ActualPlan of Reorganization
ActualPlan of Reorganization
‘D’type reorganization involves transfer part of substantially assets toa controlled corporation which follows the distribution of thecontrolled corporation’s stock pursuant. It is referred to asdivisive D reorganization.
Thethree shareholders have various characteristics which distinguisheach of them. Ms. Adam is the founder of the corporation but she isinterested in radio station. She has the biggest share in thecorporation and this gives her the freedom to execute dutiesincluding management of the corporation. Contrariwise, for the last10 years, radio station has registered $100000 loss.
Mr.Baker an executive is interested in magazine organization. He owns20% of the share of the whole organization but his business hasregistered $30000 lucrative for the last 6 years. This is to say, hisbusiness is the one making the entire organization alive.
Mr.Cohen is not recognized by the corporation. On the same note, he owns5% share from the Vanishing Point Inc. Actually he is to managepublication business. For the last 3 years it has manage to reachbreak-even. This means that its sales equals cost hence no loss noprofit experienced.
Inpractical instance, the three operations (radio station/radio shows,magazine and publishing) for them to continue surviving in themerger, sufficient stock need to be maintained to make them going.None of the business should be undermined in one way or the othersince it means coming to the end of that business. As the manager,the actual plan of reorganization needs to make a steady flow ofstock in the three businesses operating in the communication line.
Thesplit off will occur to the most non profitable business. In ourcase, since the radio station has registered loss from the last 10years, some of its stock will be exchanged for the magazine business.Magazine stock will be exchanged 100% so that profits from it willaugment. On the same note, the remaining stock of radio station willbe maintained since the business need not be dissolves. The profitfrom the magazine business will able to boost radio station and thepublication department hence capital flow from all business.
Thestock exchanged represent the voting right of the shareholders. Onthe contrary, the exchanged stock may represent nonvoting stock. Thisis a situation where remaining target stock is required to bereached. On the contrary, transaction of the substantially assetsshould be maintained by the surviving corporation.
Inother instances, Target Corporation may exchange stock for morevoting rights of the acquiring corporation. In our case, magazinebusiness is more lucrative than the other two businesses. But sinceMr. Bakerhas only 20% voting stock in the Vanishing Point Inc., he may berequired to give out the stock and in return acquire voting stockfrom the corporation.
Forthe reorganization purposes, there is a need to make Mr. Baker activein his magazine disposition for it to grow gradually. In connectionto this, the voting rights should be reversed or altered as a way ofmotivating some targeted shareholders. There is a need to reapportionMr. Baker with 50% of the voting rights hence the ration of profitsharing. This will positively motivate him hence adding effort ondeveloping the magazine business.
Onthe same note, Mr. Cohen should be recognized and be reapportioned by25% of the shares. Likewise, this will encourage him and develop thepublisher department. This will enable it step up from the break-evento making some profit. Basically, the entire corporation will haveprofited from this returns.
Therole of empowering Mr. Baker will be accomplished and the founder ofthe corporation Ms. Adam will be sufficed by the outcome. Herappreciation of the drawbacks from her department will motivate herby working day and night to see the department improving. She canprobably make it to break-even. The overall effect will be positivehence the internal revenue will be more.
Itmay be difficult to pay shareholder by cash. Therefore, thecorporation may decide to engage in phantom stock. This is alsoknown as ‘shadow stock’. This plan pays a cash award to anemployee or shareholders that equal a set number or fraction ofcompany shares times the current share price.
Thephantom stock may of two types. Phantom stock plan which pay thewhole amount of shares (initial shares plus increased shares). Theother type namely, stock appreciation rights, only pays the increasedamount per share. The plan will able to make shareholders to pledgesome amount of stock to the corporation to help it run.
Inaddition, phantom stock will motivate shareholders since they will berewarded proportionately. The more stock generated the more payreceived. For example, if the second type is applied, it can act as acaution to the shareholder since the appreciated share is the reward.This is to say, if in any circumstances, specific shareholder failsto augment the shares, no rewards is received. Hence, the wholeprocess augments the internal revenue of the corporation.
Ms.Adams loan of &500000 to the corporation will assist inpropelling the corporation. Due to the health condition, it willbring major repercussion to the corporation. This is the existingstatus of her department which has being reporting loss all through.The losses was being funded by her personally from the pocket. Thiswill be impossible due to her current health situation which needs tobe funded from the corporation.
Thehealth condition of the Ms. Adam triggers off reorganization of thecorp[oration. Due to this, there will be a need to complete the splitoff process. The remaining part of the radio station stock willsooner be exchanged for publication stock. The radio stationdissolves hence complete divisive plan of reorganization.
Ms.Adam is to be given a part of her loan sooner to boost her inmedication. The balance of the loan will probably cover the lossesthat will be experienced in her absentia. This reorganization willprotect the corporation from future losses. Even if no losses will beexperienced but practically the situation is impossible.
Inconclusion, the type D plan of reorganization helps in the case ofone of the shareholder’s not in opposition to be in the merger.The plan reduces chances for future making of the losses. Thereapportionment process of voting rights will be helpful inmotivating the shareholders. Most important, the application of thephantom stocks will be more practical than voting rights since itsrewards comes at the end. The change of status of the Ms. Adam to actas a security will protect the corporation from future losses. Hence,the entire plan of reorganization suffices the IRS requirements.