 Deal Point: A manufacturing company is spun off from its parent in a tax-free divestiture. Twelve months later the spun off company receives a purchase offer from a company in the same business. Under the terms of the Internal Revenue Code, the merger or acquisition of a target company may, under certain circumstances, jeopardize the tax-free nature of a prior spin-off. The target company has an obligation to indemnify its former parent for any tax that might become due in connection with such a determination. Despite the fact that both the target company and the potential purchaser have received independent tax opinions from their respective reputable tax counsel opining that the past tax free spin-off will not be jeopardized by the impending transaction, the financial impact on the potential purchaser if this tax treatment is not received is so significant that it is unwilling to proceed in the absence of certainty for this point.
Transactional Insurance Solution: A $60,000,000 Tax Opinion Insurance policy is issued insuring that the desired tax treatment as set forth in both reputable law firms' tax opinions will be received.
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