As momentum builds for mid-2022 deal closure, the IRS has returned a favorable ruling for the AT&T-driven merger of Discovery and WarnerMedia. The Entertainment lawyer Brandon Blake has the news for us.
Tax-free for stockholders
Surprisingly for what can only be called a mega-merger, the road to date seems to have been free of significant roadblocks for the deal. The merger is currently set to go ahead under the terms of a Reverse Morris Trust. This rare structure helps to ensure deals are tax-free for most intents and purposes.
There’s two paths open to AT&T at present, with confirmation of which will be used to be confirmed as we draw closer to the final date. Either way, it will create the temporary entity to be known as SpinCo, after which the merger with Discovery will take place.
Reverse Morris Trust
In order to allow for the tax benefits of the deal, the shareholders from the divesting company (AT&T) must retain a majority in the merged firm, in order to prove there was (technically) no capital gains to tax to the IRS. In this specific case, 71% will be retained and 7 board members named, with Discovery stakeholders holding the other 29% and 6 shareholders. This does seem odd, given that both of the current Discovery top team will remain in place to lead the new entity. This will leave the stockholders free of tax for U.S federal income tax purposes, unless they take cash over fractional shares.
As of December 28th, 2021, they have received a favorable private letter ruling from the IRS regarding this and other intended tax treatments for the split and merger, leaving it on track for the mid-2022 deadline suggested. Blake & Wang P.A will be watching further developments with interest as we accelerate to that date.
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