following statement regarding the offer price and form of consideration for this acquisition:
Based on the information contained in the information memorandum
on Matthew Bender and Mosby dated March 1998 and the
supplemental information delivered to us on April 2, 1998, and
in particular the actual and forecast financial results for the
Properties contained in those documents, our preliminary
evaluation of the Properties permits us to indicate that we % would be prepared to pay at least $ 1.2 Billion, which amount is
assumed to be payable in cash on completion.
The individuals involved in coordinating the Bender transaction for Times Mirror were referred to as the Project Philadelphia Group. As of April 7, 1998, the Project Philadelphia Group included officers, directors, and employees from the following entities: Times Mirror, Mosby, Bender, GS, GD& C, E& Y, and PW.
I. The Corporate Joint Venture Structure Is Tabbed as the
Structure of Choice for the Bender Transaction
On April 10, 1998, Daniel Shefter (Shefter), an associate at GS, faxed a revised copy of a document entitled "Presentation*49 Regarding Corporate Joint Venture Structure" (Shefter CJV presentation) to members of the Project Philadelphia Group. The "Corporate Joint Venture Structure" (CJV structure) depicted in this document was the transaction structure ultimately chosen to accomplish the Bender transaction.
After Times Mirror had become comfortable with the CJV structure, it incorporated that structure into the draft agreements reflecting the details of the Bender transaction. Times Mirror also informed prospective bidders that any bids for Bender that did not incorporate the use of the CJV structure would be severely disadvantaged in comparison to those bids that did.
J. April 14, 1998, Regular Meeting of Reed's Board of
Directors
A regular meeting of Reed's board of directors was convened on April 14, 1998, at which Herman S. Bruggink (Bruggink), co-chairman of Reed, discussed Reed's potential acquisition of Bender, Mosby, and Times Mirror's 50-percent interest in Shepard's. During this discussion, Bruggink noted *122 that Times Mirror was conducting a competitive bidding process for these businesses and that Reed's ability to respond on extremely short notice and Reed's willingness to*50 bid aggressively would be crucial to a successful outcome. Upon completing this discussion, Reed's board of directors approved resolutions regarding Reed's acquisition of Bender, Mosby, and Times Mirror's 50-percent interest in Shepard's for an aggregate purchase price not in excess of $ 2 billion. Reed's board of directors authorized this $ 2 billion purchase price based upon, inter alia, Reed's solid cash position at that time.
K. Wolters Kluwer and Reed Attend Times Mirror's
Presentations Regarding Bender
Between April 13 and 17, 1998, Times Mirror's management held discussions with and made separate presentations regarding Bender to Wolters Kluwer and to Reed at Times Mirror's offices in New York City. During these meetings, PW and GS made presentations regarding the CJV structure to Wolters Kluwer and to Reed. No other structures for potential acquisition of Bender were discussed during these meetings.
The CJV structure presented to Wolters Kluwer and to Reed depicted Times Mirror as owning 100 percent of the stock of the "target", i.e., Bender, and described the following five steps by which the acquiror would acquire the target (with dollar amounts for*51 illustrative purposes only):
1. Acquiror capitalizes Newco at $ 1,000 with voting and
nonvoting common stock and preferred stock. The voting common
stock has a value of $ 950 and 20% of the vote and represents
approximately 98% of the total common equity of Newco. The
nonvoting common stock has a value of $ 20, is non-voting and
represents approximately 2% of the total common equity of Newco.
The Preferred stock has a value of $ 30 and 80% of the vote.
Combined, the Newco preferred and non-voting common will have a
value equal to 5% of the total equity value of Newco.
* * * * * * *
2. Acquiror contributes Newco preferred and Non-Voting Common
stock to MB Parent in exchange for MB Parent preferred.
* * * * * * *
3. Newco buys MB parent common with 20% of the vote for $ 1,000.
* * * * * * *
*123 4. Target merges with Newco with Target surviving.
(Alternatively, Newco could be surviving company.) In*52 exchange
for its Target Stock, Times Mirror will receive 100% of MB
Parent common stock.
* * * * * * *
5. [MB] Parent contributes $ 1,000 to LLC in exchange for non-
voting LLC interest.
Times Mirror is sole manager of LLC but is not a member of the
LLC.
An April 22, 1998, memorandum from Charles P. Fontaine (Fontaine), director of taxes for Reed, to Ian Malcolm (" Mac") Highet, executive vice president of corporate development for Reed, posed the following questions regarding the dividend requirements of the CJV structure:
Are current dividends required to be paid on the MB preferred
stock or the MB Parent preferred stock?
Can dividends not be paid until the MB preferred stock is
redeemed?
Is a dividend rate of 5% acceptable?
Shefter, for GS, and Hatef Behnia (Behnia), a partner at GD& C, responded to these questions in the following manner:
Current dividends are required to be paid on both classes of
preferred stock.
Dividends cannot be deferred until the preferred stocks are
*53 redeemed.
A dividend rate in the range of 5.0 to 5.5% is acceptable (5% is
likely to be used). The dividend rate will be some rate below
Treasuries * * *
Fontaine posed the following questions regarding the restrictions on transfers:
Can the Target [Bender] after the merger contribute its assets
to a partnership joint venture with another Reed Elsevier
company?
After two (2) years, can Reed Elsevier dispose of the stock of
Target by transferring the entire merger structure to a third
party?
After five (5) years, can Reed Elsevier unwind the merger
structure and dispose of the Target in any manner?
Can Reed Elsevier dispose of certain assets and lines of
business within two (2) years without Seller's consent?
Shefter and Behnia responded to these questions in the following manner:
The Target cannot contribute its assets to a partnership
following the merger.
*124 As described in the revised documents, after two years Reed
could dispose of the company by transferring the entire
structure.
Note, however, *54 that Reed must represent that at the time of
the acquisition it has no plan or intent to dispose of the
acquired company or its assets and will covenant that it
will not dispose of the acquired company or its assets
within two years
After five years Reed cannot "unwind" the structure. It will,
however have the ability to sell all the stock of Target,
provided however, that the sale cannot be to an affiliate of
Reed.
Reed cannot dispose of assets or certain lines of businesses
within two years.
Fontaine posed the following questions regarding the terms of the LLC agreement:
Will the agreement contain some restrictions on the use of the
cash?
Will LLC be obligated to distribute cash to MB Parent in order
to permit MB Parent to pay its tax and any other liabilities?
Shefter and Behnia responded to these questions in the following manner:
The LLC agreement will not contain any restrictions on the use
of the cash.
The LLC will be obligated to make cash distributions to MB
Parent in order*55 to permit MB Parent to pay tax liabilities,
dividends on the MB Parent preferred stock and other general
expenses of MB Parent.
L. Wolters Kluwer and Reed Submit Offers to Times Mirror
By letter dated April 22, 1998, Wolters Kluwer submitted to Times Mirror an offer to acquire Bender and Times Mirror's 50-percent interest in Shepard's for a total of $ 1.4 billion. In its offer letter, Wolters Kluwer made the following statement regarding the offer price and form of consideration for this acquisition:
Wolters Kluwer is prepared to acquire 100% of Matthew Bender and
TMC's [Times Mirror's] 50% interest in Shepard's for aggregate
consideration of US$ 1.400 billion, which we would propose to
allocate US$ 1.150 billion for Matthew Bender and US$ 250
million for Shepard's * * *.
Wolters Kluwer also stated that it was prepared to acquire Bender substantially in the form of the CJV structure. Wolters Kluwer's offer was conditioned on Times Mirror's negotiating exclusively with Wolters Kluwer.
*125 After Times Mirror received Wolters Kluwer's offer but before Times Mirror entered into an exclusive negotiation period*56 with Wolters Kluwer, Times Mirror informed Reed that it had received a significant offer from another bidder that had accepted the use of the CJV structure for the Bender transaction. Times Mirror also informed Reed that Reed would have to respond promptly if it wished to remain in the running for Bender and Times Mirror's 50-percent interest in Shepard's.
By letter dated April 23, 1998, Reed submitted to Times Mirror an offer to acquire Bender and Times Mirror's 50-percent interest in Shepard's "for a cash consideration of $ 1.65 billion and on the terms and conditions reflected in the mark-up of the Agreement and Plan of Merger." In its offer letter, Reed accepted the use of the CJV structure for its purchase of Bender. Reed's offer was conditioned on Times Mirror's acceptance of the offer by Friday, April 24, 1998, at 5 p.m. "(Los Angeles time)".
M. Times Mirror Responds to Wolters Kluwer's Offer
On April 23, 1998, Unterman sent a letter to Wolters Kluwer in response to Wolters Kluwer's offer to acquire Bender and Times Mirror's 50-percent interest in Shepard's. Unterman included the following statements in this letter:
there is one aspect of the proposal*57 which is structurally
defective, and precludes us from complying with the conditions
set forth in your letter. The insertion in your mark-up of a
guaranty by MB Parent of Matthew Bender's post-Merger
indebtedness to you materially changes the economic and risk
profile of the transaction in that it creates a significant
contingent liability for MB Parent, the repository of our sales
proceeds. While we assume that you did not intend this provision
as a mechanism to place our sales proceeds at risk, when
questioned on the point, your counsel did not withdraw it and
your counsel did indicate that it did represent an addition to
our proposed structure designed to create leverage for you in
other circumstances.
In addition, Unterman made the following statements in an attachment to this letter:
1. Guaranty. The mark-up proposes that MB Parent guaranty
the secured debt of MergerSub to Acquiror. This proposal would
result in the assets of the LLC being placed at risk and is
unacceptable.
*126 N. April 24, 1998, Special Meeting of Times Mirror's Board of
*58 Directors
A special meeting of Times Mirror's board of directors was convened on April 24, 1998. A document entitled "Mosby Matthew Bender Update" was prepared for this meeting (April Bender update). The April Bender update listed the following as one of Times Mirror's major accomplishments since the March 5, 1998, meeting of Times Mirror's board of directors:
As part of our effort to minimize the tax liability on the
divestiture, we continued to look for tax-efficient structures.
A potential approach that is superior to the structures reviewed
at last month's Board meeting was brought to us by Price
Waterhouse through Goldman Sachs. This approach is proprietary
to Price Waterhouse and is subject to a confidentiality
agreement. * * *
The April Bender update also included a section entitled "New Tax Minimization Approach" that contained the following:
The Price Waterhouse structure separates ownership and control
so that the acquiring company controls Matthew Bender and Times
Mirror controls an amount of cash equivalent to Matthew Bender's
value, but without having paid a tax for*59 the shift in control.
The steps in this structure * * * involve the creation of a
special purpose corporation (referred to as MB Parent * * *)
that is owned partly by Times Mirror and partly by the acquiring
company. This special purpose corporation is controlled by the
acquiring company through its ownership of relatively low value,
nonparticipating preferred stock with 80% voting control. MB
Parent in turn owns preferred stock and nonvoting common stock
in an acquisition subsidiary that will merge with Matthew Bender
and a nonvoting interest in a single member limited liability
company that holds the cash referred to above. As a result of
the merger of Matthew Bender into the acquisition subsidiary,
Times Mirror will own all of the common stock and remaining 20%
voting power of MB Parent, the special purpose corporation.
However, even though Times Mirror will not have voting control
over MB Parent, it will control the limited liability
corporation holding all of the cash by virtue of being the sole
(nonequity) manager of the LLC.
*60 The results are as follows:
o Times Mirror will control the LLC, thereby controlling the
cash in it and any assets or businesses acquired with such
cash.
o Times Mirror and the LLC will be consolidated for financial
reporting purposes.
o *127 The acquiring company will control Matthew Bender and will be
able to consolidate for financial reporting purposes.
o The merger of Matthew Bender into the acquisition subsidiary
in exchange for MB Parent common stock will qualify as a tax-
free reorganization for tax purposes (even though such common
stock does not carry with it voting control).
o MB Parent, the LLC and Matthew Bender will not be consolidated
for tax purposes with either Times Mirror or the acquiring
company.
o At some later date and upon mutual agreement, the Matthew
Bender and MB Parent preferred stock can be redeemed at face
value and the nonvoting common can be redeemed at a formula
price, which would leave the acquiring company as the sole
owner of Matthew Bender and*61 Times Mirror as the sole, and
controlling owner of MB Parent, with the ability to liquidate
MB Parent and the LLC without a tax cost.
During the special meeting of the board of directors, Willes, Unterman, and Behnia made presentations concerning the proposed transaction and the competing bids received from Wolters Kluwer and Reed.
At the conclusion of this discussion, the board approved resolutions related to the Bender transaction. As part of these resolutions, the board accepted Reed's offer for Bender and Times Mirror's 50-percent interest in Shepard's.
O. Organization of CBM Acquisition Parent Co. and CBM
MergerSub Corp.
On April 24, 1998, two of Reed's wholly owned subsidiaries, Reed Elsevier Overseas BV (REBV), a Dutch private limited liability company, and Reed Elsevier U.S. Holdings, Inc. (REUS), a Delaware corporation, organized CBM Acquisition Parent Co. (MB Parent) by filing a certificate of incorporation with the secretary of state of the State of Delaware. MB Parent's bylaws included the following provisions:
ARTICLE 2
MEETINGS OF STOCKHOLDERS
* * * * * * *
*62 SECTION 2.05. Quorum. Unless otherwise provided under the
certificate of incorporation or these bylaws and subject to
Delaware Law, the presence, in person or by proxy, of the
holders of a majority of the outstanding capital stock of the
Corporation entitled to vote at a meeting of stockholders shall
constitute a quorum for the transaction of business.
SECTION 2.06. Voting. (a) Unless otherwise provided in
the certificate of incorporation and subject to Delaware Law,
each stockholder shall be *128 entitled to one vote for each
outstanding share of capital stock of the Corporation held by
such stockholder. Unless otherwise provided in Delaware Law, the
certificate of incorporation or these bylaws, the affirmative
vote of a majority of the shares of capital stock of the
Corporation present, in person or by proxy, at a meeting of
stockholders and entitled to vote on the subject matter shall be
the act of the stockholders.
* * * * * * *
SECTION 2.07. Action by Consent. (a) Unless otherwise
provided*63 in the certificate of incorporation, any action
required to be taken at any annual or special meeting of
stockholders, or any action which may be taken at any annual or
special meeting of stockholders