2005 U.S. Tax Ct. LEXIS 28">*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.
125 T.C. 110">*112 CONTENTS
FINDINGS OF FACT
Background
2005 U.S. Tax Ct. LEXIS 28">*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 Mirror2005 U.S. Tax Ct. LEXIS 28">*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
2005 U.S. Tax Ct. LEXIS 28">*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 for2005 U.S. Tax Ct. LEXIS 28">*32 decision are:
(1) Whether the Bender transaction qualifies as a reorganization under either
(2) whether
125 T.C. 110">*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, Times2005 U.S. Tax Ct. LEXIS 28">*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 125 T.C. 110">*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
2005 U.S. Tax Ct. LEXIS 28">*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 as2005 U.S. Tax Ct. LEXIS 28">*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 125 T.C. 110">*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
2005 U.S. Tax Ct. LEXIS 28">*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, briefing2005 U.S. Tax Ct. LEXIS 28">*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.
* * * * * * *
125 T.C. 110">*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.
* * * * * * *
2005 U.S. Tax Ct. LEXIS 28">*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 ownership2005 U.S. Tax Ct. LEXIS 28">*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 125 T.C. 110">*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 prepare2005 U.S. Tax Ct. LEXIS 28">*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 Matthew2005 U.S. Tax Ct. LEXIS 28">*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" 125 T.C. 110">*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 operating2005 U.S. Tax Ct. LEXIS 28">*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
The2005 U.S. Tax Ct. LEXIS 28">*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 and2005 U.S. Tax Ct. LEXIS 28">*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 125 T.C. 110">*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 resources2005 U.S. Tax Ct. LEXIS 28">*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 executed2005 U.S. Tax Ct. LEXIS 28">*46 confidentiality agreement regarding Bender.
125 T.C. 110">*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 the2005 U.S. Tax Ct. LEXIS 28">*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, 2005 U.S. Tax Ct. LEXIS 28">*48 Reed made the 125 T.C. 110">*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 "Presentation2005 U.S. Tax Ct. LEXIS 28">*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 125 T.C. 110">*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 to2005 U.S. Tax Ct. LEXIS 28">*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 for2005 U.S. Tax Ct. LEXIS 28">*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.
* * * * * * *
125 T.C. 110">*123 4. Target merges with Newco with Target surviving.
(Alternatively, Newco could be surviving company.) In2005 U.S. Tax Ct. LEXIS 28">*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
2005 U.S. Tax Ct. LEXIS 28">*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.
125 T.C. 110">*124 As described in the revised documents, after two years Reed
could dispose of the company by transferring the entire
structure.
Note, however, 2005 U.S. Tax Ct. LEXIS 28">*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 order2005 U.S. Tax Ct. LEXIS 28">*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 T.C. 110">*125 After Times Mirror received Wolters Kluwer's offer but before Times Mirror entered into an exclusive negotiation period2005 U.S. Tax Ct. LEXIS 28">*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 proposal2005 U.S. Tax Ct. LEXIS 28">*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.
125 T.C. 110">*126 N. April 24, 1998, Special Meeting of Times Mirror's Board of
2005 U.S. Tax Ct. LEXIS 28">*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 for2005 U.S. Tax Ct. LEXIS 28">*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.
2005 U.S. Tax Ct. LEXIS 28">*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 125 T.C. 110">*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 and2005 U.S. Tax Ct. LEXIS 28">*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
* * * * * * *
2005 U.S. Tax Ct. LEXIS 28">*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 125 T.C. 110">*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
provided2005 U.S. Tax Ct. LEXIS 28">*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, may be taken without a meeting,
without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be
signed by the holders of outstanding capital stock having not
less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted and shall be
delivered to the Corporation by delivery to its registered
office in Delaware, its principal place of business, or an
officer or agent of the Corporation having custody of the book
in which proceedings of meetings of stockholders are recorded. *
* * Prompt notice of the taking of the corporate action without
a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing.
2005 U.S. Tax Ct. LEXIS 28">*64 * * * * * * *
ARTICLE 3
DIRECTORS
* * * * * * *
SECTION 3.03. Quorum and Manner of Acting. Unless the
certificate of incorporation or these bylaws require a different
number, a majority of the total number of directors shall
constitute a quorum for the transaction of business, and the
affirmative vote of a majority of the directors present at [a]
meeting at which a quorum is present shall be the act of the
Board of Directors. * * *
As of the time of trial of this case, MB Parent's bylaws had never been amended.
On April 27, 1998, REBV and REUS organized CBM MergerSub Corp. (MergerSub) by filing a certificate of incorporation with the secretary of state of the State of New York.
P. Adoption of the Merger Agreement
On April 26, 1998, a document entitled "Agreement and Plan of Merger", prepared by GD& C, was presented to representatives of Times Mirror, TMD, Bender, REUS, REBV, MB Parent, and CBM Acquisition Corp. The Agreement and Plan 125 T.C. 110">*129 of Merger set forth the terms and details of the Bender transaction. On that same date, the boards2005 U.S. Tax Ct. LEXIS 28">*65 of directors of TMD, Bender, REUS, REBV, and MB Parent adopted resolutions that approved each of those corporation's engaging in the Bender transaction.
On April 27, 1998, representatives of Times Mirror, TMD, Bender, REUS, REBV, MB Parent, and MergerSub executed an agreement entitled "Amended and Restated Agreement and Plan of Merger" (the Bender agreement). Through the Bender agreement, MergerSub replaced CBM Acquisition Corp. as a party to the Bender transaction. The Bender agreement superseded the Agreement and Plan of Merger in its entirety.
The recitals to the Bender agreement stated, in pertinent part, the following:
WHEREAS, the TM Parties [Times Mirror, TMD, and Bender,
collectively], Acquiror [REUS and REBV, collectively], MB
Parent, and CBM Acquisition Corp. have entered into an Agreement
and Plan of Merger dated as of April 26, 1998 (the "Existing
Merger Agreement");
WHEREAS, the TM Parties and the Reed Parties [REUS, REBV, MB
Parent, and MergerSub, collectively] desire to amend and restate
the Existing Merger Agreement on the terms and subject to the
conditions set forth in this Agreement;
2005 U.S. Tax Ct. LEXIS 28">*66 WHEREAS, in anticipation of the Merger (as defined in Section
1.1), MB Parent will file a Restated Certificate of
Incorporation of MB Parent * * * with the Secretary of State of
the State of Delaware;
WHEREAS, in anticipation of the Merger, MergerSub will file a
Restated Certificate of Incorporation of MergerSub * * * with
the Secretary of State of the State of New York;
WHEREAS, immediately prior to the Effective Time (as defined
below), in consideration of an amount in cash equal to
$ 1,375,000,000 less the net proceeds received by MergerSub from
the MergerSub Debt (as defined below) from REUS and REBV,
MergerSub will issue to REUS (i) seven hundred and ninety-two
(792) shares of Common Stock, par value $ . 01 per share, of
MergerSub ("MergerSub Common Stock"), which MergerSub
Common Stock will have 16% of the voting power of all of the
outstanding shares of capital stock entitled to vote in an
election of directors (" Voting Power") and such other
designations, preferences, voting powers, rights and
qualifications as are2005 U.S. Tax Ct. LEXIS 28">*67 set forth in the MergerSub Certificate of
Incorporation, (ii) 75% of the authorized shares of Nonvoting
Participating Preferred Stock, par value $ . 01 per share, of
MergerSub (" MergerSub Participating Preferred Stock"),
and (iii) 75% of the authorized shares of Voting Preferred
Stock, par value $ . 01 per share, of MergerSub ("MergerSub
Preferred Stock"), which MergerSub Preferred Stock will have
60% of the Voting Power and such other designations,
preferences, voting powers, rights and qualifications as are set
forth in the MergerSub Certificate of Incorporation 125 T.C. 110">*130 and
MergerSub will issue to REBV (i) one hundred and ninety-eight
(198) shares of MergerSub Common Stock, which MergerSub Common
Stock will have 4% of the Voting Power and such other
designations, preferences, voting powers, rights and
qualifications as are set forth in the MergerSub Certificate of
Incorporation, (ii) 25% of the authorized shares of MergerSub
Participating Preferred Stock, which MergerSub Participating
Preferred Stock will have no Voting Power and such other
designations, 2005 U.S. Tax Ct. LEXIS 28">*68 preferences, voting powers, rights and
qualifications as are set forth in the MergerSub Certificate of
Incorporation and (iii) 25% of the authorized shares of
MergerSub Preferred Stock, which MergerSub Preferred Stock will
have 20% of the Voting Power and such other designations,
preferences, voting powers, rights and qualifications as are set
forth in the MergerSub Certificate of Incorporation;
WHEREAS, immediately prior to the Effective Time (as defined in
Section 1.3), MergerSub will borrow $ 600,000,000 on terms not
inconsistent with the terms set forth in Section 7.8
("MergerSub Debt") from an affiliate of Acquiror;
WHEREAS, immediately prior to the Effective Time, in
consideration for 75% of the authorized and outstanding shares
of MergerSub Participating Preferred Stock held by REUS, MB
Parent will issue to REUS 75% of the authorized shares of Voting
Preferred Stock, par value $ . 01 per share, of MB Parent ("
MB Parent Preferred Stock"), which MB Parent Preferred
Stock will have 60% of the Voting Power and such other
designations, 2005 U.S. Tax Ct. LEXIS 28">*69 preferences, voting powers, rights and
qualifications as are set forth in the MB Parent Certificate of
Incorporation;
WHEREAS, immediately prior to the Effective Time, in
consideration for 25% of the authorized and outstanding shares
of MergerSub Preferred Stock and 25% of the authorized and
outstanding shares of MergerSub Participating Preferred Stock
held by REBV, MB Parent will issue to REBV 25% of the MB Parent
Preferred Stock, which MB Parent Preferred Stock will have 20%
of the Voting Power and such other designations, preferences,
voting powers, rights and qualifications as are set forth in the
MB Parent Certificate of Incorporation;
WHEREAS, immediately prior to the Effective Time, in
consideration for $ 1,375,000,000, MB Parent will issue to
MergerSub 100% of the authorized shares of Common Stock, par
value $ . 01 per share, of MB Parent ("MB Parent Common
Stock"), which MB Parent Common Stock will have 20% of the
Voting Power and such other designations, preferences, voting
powers, rights and qualifications as are set forth2005 U.S. Tax Ct. LEXIS 28">*70 in the MB
Parent Certificate of Incorporation;
WHEREAS, in anticipation of the Merger, MB Parent will cause
Liberty Bell I, LLC, a single-member Delaware limited liability
company ("LLC") to be formed under the laws of the State
of Delaware prior to the Effective Time by filing with the
Secretary of State of the State of Delaware the Certificate of
Formation of LLC * * *;
WHEREAS, in anticipation of the Merger, MB Parent, an affiliate
of MB Parent and Times Mirror will enter into a Limited
Liability Company Agreement of LLC pursuant to which the
affiliate of MB Parent shall be 125 T.C. 110">*131 appointed the initial manager of
LLC and, immediately after the Effective Time, Times Mirror
shall be appointed the manager of LLC * * *;
WHEREAS, immediately after the Effective Time, in accordance
with the terms of the LLC Agreement, MB Parent will make a
contribution to LLC in the amount of $ 1,375,000,000;
In the Bender agreement, Reed and Times Mirror agreed, in pertinent part, to the following:
SECTION 1.1. The Merger. At the Effective Time (as
2005 U.S. Tax Ct. LEXIS 28">*71 defined in Section 1.3) and upon the terms and subject to the
conditions of this Agreement and in accordance with the New York
Business Corporation Law * * *, MergerSub shall be merged with
and into * * * [Bender] (the "Merger"). Following the
Merger, * * * [Bender] shall continue as the surviving
corporation (the "Surviving Corporation") and the
separate corporate existence of MergerSub shall cease. The
Merger is intended to qualify as a tax-free reorganization under
* * * * * * *
SECTION 1.8. Conversion of Shares.
(a) Merger Consideration. At the Effective Time, each
share of common stock, par value $ 100.00 per share, of * * *
[Bender] (individually a "Share" and collectively the
"Shares") issued and outstanding immediately prior to the
Effective Time (other than Shares held in * * * [Bender's]
treasury or by any of * * * [Bender's] Subsidiaries), all of
which are owned by TMD, shall, by virtue of the Merger and
without any action on the part of MergerSub, 2005 U.S. Tax Ct. LEXIS 28">*72 * * * [Bender] or
the holder thereof, be converted into and shall become the right
to receive a number of the fully paid and nonassessable shares
of MB Parent Common Stock held by MergerSub immediately prior to
the Effective Time equal to a fraction, the numerator of which
is the number of shares of MB Parent Common Stock held by
MergerSub immediately prior to the Effective Time and the
denominator of which is the number of Shares outstanding
immediately prior to the Effective Time (the "Merger
Consideration").
* * * * * * *
SECTION 1.10. Exchange of Certificates.
* * * * * * *
(c) Effect of Exchange. All shares of MB Parent Common
Stock issued upon the surrender of certificates representing
Shares in accordance with the terms hereof shall be deemed, to
the fullest extent permitted by applicable law, to have been
issued in full satisfaction of all rights pertaining to such
Shares * * *
* * * 2005 U.S. Tax Ct. LEXIS 28">*73 * * * *
SECTION 2.4. Conditions to TM Parties' Obligations. The
obligations of the TM Parties to consummate the Merger are
subject to the satisfaction125 T.C. 110">*132 (or waiver by each of the TM
Parties) as of the Effective Time of the following conditions:
* * * * * * *
(f) Legal Opinions.
* * * * * * *
(ii) Times Mirror shall have received a favorable opinion of its
legal counsel, in form and substance reasonably satisfactory to
it, as to the qualification of the Merger as a reorganization
under the provisions of
SECTION 2.5. Substitution Transaction. In the event that
the condition to the obligations of Times Mirror, TMD and * * *
[Bender] to consummate the Closing contained in Section
2.4(f)(ii) is not satisfied or waived by October 31, 1998 or
such earlier date on which all other conditions in Sections 2.1,
2.2 and 2.4 have been satisfied or waived (the "Revision
Date") then * * * (iii) for a period of 452005 U.S. Tax Ct. LEXIS 28">*74 days from the
Revision Date (the "Renegotiation Period"), Acquiror and
Times Mirror shall enter into bona-fide negotiations with a view
to determining whether agreement can be reached as to the terms
and conditions upon which the transactions contemplated by this
Agreement may be structured so as to replicate as much as
practicable the relative economic benefits that each party and
their Affiliates would have derived from the transactions
contemplated by the Agreement (any such restructured transaction
hereafter referred to as the "Substitution Transaction"),
(iv) unless the parties agree to the terms and conditions of a
Substitution Transaction during the Renegotiation Period, as
soon as practicable following the expiration of such period,
Times Mirror shall sell to REUS and REUS shall purchase from
Times Mirror, all the outstanding shares of * * * [Bender] for a
cash purchase price of $ 1,375,000,000 * * *
* * * * * * *
SECTION 7.7. Enforceability of LLC Agreement. The Reed
Parties will2005 U.S. Tax Ct. LEXIS 28">*75 not commence, maintain, or join any action (at law
or otherwise) that asserts that the LLC Agreement is
unenforceable.
On April 28, 1998, the board of directors of MergerSub adopted resolutions that approved MergerSub's engaging in the Bender transaction.
Q. GS Prepares "Fairness Package" for Bender Transaction
On or about April 27, 1998, GS prepared a document entitled "Fairness Package" with respect to the Bender transaction and Times Mirror's sale of its 50-percent interest in Shepard's. The Fairness Package included a page entitled "Summary of Proposed Transaction" that described the structure and consideration for the Bender transaction and Times 125 T.C. 110">*133 Mirror's sale of its 50-percent interest in Shepard's in the following manner:
o Purchase of 100% of the stock of * * * [Bender] and Times
Mirror's 50% partnership interest in * * * [Shepard's] for
$ 1.65 billion in cash
o Purchase of * * * [Bender] for $ 1.4 billion using the PW
tax-advantaged structure ("PW Structure")
o Purchase of * * * [Shepard's] for $ 250 million with a
The Fairness Package also included a page entitled "Summary of Financial Impact" that listed Times Mirror's "After-tax Cash Proceeds from Sale" using the CJV structure as $ 1,641,500,000. GS determined this $ 1,641,500,000 amount by assuming (1) a $ 1.4 billion "tax-free" purchase of Bender and (2) that the sale of Times Mirror's 50-percent interest in Shepard's would generate $ 241.5 million in after-tax proceeds.
R. Melone Drafts Memorandum Regarding the Bender Transaction
for E& Y's Files
On or about April 29, 1998, Melone drafted a memorandum entitled "Times Mirror Matthew Bender Sale" for E& Y's files. Melone included the following statements regarding the Bender transaction and Times Mirror's sale of its 50-percent interest in Shepard's in this memorandum:
Times Mirror has entered into an agreement with Reed Elsevier
for the sale of Matthew Bender for $ 1,375,000,000 and the sale
of Times Mirror's interest in Shepard's Inc. for $ 225,000,000.
The sale of Matthew Bender is structured as a reorganization in
which the $ 1,375 million proceeds from the sale will end up in
an LLC whose ownership is2005 U.S. Tax Ct. LEXIS 28">*77 as shown in the attached chart.
Through the various shareholder agreements, certificates of
incorporation and the LLC management agreement, Times Mirror has
total control over the assets and operations of the LLC and Reed
Elsevier has total control over the assets and operations of
Matthew Bender. The structure is designed to result in no tax
due by Times Mirror on the profit from the sale of Matthew
Bender.
* * * * * * *
Consolidation
* * * Times Mirror controls the assets of the LLC through the
management agreement, which specifically states that Times
Mirror has no fiduciary duty to the holder of Acquisition Parent
[MB Parent] and may use its discretion as to the use of the
assets. Times Mirror may have the LLC buy its own debt
instruments or Times Mirror stock, make business125 T.C. 110">*134 acquisitions or
any other transaction to the benefit of Times Mirror. The only
limitation is that Times Mirror may not upstream LLC assets to
itself.
Times Mirror owns all of the common stock of Acquisition2005 U.S. Tax Ct. LEXIS 28">*78 Parent
and the 20% vote it carries. The ownership of the common stock
provides Times Mirror with 100% of the residual ownership and
value of Acquisition Parent following redemption of the
preferred stock, which is virtually assured in at least 20 years
due to the redemption rights and certain put and call options.
The equity value of the preferred stock is limited to its stated
(redemption) value and fixed dividend payments.
Times Mirror has the ability to ensure that the Board of
Directors of Acquisition Parent may not do anything that may
affect the control or viability of the LLC. Certain board
actions require the unanimous vote of the Board. These include:
o the incurrence of indebtedness or guarantees of indebtedness
of Acquisition Parent
o the sale, transfer or other disposition, pledge or assignment
of any portion or all of its LLC interest
o the issuance of any other securities of Acquisition Parent
All of these factors indicate that Times Mirror not only
controls the assets of the LLC, but also is the beneficiary2005 U.S. Tax Ct. LEXIS 28">*79 of
all of the ownership risks and rewards of the LLC. * * *
S. May 7, 1998, Regular Meeting of Times Mirror's Board of
Directors
A regular meeting of Times Mirror's board of directors was convened on May 7, 1998. A document entitled "Mosby Matthew Bender Divestiture Update" was presented to Times Mirror's board of directors at this meeting (May Bender update). The May Bender update included the following statements:
Following the special Board meeting on Friday, April 24, we
began exclusive negotiations with Reed Elsevier for the
divestiture of Matthew Bender and our 50% interest in Shepard's.
Negotiations started Friday afternoon and continued for most of
the day Saturday. Contracts and press releases were finalized
Saturday night and signed on Sunday, after all corrections to
the contracts had been made. The transaction was in line with
the parameters reviewed with the Board, with a total value of
$ 1.65 billion. Matthew Bender will be divested through a merger
that takes advantage of the proprietary tax structure that was
presented to the Board. Pending the customary2005 U.S. Tax Ct. LEXIS 28">*80 regulatory review,
the transaction is expected to be completed this summer.
125 T.C. 110">*135 T. May 7, 1998, Annual Meeting of Times Mirror's
Shareholders
Times Mirror's annual shareholder meeting was convened on May 7, 1998. At this meeting, Willes discussed, among other topics, Times Mirror's "decision to sell * * * [Mosby and Matthew Bender] for strategic reasons." Willes made the following remarks with respect to this topic: "You have read in recent days that we have reached agreements to sell Matthew Bender, and our 50% interest in Shepard's for $ 1.65 billion. We have also agreed to sell Mosby for $ 415 million. This is a phenomenal amount of money for some phenomenal businesses."
U. Organization of Liberty Bell I
On May 22, 1998, Michael S. Udovic (Udovic), assistant general counsel for Times Mirror, filed the Certificate of Formation for Liberty Bell I, LLC (LBI), with the secretary of state of the State of Delaware. On May 26, 1998, Udovic resigned from his position as the authorized person of LBI. LBI did not have an authorized person between the time of Udovic's resignation and July 28, 1998.
V. July 9, 1998, Regular Meeting of Times2005 U.S. Tax Ct. LEXIS 28">*81 Mirror's Board of
Directors
A regular meeting of Times Mirror's board of directors was convened on July 9, 1998, at which the board of directors discussed, among other topics, the pending Bender transaction. According to the minutes of this meeting, Unterman discussed the following matters with the board of directors:
Thomas Unterman * * * reviewed the pending transactions
involving Mosby and Matthew Bender and their impact upon the
Company's financial projections, concluding that Times Mirror
remained on target to meet each of its major financial
objectives for the year. He noted that the proceeds from the
dispositions of these businesses will be received by two limited
liability companies and, utilizing materials previously
furnished to the Board of Directors, discussed the short-term
investment strategies Times Mirror will follow in connection
with its management of those companies.
These matters were also presented to the board of directors in a written report. In particular, the section entitled "Finance Report" contained the following statements:
125 T.C. 110">*136 FINANCE REPORT
INTRODUCTION
2005 U.S. Tax Ct. LEXIS 28">*82 Our financial objectives for this year included:
a) earnings growth of 20%,
b) continued use of every available opportunity to finance
investment in the growth of our businesses * * *,
c) optimization of the proceeds from the Mosby Matthew
Bender disposition so that future year dilution is
minimized, and
d) continuation of return on capital in excess of 12%.
At mid-year we can report that we are still on this course and
all of our corporate objectives for the year are both in sight
and within reach. While there are more "moving pieces" than
usual, there are four major items to note:
o First, as expected, following the Mosby Matthew Bender (MMB)
agreements, we are required to treat MMB as discontinued
operations and the "street" has recalibrated our performance
to a continuing earnings basis and will track us this way from
now on.
* * * * * * *
o Third, in light of the very large MMB gain on sale, 2005 U.S. Tax Ct. LEXIS 28">*83 we have
begun to review our entire balance sheet, our work processes,
and all of our systems to determine if appropriate charges,
write-offs, or buy-down/buy-outs of contracts might prove
beneficial. * * *
o Fourth, as is discussed under a separate tab entitled
Capitalization/Investment, following the MMB sale, we will
have a very substantial level of resources for redeployment
over time in operating assets and for recapitalization.
* * * * * * *
GAIN ON SALE AND DISCONTINUED EARNINGS REPORTING
* * * By divesting MMB, we are completely exiting the legal and
health sciences publishing business, and are required to
separately report MMB earnings as discontinued operations.
Similarly, the gain on sale appears in the discontinued line.
* * * * * * *
* * * We will receive over $ 2.0 billion in cash from the sale. *
* *
* * * * * * *
BALANCE SHEET REVIEW
2005 U.S. Tax Ct. LEXIS 28">*84 After the magnitude of the gain on the MMB sale became apparent,
we decided to use this opportunity to conduct a thorough
examination of our balance sheet, operations and investments to
see what actions we could take to benefit the businesses in
future years.
* * * * * * *
125 T.C. 110">*137 CAPITALIZATION AND INVESTMENT STRATEGY
Introduction
The disposition of Mosby Matthew Bender (MMB) will produce an
unprecedented level of investible [sic] capital for Times
Mirror. Net proceeds of approximately $ 2.0 billion will be
deposited into our accounts requiring immediate rigorous
management.
The net proceeds of the MMB disposition, in conjunction with our
annual operating cash flow will provide the company with
enormous investment capacity over the next few years. If we can
successfully deploy this investment capacity in assets that meet
our return criteria, our total 5 year investment capacity would
be as much as $ 5 billion. Investment at this level would still
2005 U.S. Tax Ct. LEXIS 28">*85 enable us to retain our current solid credit ratings and
associated financial flexibility.
Our first responsibility upon receipt of the disposition
proceeds is to establish a short term portfolio management
framework. The primary objective of this activity is to preserve
principal value while earning a return commensurate with the
risk parameters we establish through our investment policy.
Second, we will begin to redeploy these resources into operating
assets to drive revenue growth and into share repurchases to
start to return towards our target capitalization. In the
current high asset valuation environment, in view of our well
developed return discipline, this program could require several
years.
Most significantly, we are not looking at our resources as a war
chest for a big cash acquisition. Instead, we are expecting
increases of approximately 25%, a doubling of our recent
spending rate on acquisitions of businesses that are closely
related to or fill in gaps in our core businesses, acceleration
of our share repurchase2005 U.S. Tax Ct. LEXIS 28">*86 plans and, in general, an acceleration
of investments in our base businesses.
This stance leaves us with ample resources for pursuing
unexpected opportunities and will position us to try to "make
things happen" as important strategic initiatives are
identified. It also means that we will allocate a portion of our
surplus cash investment portfolio to investments with medium
term horizons in order to increase the overall return on our
cash. Examples of this type of investing include the investment
we made in Target Media Partners in connection with the Recycler
purchase, and the Latin Communications Group opportunity we
discussed at the last meeting, as well as increases in "new
media" venture capital investments. We will also allocate a
portion of the funds for tax-advantaged investments to enhance
yield and for "pre-funding" our charitable commitments with
contributions to our tax-exempt affiliates.
* * * * * * *
125 T.C. 110">*138 Short Term Portfolio Strategy
The following shows the gross amount of2005 U.S. Tax Ct. LEXIS 28">*87 disposition proceeds the
company will be receiving:
($ Millions)
Company Sold Entity Receiving Funds Amount (Gross)
____________ ______________________ ______________
Shepards Corporate $ 275
Bender Liberty Bell I L.L.C. 1,375
Mosby Liberty Bell II L.L.C. 415
______
Total: $ 2,065
Immediately we will utilize the funds to pay necessary
transaction expenses, pay down short-term corporate debt, and
then invest the remaining funds under our short-term investment
policy * * *. This policy ensures preservation of capital and
maintenance of liquidity through prudent standards for credit
quality, instrument type and overall portfolio limitations. At
the same time, it provides for sufficient flexibility to allow
us to search for yield2005 U.S. Tax Ct. LEXIS 28">*88 advantages where possible. The following
table shows the net investible [sic] funds that should be
available to deploy in short-term instruments:
($ Millions)
Estimated Cash
Transaction Short-Term
Fees and Debt
Funds Location Gross Funds Expenses Reduction Net Funds
______________ ___________ _______________ ___________ _________
Corporate $ 275 -- ($ 275) $ 0
Liberty Bell I 1,375 (64) -- 1,311
Liberty Bell II 415 (22) -- 393
Total: $ 1,704
W. Execution of the LBI Limited Liability Company Agreement
(the management authority)
On July 28, 1998, representatives of Times Mirror, Lexis, and MB Parent executed an agreement entitled "Limited Liability Company Agreement of Liberty Bell I, 2005 U.S. Tax Ct. LEXIS 28">*89 LLC" (LBI LLC agreement). The terms of the LBI LLC agreement included the following:
This Limited Liability Company Agreement (together with the
schedules attached hereto, this "Agreement") of LIBERTY BELL I,
LLC (the "Company"), is etered into by CBM ACQUISITION PARENT
CO., a Delaware corporation, as the sole member (the "Initial
Member"), LEXIS, INC., a Delaware corporation, as the initial
manager of the Company (the "Initial Manager"), and THE TIMES
MIRROR COMPANY, in its corporate capacity 125 T.C. 110">*139 and as the manager of
the Company appointed pursuant to Section 9(b) ("TMC"). * * *
The Initial Member, the Initial Manager and TMC, by execution of
this Agreement, hereby agree as follows:
1. Name; Formation; Tax Treatment.
The name of the limited liability company shall be LIBERTY BELL
I, LLC or such other name as the Manager may from time to time
hereafter designate. * * * The parties hereto intend that
pursuant to
Company be disregarded as an entity and not be treated as
2005 U.S. Tax Ct. LEXIS 28">*90 separate from the Initial Member. * * *
* * * * * * *
5. Members; Member Rights; Meetings.
* * * * * * *
c. No Member shall have any right, power, or duty, including the
right to approve or vote on any matter (including, without
limitation, any vote, approval or consent relating to the merger
of the Company with or into an "other business entity" (as
defined in the Act), the consolidation of the Company with or
into an other business entity, the domestication of the Company
to an other business entity, the conversion of the Company to an
other business entity, the transfer of the Company to any other
jurisdiction or, to the fullest extent permitted by law, the
dissolution of the Company), except as expressly required by
this Agreement, the Act or other applicable law.
* * * * * * *
7. Purposes.
The purpose of the Company is to invest in such property or
securities and to conduct2005 U.S. Tax Ct. LEXIS 28">*91 such businesses and other legal
activities as the Manager determines is in the best interests of
the Company.
* * * * * * *
9. Management.
a. The Manager shall have the sole right to manage the business
of the Company and shall have all powers and rights necessary,
appropriate or advisable to effectuate and carry out the
purposes and business of the Company, and no Member or other
person other than the Manager shall have any authority to act
for or bind the Company or to vote on or approve any of the
actions to be taken by the Company (unless otherwise expressly
required by the Act or other applicable law). Notwithstanding
the foregoing, the Initial Manager shall not take any action in
respect of or on behalf of the Company, other than the opening
of one or more bank accounts in the name of the Company, the
appointment of an agent for service of process for the Company
and the performance of other ministerial duties in connection
with the organization and formation of the Company. Accordingly,
2005 U.S. Tax Ct. LEXIS 28">*92 as of the Effective Time of the Merger, the Company shall have
no liabilities or obligations other than pursuant to this
Agreement.
125 T.C. 110">*140 b. The Manager shall serve until an Event of Withdrawal has
occurred [the resignation or dissolution of the Manager]. The
removal of the Manager shall be only at the request and
direction of the Manager and under no other circumstances,
including, without limitation, for cause. Upon any such Event of
Withdrawal, a new Manager shall be selected by the old Manager
prior to such resignation or dissolution, provided that if the
Manager does not make such selection, Members holding a Majority
in Interest shall be entitled to select a new Manager.
Notwithstanding anything contained herein, immediately after the
Effective Time of the Merger and without any action on the part
of TMC, the Initial Manager or any Member, the Initial Manager
(or any other Manager, if applicable) shall be automatically
removed as Manager and TMC shall become the Manager hereunder.
c. The Manager may appoint the Officers of the Company, 2005 U.S. Tax Ct. LEXIS 28">*93 who need
not be Members, to such terms and to perform such functions as
the Manager shall determine in its sole discretion as set forth
in Section 10. The Manager may appoint, employ or otherwise
contract with such other persons or entities for the transaction
of the business of the Company or the performance of services
for or on behalf of the Company as it shall determine in its
sole discretion. The Manager may delegate to any such Officer,
person or entity such authority to act on behalf of the Company
as the Manager may from time to time deem appropriate in its
sole discretion.
* * * * * * *
e. Without limiting the generality of the foregoing, to the
fullest extent permitted by law, including
the Act, and without creating any duties or obligations of the
Manager by implication or otherwise, it is expressly
acknowledged and agreed that to the extent the Manager owes any
fiduciary duties or similar obligations to the Initial Member
under any principles of law or equity2005 U.S. Tax Ct. LEXIS 28">*94 or otherwise, such duties
and obligations shall be owed solely to the holders of the
Initial Member's common equity and not to the holders of any
other class of the Initial Member's equity.
* * * * * * *
10. Officers.
a. Officers. The Officers of the Company shall be chosen
by the Manager and shall consist of at least a President, a
Secretary and a Treasurer. * * * The Manager may appoint such
other Officers and agents as it shall deem necessary or
advisable who shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be
determined from time to time by the Manager. The salaries of all
Officers and agents of the Company shall be fixed by or in the
manner prescribed by the Manager. * * * Any Officer elected or
appointed by the Manager may be removed at any time, with or
without cause, by the Manager. Any vacancy occurring in any
office of the Company shall be filled by the Manager.
* * * * * * 2005 U.S. Tax Ct. LEXIS 28">*95 *
125 T.C. 110">*141 11. Books and Records.
a. The Manager shall keep or cause to be kept complete and
accurate books of account and records with respect to the
Company's business. The Company's books of account shall be kept
using the method of accounting determined by the Manager. The
Company's independent auditor shall be an independent public
accounting firm selected by the Manager. The Manager shall give
each Member reasonable access during normal business hours to
the books and records of the Company.
* * * * * * *
12. Capital Contributions.
The Initial Member was deemed admitted as the sole Member of the
Company upon the execution and delivery of this Agreement. After
the Effective Time of the Merger and immediately after TMC shall
have been appointed Manager pursuant to Section 9(b), the
Initial Member will contribute the amount of cash to the Company
listed on Schedule B attached hereto [$ 1.375 billion].
* * * * * * *
15. Distributions.
2005 U.S. Tax Ct. LEXIS 28">*96 Distributions of cash or other assets of the Company shall be
made at such times and in such amounts as the Manager may
determine in its sole discretion; provided,
however, that notwithstanding the foregoing, the Initial
Member shall be entitled to receive, and the Company and the
Manager shall make, distributions of cash (or other assets of
the Company acceptable to the Member) to the Initial Member in
the amounts and at the times sufficient to enable the Initial
Member (a) to pay all of its liabilities, obligations and
expenses as and when they come due and (b) to make any payments
on, or distributions in respect of, the issued and outstanding
shares of the Voting Preferred Stock of the Initial Member in
accordance with the terms thereof. * * *
16. Return of Capital.
The Manager shall not have any liability for the return of each
Member's capital contribution, which return shall be payable
solely from the assets of the Company at the absolute discretion
of the Manager, subject to the requirements of the Act and
Section2005 U.S. Tax Ct. LEXIS 28">*97 15 hereof.
* * * * * * *
18. Exculpation and Indemnification.
a. No Member, Manager, Officer, employee or agent of the Company
and no employee, representative, agent, shareholder or Affiliate
of the Member or the Manager (collectively, the "Covered
Persons") shall be liable to the Company or any other Person who
has an interest in or claim against the Company for any loss,
damage or claim incurred by reason of any act or omission
performed or omitted by such Covered Person in good faith on
behalf of the Company and in a manner reasonably believed to be
within the scope of the authority conferred on such Covered
Person by this Agreement, except that a Covered Person shall be
liable for any such loss, damage 125 T.C. 110">*142 or claim incurred by reason of
such Covered Person's gross negligence or willful misconduct.
Notwithstanding anything herein to the contrary, "Covered
Person" shall include any person that was a Member, Manager,
Officer, employee or agent of the Company or an employee,
representative, 2005 U.S. Tax Ct. LEXIS 28">*98 agent, shareholder or Affiliate of the Member or
the Manager at the time the act or omission described in this
Section 18(a) was performed or omitted even if such person is no
longer a Member, Manager, Officer, employee or agent of the
Company or an employee, representative, agent, shareholder or
Affiliate of a Member or the Manager at the time the loss,
damage or claim is incurred as a result of such act or omission.
* * * * * * *
e. To the extent that, at law or in equity, a Covered Person has
duties (including fiduciary duties) and liabilities relating
thereto to the Company or to any other Covered Person, a Covered
Person acting under this Agreement shall not be liable to the
Company or to any other Covered Person for its good faith
reliance on the provisions of this Agreement or any approval or
authorization granted by the Company or any other Covered
Person. The provisions of this Agreement, to the extent that
they restrict the duties and liabilities of a Covered Person
otherwise existing at2005 U.S. Tax Ct. LEXIS 28">*99 law or in equity, are agreed by the Member
and the Manager to replace such other duties and liabilities of
such Covered Person.
f. The foregoing provisions of this Section 18 shall survive any
termination of this Agreement.
19. Resignation.
No Member shall have the right to resign from the Company except
with the consent of the Manager and upon such terms and
conditions as may be specifically agreed upon between the
Manager and the resigning Member.
* * * * * * *
21. Dissolution.
Subject to the provisions of Section 22 of this Agreement, the
Company shall be dissolved and its affairs wound up upon the
first to occur of the following:
a. The determination of the Manager to dissolve the Company;
b. The occurrence of an Event of Withdrawal;
c. The occurrence of any event which terminates the membership
of the last remaining Member of the Company unless the business
of the Company is continued in a manner permitted by the Act
including, without limitation, 2005 U.S. Tax Ct. LEXIS 28">*100 the appointment by the Manager of
a member of this Company within ninety (90) days after the
occurrence of such an event; or
d. The entry of a decree of judicial dissolution under Section
18-802 of the Act.
* * * * * * *
125 T.C. 110">*143 23. Assignments of Percentage Interest.
No Member may, directly or indirectly, sell, assign, pledge or
otherwise transfer or encumber any portion of such Member's
Percentage Interest (a "Transfer") to any other person
without the prior written consent of the Manager, which may be
given or withheld in its sole discretion and which consent may
be subject to such terms and conditions as the Manager may
determine. Any purported Transfer in violation of Section 23
shall be null and void and shall not be recognized by the
Company.
24. Waiver of Partition; Nature of Interest.
Except as otherwise expressly provided in this Agreement, to the
fullest extent permitted by law, each Member hereby irrevocably
waives any right or power that such Member might have2005 U.S. Tax Ct. LEXIS 28">*101 to cause
the Company or any of its assets to be partitioned, to cause the
appointment of a receiver for all or any portion of the assets
of the Company, to compel any sale of all or any portion of the
assets of the Company pursuant to any applicable law or to file
a complaint or to institute any proceeding at law or in equity
to cause the dissolution, liquidation, winding up or termination
of the Company. No Member shall have any interest in any
specific assets of the Company. The interest of each Member in
the Company is personal property.
* * * * * * *
29. Amendments.
This Agreement may be amended by the Manager at any time in its
sole discretion, provided that (a) any amendment to
Section 9(d), Section 11, the first sentence of Section 13,
Section 14, the proviso to the first sentence of Section 15,
Section 17, Section 18, Section 20, Section 24, this Section 29
or Section 34 hereof shall not be effective without the Initial
Member's prior written consent, which consent shall not be
2005 U.S. Tax Ct. LEXIS 28">*102 unreasonably withheld and (b) any amendment which materially and
adversely affects the rights of any Member shall not be
effective without such Member's consent, such consent not to be
unreasonably withheld; provided further that, in addition
to any consent or approval otherwise required under this Section
29 or applicable law, any amendment which materially and
adversely affects the rights of all the Members in the same or
similar manner shall only be effective if such amendment has
been approved by Members holding a Majority in Interest, such
approval not to be unreasonably withheld; and provided
further that any amendment to Section 9 must be approved by
TMC in its sole discretion.
* * * * * * *
33. Enforceability by TMC.
Notwithstanding any other provision of this Agreement, the
Member agrees that this Agreement constitutes a legal, valid and
binding agreement of the Member, and is enforceable against the
Member by 125 T.C. 110">*144 TMC (both in its corporate capacity, prior to the
Effective Time2005 U.S. Tax Ct. LEXIS 28">*103 of the Merger, and in its capacity, as of
immediately after the Effective Time of the Merger, as the
Manager of the Company), in accordance with its terms. In
addition, TMC (both in its corporate capacity, prior to the
Effective Time of the Merger, and in its capacity, as of
immediately after the Effective Time of the Merger, as the
Manager of the Company) is an intended beneficiary of this
Agreement.
X. Execution of MB Parent Stockholders Agreement and the
MergerSub Shareholders Agreement
On July 28, 1998, representatives of Times Mirror, TMD, REUS, REBV, and MB Parent executed an agreement entitled "CBM Acquisition Parent Co. Stockholders Agreement" (MB Parent stockholders agreement). Under the terms of the MB Parent stockholders agreement, Times Mirror, TMD, REUS, REBV, and MB Parent agreed, in pertinent part, to the following:
Section 1. Call Option with Respect to Voting Preferred Stock.
(a) Grant of Call Option. Acquirors [REUS and REBV]
hereby grant to TMD an option, exercisable by TMD no earlier
than fifteen (15) days after the occurrence of any Call Event
2005 U.S. Tax Ct. LEXIS 28">*104 (as defined below), to purchase, in the manner provided in
Section 1(d), all, but not less than all, of the outstanding
shares of [MB Parent] Voting Preferred Stock, at a purchase
price per share equal to 100% of the Stated Value thereof on the
date of purchase, payable in cash.
(b) Definition of Call Event. A "Call Event" shall
mean (i) June 30, 2018, (ii) any voluntary transfer or other
disposition by the Company [MB Parent] of all or any portion of
the shares of MergerSub Participating Preferred Stock or (iii)
any voluntary transfer or other disposition by the Company of
all or any portion of the shares of MergerSub Voting Preferred
Stock.
(c) Call Option Subject to the Company's Right of
Redemption. Notwithstanding the foregoing, the right of TMD
to exercise the option granted pursuant to Section 1(a) shall be
subject to the Company's right to redeem the Voting Preferred
Stock pursuant to Section 3(g)(i) of Article V of the Restated
Certificate of Incorporation of the Company upon the occurrence
of a Redemption Event (as2005 U.S. Tax Ct. LEXIS 28">*105 defined therein) and to the Company's
obligation to redeem the Voting Preferred Stock of a holder of
Voting Preferred Stock at the option of such holder pursuant to
Section 3(g)(ii) of Article V of the Restated Certificate of
Incorporation of the Company upon the occurrence of an event
specified therein.
* * * * * * *
Section 2. Put Option with Respect to Voting Preferred Stock.
(a) Grant of Put Option. TMD hereby grants to each
Acquiror an option, exercisable after (i) June 30, 2018 or (ii)
upon the occurrence of any failure of Liberty Bell I, LLC (or a
successor thereof) or its manager to make distributions
contemplated by Section 15 of the Limited Liability Company
Agreement of Liberty Bell I, LLC, dated as of July 28, 1998 * *
*, to125 T.C. 110">*145 require TMD to purchase, in the manner provided in Section
2(b), the shares of the [MB Parent] Voting Preferred Stock held
by each Acquiror, at a purchase price per share equal to 100% of
the Stated Value thereof on the date of purchase, payable in
cash.
2005 U.S. Tax Ct. LEXIS 28">*106 Section 3. Restrictions on Transfer.
(a) General. No holder of shares of [MB Parent] Voting
Preferred Stock shall, directly or indirectly, transfer or
otherwise dispose of any shares of [MB Parent] Voting Preferred
Stock owned by such holder or any interest therein prior to June
30, 2000. * * *
Also on July 28, 1998, representatives of REUS, REBV, MB Parent, and MergerSub executed an agreement entitled "CBM MergerSub Corp. Shareholders Agreement" (MergerSub shareholders agreement). Under the terms of the MergerSub shareholders agreement, REUS, REBV, MB Parent, and MergerSub agreed, in pertinent part, to the following:
Section 1. Call Option with Respect to Voting Preferred Stock.
(a) Grant of Call Option. MB Parent hereby grants to
Acquirors [REUS and REBV] an option, exercisable by Acquirors on
or after July 15, 2018, to purchase, in the manner provided in
Section 1(c), all, but not less than all, of the outstanding
shares of [MergerSub] Voting Preferred Stock, at a purchase
price per share equal to 100% of the Stated Value thereof on the
date of2005 U.S. Tax Ct. LEXIS 28">*107 purchase.
(b) Call Option Subject to the Company's Right of Redemption.
Notwithstanding the foregoing, the right of Acquirors to
exercise the option granted pursuant to Section 1(a) shall be
subject to the Company's [MergerSub's] right or obligation, as
the case may be, to redeem the Voting Preferred Stock pursuant
to Section 4(g)(i) of Article V of the Restated Certificate of
Incorporation of the Company upon the occurrence of an event
specified therein and the Company's obligation to redeem the
Voting Preferred Stock of a holder of Voting Preferred Stock at
the option of such holder pursuant to Section 4(g)(ii) of
Article V of the Restated Certificate of Incorporation of the
Company upon the occurrence of an event specified therein.
* * * * * * *
Section 2. Put Option with Respect to Voting Preferred Stock.
(a) Grant of Put Option. Acquiror[s] hereby grants [sic]
to MB Parent an option, exercisable after June 30, 2018, to
require Acquirors to purchase, in the manner provided in Section
2005 U.S. Tax Ct. LEXIS 28">*108 2(b), all, but not less than all, of the outstanding shares of
the [MergerSub] Voting Preferred Stock, at a purchase price per
share equal to 100% of the Stated Value thereof on the date of
purchase.
* * * * * * *
125 T.C. 110">*146 Section 3. Call Option with Respect to Participating Preferred
Stock.
(a) Grant of Call Option. MB Parent hereby grants to
Acquirors an option, exercisable by Acquirors on or after July
15, 2018, to purchase, in the manner provided in Section 3(c),
all, but not less than all, of the outstanding shares of
[MergerSub] Participating Preferred Stock, at a purchase price
per share equal to the dollar amount derived from the EBITDA
Formula (as defined in Section 3(g)(i)(B) of Article V of the
Restated Certificate of Incorporation of the Company).
(b) Call Option Subject to the Company's Right of
Redemption. Notwithstanding the foregoing, the right of
Acquirors to exercise the option granted pursuant to Section
3(a) shall be subject to the Company's right to redeem the
2005 U.S. Tax Ct. LEXIS 28">*109 Participating Preferred Stock pursuant to Section 3(g)(i) of
Article V of the Restated Certificate of Incorporation of the
Company upon the occurrence of an event specified therein and
the Company's obligation to redeem the Participating Preferred
Stock pursuant to Section 3(g)(ii) of Article V of the Restated
Certificate of Incorporation of the Company upon the occurrence
of an event specified therein.
* * * * * * *
Section 4. Put Option with Respect to Participating Preferred
Stock.
(a) Grant of Put Option. Acquirors hereby grant to MB
Parent an option, exercisable after June 30, 2018, to require
Acquirors to purchase, in the manner provided in Section 2(b),
all, but not less than all, of the outstanding shares of the
[MergerSub] Participating Preferred Stock, at a purchase price
per share equal to the dollar amount derived from the EBITDA
Formula.
* * * * * * *
Section 5. Certain Additional Call Options.
(a) Grant2005 U.S. Tax Ct. LEXIS 28">*110 of Call Option. MB Parent hereby grants to Acquirors
an option, exercisable by Acquirors upon the occurrence of a
Call Event (as defined * * * below) to purchase in the manner
provided in Section 5(c), all, but not less than all, of either
or both of (i) the shares of [MergerSub] Voting Preferred Stock,
at a purchase price per share equal to 100% of the Stated Value
thereof on the date of purchase and (ii) the shares of
[MergerSub] Participating Preferred Stock, at a purchase price
per share equal to the dollar amount derived from the EBITDA
Formula.
(b) Definition of Call Event. For purposes of Section 5,
a "Call Event" shall mean (i) that the Net Worth of
Liberty Bell I, LLC is less than $ 275 million, (ii) the
insolvency, liquidation, bankruptcy, or any similar event, of MB
Parent, (iii) any threatened or actual involuntary transfer or
disposition by MB Parent of any shares of Participating
Preferred Stock, (iv) any threatened or actual involuntary
transfer or disposition by MB Parent of any shares of Voting
Preferred Stock or (v) 2005 U.S. Tax Ct. LEXIS 28">*111 any failure of Liberty Bell I, LLC (or a
successor thereof) or its manager to make distributions
contemplated by Section 15 of the Limited Liability Company
Agreement of Liberty Bell I, LLC dated as of July 28, 1998 * * *
* * * * * * *
125 T.C. 110">*147 Section 6. Drag-Along Rights.
(a) The Drag-Along Right. After June 30, 2003, if
Acquirors (together with any of their successors, transferees
and assigns, the "Selling Shareholders") propose to sell
all of the shares of [MergerSub] Common Stock to a single person
or to any group of related persons (the "Prospective
Purchaser"), then such Selling Shareholders shall have the
right (the "Drag-Along Right") to compel MB Parent
(together with its successors, transferees and assigns, the
"Drag-Along Shareholders") to sell all of the shares of
[MergerSub] Participating Preferred Stock and [MergerSub] Voting
Preferred Stock owned by them to the Prospective Purchaser at,
in the case of Voting Preferred Stock, a price per share equal
to 100% of the Stated Value2005 U.S. Tax Ct. LEXIS 28">*112 of the Voting Preferred Stock on the
date of purchase and, in the case of the Participating Preferred
Stock, a price per share equal to the dollar amount derived from
the EBITDA Formula, and otherwise on the same terms and subject
to the same conditions, as the Selling Shareholders are able to
obtain with respect to the Common Stock. * * *
* * * * * * *
Section 7. Restrictions on Transfer.
(a) General. Except as otherwise permitted or required
hereby, no holder of shares of Voting Preferred Stock shall,
directly or indirectly, transfer or otherwise dispose of any
shares of Voting Preferred Stock owned by such holder or any
interest therein prior to June 30, 2003. Except as otherwise
permitted or required hereby, no holder of shares of
Participating Preferred Stock shall, directly or indirectly,
transfer or otherwise dispose of any shares of Participating
Preferred Stock owned by such holder, or any interest therein
prior to June 30, 2003. * * *
Y. Filing of the Restated Certificates2005 U.S. Tax Ct. LEXIS 28">*113 of Incorporation for
MB Parent and MergerSub
On July 29, 1998, a restated certificate of incorporation for MB Parent was filed with the Secretary of State of the State of Delaware. The restated certificate of incorporation for MB Parent established five directors, of whom three would constitute a quorum, and included the following provisions:
ARTICLE V
AUTHORIZED CAPITAL STOCK
Section 1. Authorized Shares.
The total number of shares of all classes of capital stock which
the corporation shall have the authority to issue is Five
Thousand (5,000) shares, of which (1) One Thousand (1,000)
shares, having a par value of $ . 01 per share, shall be Common
Stock (" Common Stock") and (ii) Four Thousand (4,000) shares,
having a par value of $ . 01 per share, shall be Voting Preferred
Stock (" Voting Preferred Stock").
125 T.C. 110">*148 Section 2. Common Stock.
* * * * * * *
(b) Voting Rights.
(i) Voting Power. Except as otherwise provided in Section
2005 U.S. Tax Ct. LEXIS 28">*114 (3)(i)(ii) of this Article V, the holders of shares of Common
Stock shall be entitled to vote on all matters presented to the
stockholders of the corporation. Except as otherwise provided
herein or required by law, the holders of Common Stock shall
vote together with the holders of shares of Voting Preferred
Stock. Each share of Common Stock shall be entitled to one (1)
vote per share.
(ii) Voting Rights with Respect to Election or Removal of
Directors. The holders of shares of Common Stock shall be
entitled, voting as a separate class, to elect one (1) director
of the corporation (the "Common Stock Director"). The Common
Stock Director shall be removed only by a vote of the holders of
a majority of the shares of Common Stock, voting as a separate
class.
Section 3. Voting Preferred Stock.
* * * * * * *
(b) Issuance and Stated Value. The shares of Voting
Preferred Stock shall be issued by the corporation for their
Stated Value (as defined below), in such amounts, at such times
2005 U.S. Tax Ct. LEXIS 28">*115 and to such persons as shall be specified by the corporation's
Board of Directors, from time to time. For the purposes hereof,
the "Stated Value" of each share of Voting Preferred Stock
(regardless of its par value) shall be $ 17,187.50 per share plus
the Unpaid Dividend Amount (as defined below), which Stated
Value shall be proportionately increased or decreased for any
subdivision, combination, reclassification or stock split,
respectively, of the outstanding shares of Voting Preferred
Stock. For the purposes hereof, the "Unpaid Dividend Amount"
with respect to each share of the Voting Preferred Stock shall
be equal to the aggregate of all Quarterly Dividends (as defined
below) that the holder of such share shall have theretofore
become entitled to receive for such share but that shall not
have been declared and paid by the Board of Directors of the
corporation.
(c) Rank. The Voting Preferred Stock shall, with respect
to dividend rights and rights on liquidation, winding up and
dissolution, rank (i) senior to the Common Stock and all other
2005 U.S. Tax Ct. LEXIS 28">*116 classes or series of stock of the corporation now or hereafter
authorized, issued or outstanding that by their terms expressly
provide that they are junior to the Voting Preferred Stock or
which do not specify their rank with respect to the Voting
Preferred Stock (collectively with the Common Stock, "Junior
Securities") and (ii) on a parity with all classes or series of
stock of the corporation now or hereafter authorized, issued or
outstanding that by their terms expressly provide that they will
rank on parity with the Voting Preferred Stock as to dividend
distributions and distributions upon liquidation, winding up and
dissolution of the corporation (collectively, "Parity
Securities").
125 T.C. 110">*149 (d) Dividends.
(i) Amount of Dividends. On the last business day of each
March, June, September and December in each calendar year (the
"Dividend Accrual Date"), each holder of record as of the close
of business on the Dividend Accrual Date of shares of the Voting
Preferred Stock as their names appear in the stock register of
the corporation on2005 U.S. Tax Ct. LEXIS 28">*117 such date shall become entitled to receive
(when, as and if declared by the Board of Directors of the
corporation) a dividend (the "Quarterly Dividend") equal to one
and three hundred seventy-five thousands percent (1.375%) of the
Stated Value of such share (pro-rated for any portion of the
full calendar quarter that such share shall have been issued and
outstanding).
* * * * * * *
(e) Restrictions on Junior Payments. So long as any
shares of Voting Preferred Stock are outstanding, the
corporation shall not (i) declare, pay or set apart for payment
any dividend on, or make any distribution in respect of, Junior
Securities or any warrants, rights, calls or options exercisable
or convertible into any Junior Securities, either directly or
indirectly, whether in cash, obligations or shares of the
corporation or other property * * *, (ii) make any payment on
account of, or set apart for payment money for a sinking or
other similar fund for, the purchase, redemption, retirement or
other acquisition2005 U.S. Tax Ct. LEXIS 28">*118 for value of any of, or redeem, purchase,
retire or otherwise acquire for value any of, the Junior
Securities * * * or any warrants, rights, calls or options
exercisable for or convertible into any of the Junior
Securities, or (iii) permit any corporation or other entity
directly or indirectly controlled by the corporation to
purchase, redeem, retire, or otherwise acquire for value any of
the Junior Securities or any warrants, rights, calls or options
exercisable for or convertible into any Junior Securities.
(f) Liquidation Preference.
(i) Liquidation Preference. In the event of any voluntary
or involuntary liquidation, dissolution or winding up of the
affairs of the corporation, the holders of shares of Voting
Preferred Stock then outstanding shall be entitled to be paid
out of the assets of the corporation available for distribution
to its stockholders, whether such assets are capital or surplus
and whether or not any Quarterly Dividends are declared, an
amount equal to the Stated Value for each share outstanding on
the date fixed2005 U.S. Tax Ct. LEXIS 28">*119 for liquidation, dissolution or winding up (the
"Liquidation Preference"), before any payment shall be made or
any assets distributed to the holders of Junior Securities. * *
*
* * * * * * *
(g) Redemption.
(i) Redemption by the Corporation.
(A) The corporation may, at its option upon or after the
occurrence of any Redemption Event (as defined below), redeem,
out of funds legally available therefor, in the manner provided
in Section 3(g)(ii)(A) of this Article V, all, but not less than
all, of the shares of Voting Preferred Stock, 125 T.C. 110">*150 at a redemption
price equal to 100% of the Stated Value thereof on the date of
redemption payable in cash.
(B) For purposes of this Section 3(g)(i), a "Redemption Event"
shall mean (x) June 30, 2018, (y) any transfer or other
disposition by the corporation of shares of Participating
Preferred Stock, par value $ . 01 per share, of CBM MergerSub
Corp., a New York corporation (hereinafter "CBM MergerSub
Corp.") [MergerSub], or the comparable securities2005 U.S. Tax Ct. LEXIS 28">*120 of any
successor corporation to CBM MergerSub Corp. (the "MergerSub
Participating Preferred Stock") or (z) any transfer or other
disposition by the corporation of shares of Voting Preferred
Stock, par value $ . 01 per share, of CBM MergerSub Corp. or the
comparable securities of any successor corporation to CBM
MergerSub Corp. (the "MergerSub Voting Preferred Stock").
(ii) Redemption at Option of Holders. (i) After June 30,
2018 or (ii) upon the occurrence of any failure of Liberty Bell
I, LLC (or a successor thereof) or its manager to make
distributions contemplated by Section 15 of the Limited
Liability Company Agreement of Liberty Bell I, LLC dated as of
July 28, 1998 * * *, any holder of shares of Voting Preferred
Stock shall be entitled at its option, to require the
corporation to redeem, out of funds legally available therefor,
in the manner provided in Section 3(g)(iii)(B) of this Article
V, all of the shares of the Voting Preferred Stock held by such
holder, at a redemption price per share equal to 100% of the
Stated Value thereof2005 U.S. Tax Ct. LEXIS 28">*121 on the date of redemption payable in cash.
* * * * * * *
(i) Voting Rights.
(i) Voting Power. Except as otherwise provided in Section
2(b)(ii) of this Article V or as required by law, the holders of
Voting Preferred Stock shall be entitled to vote on all matters
presented to the stockholders of the corporation. Except as
otherwise provided herein or required by law, the holders of
Voting Preferred Stock shall vote together with the holders of
shares of Common Stock. Each share of Voting Preferred Stock
shall be entitled to one (1) vote per share.
(ii) Voting Rights with Respect to Election of Directors.
The holders of shares of Voting Preferred Stock shall be
entitled, voting as a separate class, to elect four (4)
directors of the corporation (the "Preferred Stock Directors").
A Preferred Stock Director shall be removed only by the vote of
the holders of a majority of the shares of Voting Preferred
Stock, voting as a separate class.
* * * * 2005 U.S. Tax Ct. LEXIS 28">*122 * * *
(j) Transfer Restrictions.
(i) General. No holder of shares of Voting Preferred
Stock shall, directly or indirectly, transfer or otherwise
dispose of any shares of Voting Preferred Stock owned by such
holder, or any interest therein prior to June 30, 2000. * * *
* * * * * * *
125 T.C. 110">*151 ARTICLE VI
POWERS OF THE BOARD OF DIRECTORS
Except as otherwise provided by law, the Board of Directors is
expressly authorized and empowered by majority vote to determine
all matters relating to the business and management of the
corporation; provided, however, the following actions
shall be taken by the corporation only upon the unanimous vote
of the Board of Directors including, in each case, the Common
Stock Director: (a) the incurrence of indebtedness or any other
similar obligation, including in the form of any guaranty of the
indebtedness of another person; (b) the sale, transfer or other
disposition, pledge, encumbering or assignment2005 U.S. Tax Ct. LEXIS 28">*123 by the
corporation of all or any portion of its limited liability
company interest in Liberty Bell I, LLC; (c) the amendment of
this Restated Certificate of Incorporation; (d) the issuance by
the corporation of any shares of capital stock, or any other
securities or options or warrants to purchase any shares of
capital stock or other securities; (e) the declaration of any
dividends with respect to the Common Stock; (f) the sale or
redemption of the shares of MergerSub Participating Preferred
Stock held by the corporation prior to June 30, 2003 other than
in accordance with the terms thereof or of the CBM MergerSub
Corp. Shareholders Agreement among CBM MergerSub Corp., Reed
Elsevier U.S. Holdings Inc., Reed Elsevier Overseas BV and the
corporation dated as of July 28, 1998 * * * (the "MergerSub
Shareholders Agreement"); (g) the sale or redemption of the
shares of MergerSub Voting Preferred Stock held by the
corporation prior to June 30, 2003 other than in accordance with
the terms of the Shareholder Agreement; (h) the approval by the
Board2005 U.S. Tax Ct. LEXIS 28">*124 of Directors of any action taken by the corporation with
respect to any shareholder resolution relating to a change in
the Restated Certificate of Incorporation of CBM MergerSub Corp.
or any successor entity, or a modification of the terms of the
MergerSub Participating Preferred Stock or the MergerSub Voting
Preferred Stock, except for an increase in the authorized shares
of Common Stock of CBM MergerSub Corp., (i) the approval by the
Board of Directors of any action taken by the corporation with
respect to any shareholder resolution relating to the
liquidation or dissolution of CBM MergerSub Corp. or any
successor corporation, the merger into or consolidation with
another entity of CBM MergerSub Corp. or any successor
corporation unless the certificate of incorporation of the
surviving corporation in such merger or consolidation is the
Restated Certificate of Incorporation of Matthew Bender &
Company, Incorporated, immediately after giving effect to the
merger of CBM MergerSub Corp. with and into Matthew Bender &
Company, Incorporated, without any2005 U.S. Tax Ct. LEXIS 28">*125 amendment or restatement; (j)
the amendment of the Stockholders Agreement or (k) the amendment
of the MergerSub Shareholders Agreement.
(On August 6, 1998, a certificate of correction was filed with the secretary of state of the State of Delaware with respect to MB Parent's restated certificate of incorporation. The minor corrections that were made to MB Parent's restated 125 T.C. 110">*152 certificate of incorporation as a result of this filing are reflected in the preceding excerpt.)
Also on July 29, 1998, a restated certificate of incorporation for MergerSub was filed with the Department of State of the State of New York. The restated certificate of incorporation for MergerSub established five directors, of whom three would constitute a quorum, and included the following provisions:
ARTICLE V
AUTHORIZED CAPITAL STOCK
Section 1. Authorized Shares.
The total number of shares of all classes of capital stock which
the corporation shall have authority to issue is Twenty-Three
Thousand Nine Hundred Seventy (23,970) shares, of which (i)
Twenty Thousand2005 U.S. Tax Ct. LEXIS 28">*126 (20,000) shares, having a par value of $ . 01 per
share, shall be Common Stock (" Common Stock") having the
rights, preferences and privileges set forth in Section 2 of
this Article V, (ii) Ten (10) shares, having a par value of $ .
01 per share, shall be Nonvoting Participating Preferred Stock
(" Participating Preferred Stock") having the rights,
preferences and privileges set forth in Section 3 of this
Article V and (iii) Three Thousand Nine Hundred Sixty (3,960)
shares, having a par value of $ . 01 per share, shall be Voting
Preferred Stock ("Voting Preferred Stock" and, together with
the Participating Preferred Stock, "Preferred Stock") having the
rights, preferences and privileges set forth in Section 4 of
this Article V.
Section 2. Common Stock.
* * * * * * *
(i) Voting Power. Except as otherwise provided in
Sections 4(i)(ii) of this Article V, the holders of shares of
Common Stock shall be entitled to vote on all matters presented
to the shareholders of the corporation. Except as2005 U.S. Tax Ct. LEXIS 28">*127 otherwise
provided herein or required by law, holders of shares of Common
Stock shall vote together with holders of shares of Voting
Preferred Stock. Except as otherwise provided in Section
2(a)(ii), the shares of Common Stock shall represent, in the
aggregate, twenty (20) votes and each share of Common Stock
outstanding on the relevant record date shall have a vote equal
to twenty (20) divided by the number of shares of Common Stock
outstanding on such record date.
(ii) Voting Rights with Respect to Election or Removal of
Directors and Certain Other Matters. The holders of shares
of Common Stock shall be entitled, voting as a separate class,
to elect one (1) director of the corporation (the "Common Stock
Director"). The Common Stock Director shall be removed only by
the vote of the holders of a majority of the shares of Common
Stock, voting as a separate class. In voting for the election or
removal of the Common Stock Director or in any other matter on
which the Common Stock shall vote as a separate class, each
share of Common Stock shall2005 U.S. Tax Ct. LEXIS 28">*128 be entitled to one vote per share.
125 T.C. 110">*153 Section 3. Participating Preferred Stock.
(a) Issuance. The shares of Participating Preferred Stock
shall be issued by the corporation for their par value, without
stated value.
(b) Rank. The Participating Preferred Stock shall, (i)
with respect to rights with respect to the Quarterly Preferred
Dividends (as defined below) and rights with respect to the
Participating Preferred Liquidation Preference (as defined
below) upon liquidation, winding up and dissolution, rank (x)
senior to the Common Stock and all other classes or series of
stock of the corporation now or hereafter authorized, issued or
outstanding that by their terms expressly provide that they are
junior to the Participating Preferred Stock as to Quarterly
Preferred Dividend distributions or as to the Participating
Preferred Liquidation Preference upon liquidation, winding up or
dissolution or which do not specify their rank with respect to
the Participating Preferred Stock (collectively with the Common
Stock, "Participating Junior Securities") 2005 U.S. Tax Ct. LEXIS 28">*129 and (y) on a parity
with the Voting Preferred Stock and all other classes or series
of stock of the corporation now or hereafter authorized, issued
or outstanding that by their terms expressly provide that they
will rank on parity with the Voting Preferred Stock as to the
dividend distributions and distributions upon liquidation,
winding up and dissolution of the corporation (collectively with
the Voting Preferred Stock, "Preferred Parity Securities") and
(ii) with respect to the Participating Dividends (as defined
below) and all other rights with respect to distributions upon
liquidation, winding up or dissolution, on a parity with the
Common Stock.
(c) Quarterly Preferred Dividends.
(i) Amount of Quarterly Preferred Dividends. On the last
business day of each March, June, September and December in each
calendar year (the "Preferred Dividend Accrual Date"), each
holder of record as of the close of business on the Preferred
Dividend Accrual Date of shares of the Participating Preferred
Stock as their names appear in the stock register2005 U.S. Tax Ct. LEXIS 28">*130 of the
corporation on such date shall become entitled to receive (when,
as and if declared by the Board of Directors of the corporation)
a dividend (the "Quarterly Preferred Dividend") equal to one
cent ($ . 01) per share (pro-rated for any portion of a full
calendar quarter that such share shall have been issued and
outstanding).
* * ? * * * * *
(d) Restrictions on Participating Junior Payments. So
long as any shares of Participating Preferred Stock are
outstanding, the corporation shall not (i) declare, pay or set
apart for payment any dividend on, or make any distribution in
respect of, Participating Junior Securities or any warrants,
rights, calls or options exercisable or convertible into any
Participating Junior Securities, either directly or indirectly,
whether in cash, obligations or shares of the corporation or
other property * * *, (ii) make any payment on account of, or
set apart for payment money for a sinking or other similar fund
for, the purchase, redemption, retirement or other2005 U.S. Tax Ct. LEXIS 28">*131 acquisition
for value of any of, or redeem, purchase, retire or otherwise
acquire for value any of, the Participating Junior Securities *
* * or any warrants, 125 T.C. 110">*154 rights, calls or options exercisable for or
convertible into any of the Participating Junior Securities, or
(iii) permit any corporation or other entity directly or
indirectly controlled by the corporation to purchase, redeem,
retire or otherwise acquire for value any of the Participating
Junior Securities or any warrants, rights, calls or options
exercisable for or convertible into any Participating Junior
Securities, in each case, at any time when there is an Unpaid
Preferred Dividend Amount. For the purposes hereof, the "Unpaid
Preferred Dividend Amount" with respect to each share of the
Participating Preferred Stock shall be equal to the aggregate of
all Quarterly Preferred Dividends that the holder of such share
shall have theretofore become entitled to receive for such share
but that shall not have been declared and paid by the Board of
Directors of the corporation.
Participating2005 U.S. Tax Ct. LEXIS 28">*132 Dividends. Each holder of record as of the
close of business on the record date set therefor of shares of
Participating Preferred Stock * * * shall become entitled to
receive on a pro rata basis with the holders of shares of Common
Stock any dividend (when, as and if declared by the Board of
Directors of the corporation) with respect to the Common Stock
(the "Participating Dividend").
(f) Participating Preferred Liquidation Preference.
(i) Participating Preferred Liquidation Preference. In
the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the corporation, the
holders of shares of Participating Preferred Stock then
outstanding shall be entitled to be paid out of the assets of
the corporation available for distribution to its shareholders,
whether such assets are capital or surplus and whether or not
any Quarterly Preferred Dividends are declared, an amount equal
to the par value for each share outstanding on the date fixed
for liquidation, dissolution or winding up (the "Participating
2005 U.S. Tax Ct. LEXIS 28">*133 Preferred Liquidation Preference"), before any payment shall be
made or any assets distributed to the holders of Participating
Junior Securities. * * *
(ii) Additional Rights Upon Liquidation. In addition to
the Participating Preferred Liquidation Preference, each holder
of shares of Participating Preferred Stock will be entitled to
participate on a pro rata basis with holders of shares of the
Common Stock in any distribution of the assets of the
corporation upon liquidation, winding up or dissolution.
* * * * * * *
(g) Redemption.
(i) Redemption by the Corporation.
(A) After (i) June 30, 2018, (ii) the insolvency, liquidation,
bankruptcy or any similar event, of CBM Acquisition Parent Co.
(hereinafter referred to as "MB Parent"), (iii) any threatened
or actual involuntary transfer or disposition by MB Parent of
any shares of Participating Preferred Stock, (iv) any threatened
or actual involuntary transfer or disposition by MB Parent of
any shares of Voting Preferred Stock or (v) 2005 U.S. Tax Ct. LEXIS 28">*134 any failure of
Liberty Bell I, LLC (or a successor thereof) or its manager to
make distributions contemplated by Section 15 of the Limited
Liability Company Agreement of Liberty Bell I, LLC dated as of
July __, 1998 * * * (each of the events 125 T.C. 110">*155 described in clauses
(ii) through (v), a "Trigger Event"), the corporation may, at
its option, redeem, out of funds legally available therefor, in
the manner provided in Section 3(g)(iii)(A) of Article V, all,
but not less than all, of the shares of Participating Preferred
Stock, at a redemption price per share, payable in cash, equal
to the dollar amount derived from the EBITDA Formula (as defined
below).
(B) "EBITDA Formula" means (x)(I) 8.5 multiplied by Trailing
Four Quarter EBITDA less (II) Debt less (III) the aggregate
Stated Value of the Voting Preferred Stock multiplied by
(y). 01 divided by (z) the number of shares of
Participating Preferred Stock then outstanding or, expressed
algebraically
.01 x (8.5 x Trailing Four Quarter EBITDA - Debt - Aggregate Stated
Value of2005 U.S. Tax Ct. LEXIS 28">*135 the Voting Preferred Stock)
______________________________________________________________________
number of shares of Participating Preferred Stock then outstanding
"Trailing Four Quarter EBITDA" means the sum of the earnings
before interest, taxes, depreciation and amortization of the
corporation as of the last day of each of the preceding four
fiscal quarters of the corporation ended prior to the date of
determination * * *. "Debt" means all indebtedness for borrowed
money of the corporation * * *
(ii) Redemption at Option of Holders. After June 30,
2018, any holder of shares of Participating Preferred Stock
shall be entitled, at its option, to require the
corporation to redeem, out of funds legally available therefor,
in the manner provided in Section 3(g)(iii)(B) of this Article
V, all of the shares of the Participating Preferred Stock held
by it, at a redemption price per share, payable in cash, equal
to the dollar amount derived from the EBITDA Formula.
* * * * * * *
(i) Voting Rights. Except2005 U.S. Tax Ct. LEXIS 28">*136 as specifically set forth in
the NYBCL [the Business Corporation Law of the State of New
York], the holders of shares of Participating Preferred Stock
shall not be entitled to any voting rights with respect to any
matters voted upon by shareholders of the corporation.
(j) Restrictions on Transfer.
(i) No holder of shares of Participating Preferred Stock shall,
directly or indirectly, transfer or otherwise dispose of any
shares of Participating Preferred Stock owned by such holder, or
any interest therein prior to June 30, 2003. * * *
* * * * * * *
Section 4. Voting Preferred Stock.
* * * * * * *
(b) Issuance and Stated Value. The shares of Voting
Preferred Stock shall be issued by the corporation for their
Stated Value (as defined below), in such amounts, at such times
and to such persons as shall be specified by the corporation's
Board of Directors, from time to time. For the125 T.C. 110">*156 purposes hereof,
the "Stated Value" of each share of2005 U.S. Tax Ct. LEXIS 28">*137 Voting Preferred Stock
(regardless of its par value) shall be $ 15,559.6369 per share
plus the Unpaid Dividend Amount (as defined below), which Stated
Value shall be proportionately increased or decreased for any
subdivision, combination, reclassification, or stock split,
respectively, of the outstanding shares of Voting Preferred
Stock. For the purposes hereof, the "Unpaid Dividend Amount"
with respect to each share of Voting Preferred Stock shall be
equal to the aggregate of all Quarterly Dividends (as defined
below) that the holder of such share shall have theretofore
become entitled to receive for such share but that shall not
have been declared and paid by the Board of Directors of the
corporation.
(c) Rank. The Voting Preferred Stock shall, with respect
to dividend rights and rights on liquidation, winding up and
dissolution, rank (i) senior to the Common Stock, the
Participating Preferred Stock with respect to the Participating
Dividend rights of the Participating Preferred Stock, and all
other classes or series of stock of the corporation2005 U.S. Tax Ct. LEXIS 28">*138 now or
hereafter authorized, issued or outstanding that by their terms
expressly provide that they are junior to the Preferred Stock or
which do not specify their rank with respect to the Voting
Preferred Stock (collectively with the Common Stock, "Junior
Securities") and (ii) on a parity with the Participating
Preferred Stock with respect to the Preferred Dividend rights of
the Participating Preferred Stock and all other classes or
series of stock of the corporation now or hereafter authorized,
issued or outstanding that by their terms expressly provide that
they will rank on parity with the Voting Preferred Stock as to
dividend distributions and distributions upon the liquidation,
winding up and dissolution of the corporation (collectively,
"Parity Securities").
(d) Quarterly Dividends.
(i) Amount of Quarterly Dividends. On the last business
day of each Preferred Dividend Accrual Date, each holder of
record as of the close of business on the Preferred Dividend
Accrual Date of shares of the Voting Preferred Stock as their
names2005 U.S. Tax Ct. LEXIS 28">*139 appear in the stock register of the corporation on such
date shall become entitled to receive (when, as and if declared
by the Board of Directors of the corporation) a dividend (the
"Quarterly Dividend") equal to one and one-quarter percent (1
1/4%) of the Stated Value of such share (pro-rated for any
portion of a full calendar quarter that such share shall have
been issued and outstanding).
* * * * * * *
(e) Restrictions on Junior Payments. So long as any
shares of Voting Preferred Stock are outstanding, the
corporation shall not (i) declare, pay or set apart for payment
any dividend on, or make any distribution in respect of, Junior
Securities or any warrants, rights, calls or options exercisable
or convertible into any Junior Securities, either directly or
indirectly, whether in cash, obligations or shares of the
corporation or other property * * * (ii) make any payment on
account of, or set apart for payment money for a sinking or
other similar fund for, the purchase, redemption, retirement or
2005 U.S. Tax Ct. LEXIS 28">*140 other acquisition for value of any of, or redeem, purchase,
125 T.C. 110">*157 retire or otherwise acquire for value any of, the Junior
Securities * * * or any warrants, rights, calls or options
exercisable for or convertible into any of the Junior
Securities, or (iii) permit any corporation or other entity
directly or indirectly controlled by the corporation to
purchase, redeem, retire or otherwise acquire for value any of
the Junior Securities or any warrants, rights, calls or options
exercisable for or convertible into any Junior Securities at any
time when there is an Unpaid Dividend Amount with respect to the
Voting Preferred Stock. * * *
(f) Liquidation Preference.
(i) Liquidation Preference. In the event of any voluntary
or involuntary liquidation, dissolution or winding up of the
affairs of the corporation, the holders of shares of Voting
Preferred Stock then outstanding shall be entitled to be paid
out of the assets of the corporation available for distribution
to its shareholders, whether such assets are capital or surplus
and whether2005 U.S. Tax Ct. LEXIS 28">*141 or not any Quarterly Dividends are declared, an
amount equal to the Stated Value for each share outstanding on
the date fixed for liquidation, dissolution or winding up (the
"Liquidation Preference"), before any payment shall be made or
any assets distributed to the holders of Junior Securities. * *
*
* * * * * * *
(g) Redemption.
(i) Redemption by the Corporation. After (A) June 30,
2018, the corporation may, at its option, in the manner provided
in Section 4(g)(iii)(A), and (B) upon the occurrence of a
Trigger Event, the corporation shall, in the manner provided in
Section 4(g)(iii)(B) of this Article V, redeem, out of funds
legally available therefor, all, but not less than all, of the
shares of Voting Preferred Stock, at a redemption price per
share equal to 100% of the Stated Value thereof on the date of
redemption payable in cash.
(ii) Redemption at Option of Holders. After June 30,
2018, any holder of shares of Voting Preferred Stock shall be
entitled, at its option, 2005 U.S. Tax Ct. LEXIS 28">*142 to require the corporation to redeem,
out of funds legally available therefor, in the manner provided
in Section 4(g)(iii)(C) of this Article V, the shares of the
Preferred Stock held by it, at a redemption price per share
equal to 100% of the Stated Value thereof on the date of
redemption payable in cash.
* * * * * * *
(i) Voting Rights.
(i) Voting Power. Except as otherwise provided in Section
2(a)(ii) of this Article V or as required by law, the holders of
Voting Preferred Stock shall be entitled to vote on all matters
presented to the shareholders of the corporation. Except as
otherwise provided herein or required by law, the holders of
shares of Voting Preferred Stock shall vote together with the
holders of shares of Common Stock. Except as otherwise provided
in Section 4(i)(ii) and 4(i)(iii) of this Article V, the shares
of Voting Preferred Stock shall represent, in the aggregate,
eighty (80) votes * * *
(ii) Voting Rights With Respect to Election or Removal of
Directors2005 U.S. Tax Ct. LEXIS 28">*143 and Certain Other Matters. The holders of Voting
Preferred Stock shall be entitled, 125 T.C. 110">*158 voting as a separate class,
to elect four (4) directors of the corporation (the "Preferred
Stock Directors"). A Preferred Stock Director shall be removed
only by the vote of the holders of a majority of the shares of
Voting Preferred Stock, voting as a separate class. In voting
for the election or removal of a Preferred Stock Director or in
any other matter on which the Voting Preferred Stock shall vote
as a separate class, each share of Voting Preferred Stock shall
be entitled to one vote per share.
* * * * * * *
(j) Restrictions on Transfer. No holder of shares of
Voting Preferred Stock shall, directly or indirectly, transfer
or otherwise dispose of any shares of Voting Preferred Stock
owned by such holder, or any interest therein prior to June 30,
2003. * * *
* * * * * * *
ARTICLE X
RESTRICTIONS2005 U.S. Tax Ct. LEXIS 28">*144 ON MERGERS, ETC.
The corporation may not be liquidated, dissolved, merged into or
consolidated with another entity and no other entity may be
merged into or consolidated with the corporation without the
unanimous approval of all of the shareholders of the corporation
entitled to vote.
ARTICLE XI
CERTAIN WAIVERS
The holders of the Preferred Stock hereby acknowledge and agree
that their rights against the corporation, the directors of the
corporation and holders of Common Stock are only those
explicitly provided by this Restated Certificate of
Incorporation or in any shareholders agreement executed among
the shareholders of this corporation and to the extent that, at
law or in equity, the corporation, the directors of the
corporation or holders of Common Stock would otherwise have any
other duties (including fiduciary duties) or obligations to the
holders of the Preferred Stock, either at law or in equity, such
duties and obligations are waived.
The Mechanics2005 U.S. Tax Ct. LEXIS 28">*145 of the Bender Transaction
The mechanics of the Bender transaction are set forth below. All of the events described in this section occurred on July 31, 1998, in accordance with detailed instructions prepared by GD& C.
A. Capitalization of MergerSub and MB Parent
As the first step in the capitalization of MergerSub, MergerSub borrowed $ 600 million from the Luxembourg branch of Elsevier, S. A., an affiliate of Reed. The Luxembourg branch of Elsevier, S. A., transferred the $ 600 million 125 T.C. 110">*159 to a bank account that MergerSub maintained at Citibank (MergerSub Citibank account).
In addition to MergerSub's borrowing $ 600 million from the Luxembourg branch of Elsevier, S. A., REUS and REBV contributed $ 616,562,500 and $ 158,437,500, respectively, to MergerSub. REUS and REBV transferred their respective contributions to MergerSub to the MergerSub Citibank account.
After making their respective contributions to MergerSub, REUS and REBV owned all of the issued and outstanding common stock of MergerSub, all of the voting preferred stock of MergerSub, and all of the participating preferred stock of MergerSub.
After the capitalization of MergerSub was completed, REUS and REBV contributed2005 U.S. Tax Ct. LEXIS 28">*146 all of their shares of MergerSub voting preferred stock and MergerSub participating preferred stock to MB Parent in exchange for 100 percent of MB Parent voting preferred stock. As a class, the MB Parent voting preferred stock held by REUS and REBV was entitled to 80 percent of the voting power of MB Parent and had the power to elect four of the five directors of MB Parent.
In addition to REUS and REBV's contributions to MB Parent, MergerSub contributed $ 1.375 billion to MB Parent. In return, MB Parent issued 1,000 shares, i.e., all, of its common stock to MergerSub. The 1,000 shares of MB Parent common stock received by MergerSub were entitled to 20 percent of the voting power of MB Parent. As a class, the MB Parent common stock held by MergerSub had the power to elect one of the five directors of MB Parent. MergerSub transferred the $ 1.375 billion from the MergerSub Citibank account to a bank account that MB Parent maintained at Citibank (MB Parent Citibank account).
After the capitalization transactions described above had been completed, REUS, REBV, and MB Parent together owned all of the issued and outstanding common stock of MergerSub, all of the voting preferred stock of2005 U.S. Tax Ct. LEXIS 28">*147 MergerSub, and all of the participating preferred stock of MergerSub. In addition, REUS, REBV, and MergerSub together owned all of the issued and outstanding common stock of MB Parent and all of the voting preferred stock of MB Parent.
125 T.C. 110">*160 B. Merger of MergerSub and Bender
After the capitalization transactions described above had been completed, MergerSub merged with and into Bender under the relevant provisions of the New York Business Corporation Law, with Bender continuing as the surviving corporation. At the time that the merger of MergerSub with and into Bender became effective, all outstanding MergerSub stock was converted into Bender stock, in the same number of shares, in the same classes, and with the same voting power, rights, and qualifications as the previously issued MergerSub common stock, Mergersub voting preferred stock, and MergerSub participating preferred stock.
After the merger of MergerSub with and into Bender, REUS, REBV, and TMD held the following interests in MB Parent:
MB Parent Stock REUS REBV TMD
_______________ ____ ____ ___
Common stock
2005 U.S. Tax Ct. LEXIS 28">*148 Shares owned -- -- 1,000
Percentage of class -- -- 100%
Percentage of vote -- -- 20%
Voting preferred stock
Shares owned 3,000 1,000 --
Percentage of class 75% 25% --
Percentage of vote 60% 20% --
In addition, REUS, REBV, and MB Parent held the following interests in Bender:
Bender Stock REUS REBV MB Parent
____________ ____ ____ __________
Common stock
Shares owned 792 198 --
Percentage of class 80% 20% --
Percentage of vote 16% 4% --
Voting preferred stock
Shares owned -- -- 3,960
Percentage of class -- -- 100%
Percentage2005 U.S. Tax Ct. LEXIS 28">*149 of vote -- -- 80%
Participating preferred stock
Shares owned -- -- 10
Percentage of class -- -- 100%
Percentage of vote -- -- --
125 T.C. 110">*161 C. Capitalization of LBI (the LLC)
Pursuant to section 9. b. of the LBI LLC agreement, Times Mirror became the manager of LBI immediately following when the merger of MergerSub with and into Bender became effective. As of that time, Lexis informed Mellon Trust and Bank of America that Times Mirror had replaced Lexis as manager of LBI and that they were to take instructions directly from Times Mirror on any administrative and operational aspects relating to LBI's bank accounts.
Immediately following Times Mirror's appointment as manager of LBI, MB Parent contributed $ 1.375 billion to LBI. MB Parent transferred the $ 1.375 billion from the MB Parent Citibank account to a bank account that LBI maintained at Citibank (LBI Citibank account). The $ 1.375 billion was then transferred from the LBI Citibank account to a bank account that LBI2005 U.S. Tax Ct. LEXIS 28">*150 maintained at Bank of America. Times Mirror maintained its bank accounts at Bank of America as well.
D. Closing
The Bender transaction closed on July 31, 1998. Times Mirror's sale of its 50-percent interest in Shepard's also closed on that date.
From the time that the Bender transaction closed to the time of trial of this case, Bender continued as a going concern in the legal publishing business. The parties have agreed that the merger of MergerSub with and into Bender, with Bender as the surviving corporation, under the terms of the Bender agreement and in accordance with New York Business Corporation Law, satisfied the continuity of business enterprise requirement for qualification as a tax-free reorganization under
Times Mirror's Management of LBI and the Development of Times Mirror's Investment Strategy Following the Closing of the Bender Transaction
On July 31, 1998, the law firm of Richards, Layton & Finger (RL& F) prepared an opinion regarding LBI for Times Mirror, MB Parent, REUS, and REBV. With respect to the LBI LLC agreement, RL& F was of the opinion that:
125 T.C. 110">*162 2. The LLC Agreement constitutes a legal, valid and binding
agreement2005 U.S. Tax Ct. LEXIS 28">*151 of the Member [MB Parent] and Manager [Times Mirror],
and is enforceable against the Member and the Manager, in
accordance with its terms.
3. If properly presented to a Delaware court, a Delaware court
applying Delaware law, would conclude that (i) the removal of
the Manager shall be only at the request and direction of the
Manager and under no other circumstances, including, without
limitation, for cause, as provided for in Section 9(b) of the
LLC Agreement and (ii) such provision, contained in Section 9(b)
of the LLC Agreement, that requires the removal of the Manager
to be only at the request and direction of the Manager,
constitutes a legal, valid and binding agreement of the Member,
and is enforceable against the Member, in accordance with its
terms.
On September 1, 1998, Times Mirror, acting in its capacity as manager of LBI, approved a purchase agreement into which LBI had entered with Merrill Lynch International on August 17, 1998 (LBI-MLI purchase agreement). Pursuant to the LBI-MLI purchase agreement, LBI agreed to purchase 1.5 million shares of Series A common2005 U.S. Tax Ct. LEXIS 28">*152 stock of Times Mirror from Merrill Lynch International for an initial price of approximately $ 92 million.
On September 30, 1998, Times Mirror, acting in its capacity as manager of LBI, approved the change of LBI's name to Eagle New Media Investments, LLC (hereinafter referred to as the LLC).
A meeting of the officers of the LLC was convened on October 5, 1998. As of that date, the officers of the LLC were Unterman; Debra A. Gastler (Gastler), vice president of taxes for Times Mirror; Steven J. Schoch, vice president and treasurer of Times Mirror; William A. Niese (Niese); Kay D. Leyba; Anne M. Bacher; and Udovic. At this meeting, Unterman informed the other LLC officers of plans to invest the LLC's funds in shares of Series A common stock of Times Mirror and in three companies: Northern Lights, Sinanet, and Homeshark. com.
A regular meeting of Times Mirror's board of directors was convened on October 8, 1998. A written report for this meeting contained the following statements:
Mosby and Matthew Bender Update
Since our last Board meeting in July, substantial progress has
been made in the divestiture of Mosby and Matthew Bender.
2005 U.S. Tax Ct. LEXIS 28">*153 The divestiture of Matthew Bender/Shepard's * * * closed on July
31. Times Mirror received $ 275 million in cash for the sale of
our 50% interest in Shepard's and Liberty Bell I was funded with
$ 1,375 million through 125 T.C. 110">*163 the merger of Matthew Bender. As
indicated at the last Board meeting, the cash received by Times
Mirror was used to repay short-term debt and the funds held by
Liberty Bell will be invested in the repurchase of Times Mirror
stock and in high-quality short-term investments.
In addition, the section of the October 8, 1998, board report entitled "Capital Planning Discussion" contained the following statements:
Introduction
Since the July Board meeting, we have continued to sharpen our
focus on our intended use of the proceeds from the Mosby and
Matthew Bender dispositions as well as our continuing
significant free cash flow. It had not been our assumption that
we would immediately turn around and use these resources as a
war chest to finance a major acquisition program, and over the
past several months we tested this presumption by examining2005 U.S. Tax Ct. LEXIS 28">*154 in
detail the prospect for value creation and the acceleration of
earnings growth through acquisitions. * * *
* * * * * * *
Background
In August, with the closing of the Matthew Bender and Shepards
divestitures, we began what we expect will be an extensive
period of managing surplus capital. * * *
Ultimately, our
planning challenge is to assess realistically what the levels of
spending might be in the primary areas of priority which we have
stated to the Board before:
o Capital investments in existing businesses to drive growth
o Acquisitions that enhance our existing lines of business
o Dividends necessary to maintain a payout ratio commensurate
with our peer group average
o Consistent with long-term capitalization goals, opportunistic
stock repurchase
* * * * * * *
Sizing Our Resources
In August, the closing of the divestiture of Matthew Bender
resulted in the deposit of $ 1,375 million of gross2005 U.S. Tax Ct. LEXIS 28">*155 proceeds into
the account of Liberty Bell I, L. L. C., an investment affiliate
of Times Mirror. Additionally, the divestiture of our share of
the Shepards joint venture resulted in the deposit in Times
Mirror's account of $ 275 million. While the cash received by
Times Mirror has all been used to retire short-term debt, the
following approximately depicts the current deployment of
capital within Liberty Bell:
$ Millions
__________
Short-term Money Market Assets $ 1,000
Times Mirror Common Stock 1 384
Other 2
__________
Total Liberty Bell Assets $ 1,386
2005 U.S. Tax Ct. LEXIS 28">*156 * * * * * * *
125 T.C. 110">*164 Looked at from a spending capacity viewpoint, the following
shows our 1999-2001 total resources for investment:
$ Millions
Current Surplus Balance 1 $ 1,400
1999-2001 Capex 375
1999-2001 Acquisitions 900
Excess Debt Capacity Estimate 500
___ ______
Total 3-year Resources $ 3,175
* * * * * * *
Share Repurchase Status and Outlook
As previously discussed, we expect to have approximately $ 3.2
2005 U.S. Tax Ct. LEXIS 28">*157 billion of investment capacity over the next few years. Because
our realistic expectations are to spend about $ 1.5 billion on
acquisitions, capital projects and dividends, this leaves $ 1.5-$
2 billion to be deployed in share repurchase, which is our
highest return alternative in the absence of additional high-
return acquisitions or capital projects.
* * * * * * *
Investment Plans
Most immediately, we have concerned ourselves with establishing
a short-term investment plan that emphasizes safety and
liquidity. Over time, any L. L. C. funds not deployed in
acquisitions, capital investments or Times Mirror stock shall be
managed under our Short-Term Investment Policy.
After the board of directors had considered the materials that had been presented to it regarding the LLC and Eagle Publishing (an LLC created for the Mosby transaction), the board approved resolutions with respect to the use of the LLC and Eagle Publishing in Times Mirror's share repurchase program and in transactions involving the purchase of Times Mirror's outstanding2005 U.S. Tax Ct. LEXIS 28">*158 debt securities.
During the period August 1 through December 31, 1998, Times Mirror directed the LLC to purchase (1) approximately 125 T.C. 110">*165 13.3 million shares of Times Mirror for between $ 750 million and $ 760 million and (2) interests in several Internet media companies for approximately $ 9 million.
In a finance report presented to the Times Mirror board of directors on February 4, 1999, the following statement appeared:
Resources-Background
In 1998, with the closing of the Matthew Bender, Mosby and
Shepards divestitures, we began what we expect will be an
extensive period of managing surplus capital. As we have
articulated in the past, our initial responsibility is to manage
this cash under a short-term investment policy, which stresses
preservation of capital. This naturally results in returns
commensurate with the low tolerance for risk.
Ultimately, our planning challenge is to assess realistically
what the levels of spending might be in the primary areas of
priority, which we have articulated before:
o Capital investments in existing businesses to drive growth
2005 U.S. Tax Ct. LEXIS 28">*159 o Acquisitions that enhance our existing lines of business
o Dividends necessary to maintain a payout ratio commensurate
with our peer group average
o Consistent with long-term capitalization goals, opportunistic
stock repurchase
* * * * * * *
Sizing Our Resources
In the second half of 1998, the closing of the divestiture of
Matthew Bender and Mosby resulted in the deposit of $ 1,790
million of gross proceeds into the accounts of the two Eagle
LLC's, both investment affiliates of Times Mirror. Additionally,
the divestiture of our share of the Shepards joint venture
resulted in the deposit in Times Mirror's account of $ 275
million. While the cash received by Times Mirror has all been
used to retire short-term debt, the following approximately
depicts the 1/12/99 deployment of capital within the Eagle
LLC's:
2005 U.S. Tax Ct. LEXIS 28">*160 $ Millions
Short-term Money Market Assets $ 1,025
Times Mirror Common Stock (13.3M shares) 780
Tax Credit Partnerships 1 19
New Media Investments
___________
Total Eagle Assets $ 1,831
A preliminary cash flow analysis for the 1999-2001 period
enables us to forecast total resources available to us. The
following table shows how 125 T.C. 110">*166 much net cash is used under our plans
for spending in our major investment categories:
($ Millions)
1999 2000 2001 3-year Total
____ ____ ____ ____________
Cash From Operations $ 383 $ 401 $ 434 $ 1,218
2005 U.S. Tax Ct. LEXIS 28">*161 Capital Expenditures (201) (131) (120) (452)
Acquisitions, Net (300) (300) (300) (900)
Dividends (80) (83) (89) (252)
_______ _______ _______ _________
Annual Surplus/(deficit) ($ 198) ($ 113) ($ 75) ($ 386)
Thus over the 3 years of our plan, before repurchase, our total
spending would be around $ 400 million out of the $ 1.0 billion
held by the investment LLCs.
* * * * * * *
Conclusion
In consideration of the resources we have available and the
capital and acquisition spending we anticipate, we are
recommending a gross repurchase level of approximately 4-5
million shares per year for the plan period. With approximately
3-4 million shares expected to be issued each year through
options and other equity incentive programs, our planned
repurchase level should result in a net retirement of 1-2
2005 U.S. Tax Ct. LEXIS 28">*162 million shares per year in each of the next 3 years. This will
allow us to invest for our continued growth while returning us
to an optimal capital mix.
After the board of directors had considered the materials that had been presented regarding these matters, the board approved resolutions regarding the use of the LLC and Eagle Publishing in Times Mirror's share repurchase program.
On May 3, 1999, Udovic distributed a memorandum to, among others, Unterman, Gastler, Niese, and Behnia regarding the amendment of MB Parent's restated certificate of incorporation to permit the payment of dividends on the shares of MB Parent's common stock. Udovic's memorandum contained the following statements:
In connection with distributing to Times Mirror the income of
Eagle New Media Investments, LLC, attached is a draft of a
Restated Certificate of Incorporation of CBM Acquisition Parent
Co., Section 3(e) of Article V of which has been amended to
permit the payment of dividends on shares of common stock. * * *
Also attached are drafts of Board and shareholder resolutions
approving the Restated Certificate of Incorporation.
2005 U.S. Tax Ct. LEXIS 28">*163 I have sent these drafts to Charlie Fontaine at Reed who has
agreed to coordinate having the Restated Certificate approved
and filed and dividends paid to Times Mirror. The amounts
currently proposed to be paid to Times Mirror as dividends are
$ 14,808,000 for the period ended December125 T.C. 110">*167 31, 1998 and
$ 4,536,000 (which is 65% of Eagle New Media's post-preferred
dividend net income) for the quarter ended March 31, 1999. * * *
Reed agreed to the proposed amendment to MB Parent's restated certificate of incorporation because (1) Reed had no interest in the profits generated by the LLC and (2) Reed understood that none of the $ 1.375 billion that had been contributed to the LLC would ever be returned to Reed.
On June 24, 1999, the board of directors of MB Parent adopted resolutions that approved (1) the amendment of MB Parent's restated certificate of incorporation to permit the payment of dividends on the shares of MB Parent's common stock and (2) the declaration and payment of dividends on MB Parent's common stock and voting preferred stock. These resolutions stated, in pertinent part, the following:
4. Amendment of2005 U.S. Tax Ct. LEXIS 28">*164 the Restated Certificate of Incorporation of
the Corporation.
* * * * * * *
RESOLVED, that the Restated Certificate of Incorporation of the
Corporation be further amended by changing subsection (e) of
Section 3 of the Article thereof numbered "Article V" so that,
as amended, said subsection of said Article shall be and read as
follows:
"(e) Restrictions on Junior Payments. So long as any
shares of Voting Preferred Stock are outstanding, the
corporation shall not, except only upon the unanimous vote
of the Board of Directors, (i) declare, pay or set apart
for payment any dividend on, or make any distribution in
respect of, Junior Securities or any warrants, rights,
calls or options exercisable for, or convertible into, any
Junior Securities, either directly or indirectly, whether
in cash, obligations or shares of the corporation or other
property (other than distributions or dividends solely in
the form2005 U.S. Tax Ct. LEXIS 28">*165 of a particular class or series of Junior
Securities, or warrants, rights, calls or options
exercisable for, or convertible into, such Junior
Securities, to holders of such Junior Securities), (ii)
make any payment on account of, or set apart for payment
money for a sinking or other similar fund for the purchase,
redemption, retirement or other acquisition for value of
any of, or redeem, purchase, retire or otherwise retire for
value any of, Junior Securities (other than as a result of
a reclassification of Junior Securities or the exchange or
conversion of one class or series of Junior Securities for
or into another class or series of Junior Securities) or
any warrants, rights, calls or options exercisable for, or
convertible into, any of the Junior Securities, or (iii)
permit any corporation or other entity directly or
indirectly controlled by the corporation to purchase,
redeem, retire or otherwise acquire for value any of the
2005 U.S. Tax Ct. LEXIS 28">*166 Junior Securities or any warrants, rights, calls or options
exercisable for, or convertible into, any Junior
Securities."
* * * * * * *
125 T.C. 110">*168 5. Declaration of Dividends.
RESOLVED, that, subject to the receipt of dividends due to the
Corporation upon the shares of capital stock of MB held by the
Corporation in respect of the period from August 1, 1998 through
June 30, * * * [1999], the Corporation declare and pay dividends
upon its capital stock in respect of the period from August 1,
1998, through June 30, 1999 as set forth below:
Class of Shares Gross Amount Amount per Share
_______________ ____________ ________________
Common Stock, par value $ 21,160,000.00 $ 21,160.00
$ 0.01 per share
Voting Preferred Stock, $ 3,466,145.20 $ 866.5653
par value $ 0.01
per share
; and further
RESOLVED, that, in accordance with Section 15 of that certain
Limited Liability Company Agreement2005 U.S. Tax Ct. LEXIS 28">*167 dated as of July 28, 1998
(the "LLC Agreement") among CBM Acquisition Parent Co., LEXIS
Inc. and The Times Mirror Company (" TMC"), all Delaware
corporations, the Corporation demand from Eagle New Media
Investments, LLC, a Delaware limited liability company, a
distribution in the amount of Twenty-One Million Eight Hundred
Two Thousand Seventy Dollars and Eighty-Seven Cents ($
21,802,070.87), to be paid not later than July 1, 1999 to
partially fund the aforesaid dividends; * * *
Also on June 24, 1999, MB Parent's stockholders, i.e., REUS, REBV, and TMD, adopted resolutions that approved of the amendment to MB Parent's restated certificate of incorporation.
On June 30, 1999, Times Mirror, acting in its capacity as manager of the LLC, approved a distribution of $ 21,802,070.87 from the LLC to MB Parent. MB Parent used this distribution to pay the dividends that had been declared on its common stock and its preferred stock on June 24, 1999. In this regard, MB Parent distributed $ 21,160,000 to TMD and $ 642,070.87 (i.e., the difference between the $ 3,466,145.20 dividend that MB Parent had declared on its preferred stock2005 U.S. Tax Ct. LEXIS 28">*168 and the $ 2,824,074.33 dividend that had accumulated on the Bender participating preferred stock owned by MB Parent between August 1, 1998, and June 30, 1999) to REUS and REBV. MB Parent neither declared nor made any other dividend distributions from the time of MB Parent's organization to the end of 2000.
125 T.C. 110">*169 Summary of the LLC's Investment Activity During 1999
During 1999, Times Mirror directed the LLC to purchase (1) approximately 2.1 million shares of Times Mirror common stock for between $ 125 million and $ 135 million; (2) interests in several Internet media companies; (3) Newport Media, Inc., for $ 132 million; (4) Airspace Safety Analysis Corp. and ASAC International, LLC, for $ 14.5 million; and (5) ValuMail, Inc. Times Mirror also directed the LLC to contribute $ 233,252,000 to TMCT II, LLC, an entity formed for the purpose of retiring stock held by the Chandler Trusts.
Times Mirror's and MB Parent's Income Tax Returns for 1998
On September 14, 1999, Gastler signed Times Mirror's Form 1120, U.S. Corporation Income Tax Return, for 1998. Times Mirror did not disclose any information concerning the Bender transaction on this Form 1120 or on any attachments to this Form 1120.
2005 U.S. Tax Ct. LEXIS 28">*169 On September 15, 1999, Vera Lang, treasurer of MB Parent, signed MB Parent's Form 1120 for 1998. Attached to MB Parent's Form 1120 for 1998 was Schedule L, Balance Sheet per Books, on which MB Parent reported its total assets. According to the Schedule L, the following amounts comprised MB Parent's total assets as of the end of 1998: (1) $ 1,613,268 of "Other current assets" and (2) $ 1,457,251,204 of "Other investments". Furthermore, the following amounts comprised MB Parent's "Other investments" as of the end of 1998: (1) $ 61,616,016 of "OTHER INVESTMENTS" held by MB Parent; (2) $ 867,197,048 of "OTHER INVESTMENTS" held by the LLC; and (3) $ 528,438,140 of "Marketable securities" held by the LLC. MB Parent also reported the value of its capital stock on this Schedule L. According to the Schedule L, $ 68,750,000 of preferred stock comprised the total value of MB Parent's capital stock as of the end of 1998. MB Parent did not report a value for its common stock on this Schedule L. In addition, MB Parent reported its additional paid-in capital on this Schedule L. According to the Schedule L, the value of MB Parent's additional paid-in capital was $ 1.375 billion as of the end of 1998.
2005 U.S. Tax Ct. LEXIS 28">*170 The Internal Revenue Service (IRS) began its audit of Times Mirror's Form 1120 for 1998 sometime during February 125 T.C. 110">*170 2000. On March 15, 2000, Gastler signed the cover sheet to a packet of documents that Times Mirror provided to the IRS as part of this audit. Included in this packet of documents was Form 8275, Disclosure Statement, for the period January 1, 1997, through December 31, 1998, for Times Mirror and its subsidiaries. Referenced in an attachment to the Form 8275 were "Statements previously submitted on February 18, 2000, indicating reorganization of Matthew Bender and Company, per
MATTHEW BENDER & COMPANY
STATEMENT PURSUANT TO IRC
REG. 1.368-3
Matthew Bender & Company was disposed of pursuant to an
agreement and plan of merger dated April 27, 1998 by and between
The Times Mirror Company, TMD Inc, a wholly owned subsidiary of
Times Mirror and Reed Elsevier U.S. Holdings Inc., Reed Elsevier
Overseas BV, CBM Acquisition Parent Co, MB Parent and2005 U.S. Tax Ct. LEXIS 28">*171 CBM
MergerSub Corp. The transactions are fully described in the plan
of merger attached. The purpose of the transaction was to
dispose of Matthew Bender in a transaction that would qualify as
reorganization under
1986 as amended.
Times Mirror's Financial Reporting Following the Close of the Bender Transaction
On August 13, 1998, Unterman signed Times Mirror's Form 10-Q, Quarterly Report Pursuant To
Note 3 -- Discontinued Operations
The Company signed definitive agreements with Reed Elsevier plc
on2005 U.S. Tax Ct. LEXIS 28">*172 April 26, 1998 for the disposition of Matthew Bender &
Company, Incorporated (Matthew Bender), the Company's legal
publisher, in a tax-free reorganization and the sale of Times
Mirror's 50% ownership interest in 125 T.C. 110">*171 Shepard's. The two
transactions were valued at $ 1.65 billion in the aggregate and
were completed on July 31, 1998. The disposition of Matthew
Bender was accomplished through the merger of an affiliate of
Reed Elsevier with and into Matthew Bender with Matthew Bender
as the surviving corporation in the merger. As a result of the
merger, TMD, Inc., a wholly owned subsidiary of Times Mirror,
received all of the issued and outstanding common stock of CBM
Acquisition Parent Co. (MB Parent). MB Parent is a holding
company that owns controlling voting preferred stock of Matthew
Bender with a stated value of $ 61,616,000 and participating
stock of Matthew Bender. MB Parent is also the sole member of
Liberty Bell I, LLC (Liberty Bell I). Affiliates of Reed
Elsevier own voting preferred stock of MB Parent with a stated
value of $ 68,750,000 which affords2005 U.S. Tax Ct. LEXIS 28">*173 them voting control over MB
Parent, subject to certain rights held by Times Mirror with
respect to Liberty Bell I. Concurrently with the closing of the
merger, the Company became the sole manager of Liberty Bell I
and controls its operations and assets. At the time of the
merger, the principal asset of Liberty Bell I was $ 1,375,000,000
of cash. The consolidated financial statements of Times Mirror
will include the accounts of Liberty Bell I.
The portion of the August 13, 1998, Form 10-Q entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" included the following statements:
General
In the second quarter of 1998, the Company reached agreements to
divest its legal publisher Matthew Bender & Company,
Incorporated (Matthew Bender), its 50% ownership interest in
legal citation provider Shepard's, and its health sciences
publisher Mosby, Inc. (Mosby). On July 31, 1998, the Company
completed the divestiture of Matthew Bender in a tax-free
reorganization and the sale of the Company's interest in
Shepard's to Reed2005 U.S. Tax Ct. LEXIS 28">*174 Elsevier plc. The two transactions were valued
at $ 1.65 billion in the aggregate. * * *
In anticipation of the expected impact of the divestitures, the
Company has begun a comprehensive review of its business
configurations, operating systems and other investments to
determine economically attractive actions it can take to prepare
for future growth. * * *
In addition, the pace of share repurchase activity will be
accelerated to result in the repurchase of approximately 9.0
million shares of Series A common stock in 1998. The Company
purchased 2.1 million shares through the 1998 second quarter. On
July 27, 1998, the Company entered into a forward purchase
contract to purchase 2.0 million shares of Series A common
stock. Additionally, 2.7 million shares of Series A common stock
were purchased subsequent to June 30, 1998.
* * * * * * *
125 T.C. 110">*172 Liquidity and Capital Resources
* * * * * * *
Acquisitions and Dispositions
2005 U.S. Tax Ct. LEXIS 28">*175 * * * * * * *
* * * Concurrently with the closing of the Matthew Bender
transaction, the Company became the sole manager of Liberty Bell
I, LLC (Liberty Bell I), the principal asset of which was
approximately $ 1.38 billion of cash. Subsequent to such closing,
Liberty Bell I purchased 2.7 million shares of the Company's
Series A common stock. The Company intends to deploy the
remaining assets of Liberty Bell I to finance acquisitions and
investments, including purchases of the Company's common stock,
and does not intend to use those funds for the Company's working
capital purposes or to retire the Company's debt. * * *
* * * * * * *
Common Share Repurchases
The Company repurchased 2.1 million and 6.5 million shares of
its Series A common stock during the year to date periods ended
June 30, 1998 and 1997, respectively. On July 27, 1998, the
Company entered into a forward purchase contract to purchase 2.0
million shares of Series A common stock. Additionally, 2005 U.S. Tax Ct. LEXIS 28">*176 Liberty
Bell I purchased 2.7 million shares of Series A common stock
subsequent to June 30, 1998. The Company believes that the
purchase of shares of its common stock by Liberty Bell I is an
attractive investment for Liberty Bell I that will also enhance
Times Mirror shareholder value as well as offset dilution from
the shares of common stock issued under the Company's stock-
based employee compensation and benefit programs. * * *
On August 17, 1998, Unterman signed Times Mirror's Form 8-K, Current Report Pursuant To
125 T.C. 110">*173 On February 22, 1999, Willes signed Times Mirror's annual shareholder report for 1998. In the section entitled "Letter to Shareholders", Willes made the following statements:
1998 was a record year for Times Mirror. * * * Clearly our
biggest accomplishment last year was the divestiture of Matthew
Bender and Mosby for over $ 2 billion in value, a whopping 17
times cash flow. These transactions eliminated a major strategic
vulnerability for the company. And because they were done in a
tax-efficient way, we can redeploy the resources in ways that
will enhance the earnings power of Times Mirror.
In addition, the section entitled "A Crisis of Growth" contained the following statements:
In 1998 * * * [Newsday] again increased circulation and revenue,
partly because it employed innovative ventures to do so. * * *
It has organized a separate effort to distribute advertising
2005 U.S. Tax Ct. LEXIS 28">*178 shoppers throughout Long Island and New York City and a Times
Mirror affiliate just recently acquired a chain of weekly papers
to increase Newsday's role in printed advertising in its
circulation area.
* * * * * * *
Fortunately for a company responding to a changing world, Times
Mirror has immense resources. The sale in 1998 of the Matthew
Bender and Mosby legal and medical publishing units has given
Times Mirror a gain of $ 1.35 billion.
That enormous chunk of capital awaits redeployment in Times
Mirror operations or in acquisition of other companies. * * *
* * * Times Mirror is budgeting $ 300 million for acquisitions in
1999. * * *
* * * Chains of small newspapers are being acquired in the
circulation areas of Newsday and The Baltimore Sun. Up to $ 50
million a year is being invested in venture capital backing for
Internet start-ups to gain expertise and give the company
expertise and participation in developing technologies.
* * * The big $ 1.3-billion proceeds from the2005 U.S. Tax Ct. LEXIS 28">*179 Mosby-Bender sale
would be brought into play if newspaper acquisition opportunity
came up in adjacent markets, such as San Diego or Las Vegas.
Times Mirror could swing a very big acquisition: With its own
capital plus borrowing power, the company could easily finance a
$ 4-billion, even a $ 5-billion acquisition.
The section entitled "Financial Questions and Answers" contained the following statements:
Following the 1998 divestitures, Times Mirror has considerable
cash resources. What are your priorities for reinvestment?
125 T.C. 110">*174 Times Mirror has significant financial flexibility as we enter
1999. With control over more than $ 1 billion of cash resources
and further debt capacity available, we are very well positioned
to pursue new opportunities.
Unterman and Times Mirror's board of directors signed Times Mirror's 1998 Form 10-K on March 4, 1999. Part I contained the following statements:
During 1998, Times Mirror engaged in several strategic
transactions including the divestiture of Matthew Bender &
Company, Incorporated, a publisher of legal information, the
2005 U.S. Tax Ct. LEXIS 28">*180 Company's 50% interest in Shepard's, a legal citation provider,
and Mosby, Inc., a publisher of health science information. * *
* In February 1999, an investment affiliate of the Company
acquired Newport Media, Inc., a publisher of shopper
publications in the Long Island and New Jersey areas.
The Company continued to have an active share purchase program
with a total of 16.7 million shares of Series A Common Stock
acquired by the Company or its affiliates during 1998 * * *. In
1998, the Company, in anticipation of the expected impact of
divestitures, also began a comprehensive review of its business
configurations, operating systems and other investments to
determine economic actions it could take to prepare for future
growth. * * *
Part II contained, among other information, management's discussion and analysis of the company's financial condition and results of operations, the audited consolidated financial statements for Times Mirror, and the notes to the company's consolidated financial statements. According to Times Mirror's consolidated balance sheets, the company's current assets2005 U.S. Tax Ct. LEXIS 28">*181 totaled $ 1,629,259,000 as of December 31, 1998, and its total assets amounted to $ 4,218,306,000 as of that time. Both of these amounts included the "proceeds of reorganization", i.e., the proceeds from (1) the Bender transaction, (2) the sale of Times Mirror's 50-percent interest in Shepard's, and (3) the Mosby transaction.
The portion of part II of Times Mirror's 1998 Form 10-K that comprised management's discussion and analysis of Times Mirror's financial condition and results of operations contained the following statements:
OVERVIEW
The Company achieved record earnings in 1998 with net income of
$ 1.42 billion, or $ 16.06 per share on a diluted basis, compared
with 1997 net income of $ 250.3 million, or $ 2.29 per share. The
1998 results reflect:
o An after-tax gain of $ 1.35 billion, or $ 15.50 per share, on
the disposition of Matthew Bender/Shepard's and Mosby and
$ 30.8 million, or $ . 35 per 125 T.C. 110">*175 share, of after-tax losses
associated with discontinuance of certain other businesses.
* * * * * * *
o Share purchases in 19982005 U.S. Tax Ct. LEXIS 28">*182 which reduced the number of shares of
common stock outstanding for financial reporting purposes to
73.4 million at December 31, 1998 compared with 87.9 million
at December 31, 1997.
* * * * * * *
Discontinued Operations
On July 31, 1998, the Company completed the divestiture of
Matthew Bender & Company, Incorporated and its 50% ownership in
legal citation provider Shepard's to an affiliate of Reed
Elsevier, Inc. in a transaction valued at $ 1.65 billion.
Additionally, on October 9, 1998, the Company completed the
divestiture of Mosby, Inc., its health science and medical
publisher, to Harcourt General, Inc. in a transaction valued at
$ 415.0 million.
* * * * * * *
Share Purchases
Share purchases continued in 1998 through open market
transactions, accelerated purchases and purchases by an
affiliated limited liability company. A total of 16.7 million
Series A common shares were acquired during 1998 which more than
2005 U.S. Tax Ct. LEXIS 28">*183 offset 2.1 million shares issued as a result of the exercise of
stock options.
CONSOLIDATED RESULTS OF OPERATIONS
* * * * * * *
1998 Compared with 1997
* * * * * * *
Earnings per share for 1998 benefited principally from the net
gain on divestitures as well as a reduction in the average
number of common shares outstanding and lower preferred dividend
requirements. * * *
Net interest expenses declined in 1998 due to an increase in
interest income resulting from investment activity of the
affiliated limited liability companies created as part of the
Matthew Bender and Mosby transactions. Higher interest income
more than offset a rise in interest expense primarily due to
increased debt levels attributable to common stock purchases,
the 1997 third quarter recapitalization and new acquisitions.
* * * * * * *
LIQUIDITY AND CAPITAL RESOURCES
* 2005 U.S. Tax Ct. LEXIS 28">*184 * * * * * *
Acquisitions
* * * * * * *
In February 1999, Eagle New Media Investments, LLC, an
investment affiliate of the Company, acquired Newport Media,
Inc., a publisher of 125 T.C. 110">*176 shopper publications in the Long Island and
New Jersey areas, for $ 132 million.
Dispositions
On July 31, 1998, the Company completed the divestiture of
Matthew Bender in a tax-free reorganization and the sale of the
Company's 50% ownership interest in Shepard's to Reed Elsevier
plc. The two transactions were valued at $ 1.65 billion in the
aggregate. Proceeds from the sale of Shepard's were used to pay
down commercial paper and short-term borrowings of $ 222.4
million. Concurrently with the closing of the Matthew Bender
transaction, the Company became the sole manager of Eagle New
Media Investments, LLC (Eagle New Media). At December 31, 1998,
the assets of Eagle New Media were $ 605.8 million of cash and
cash equivalents, $ 753.0 million of Times Mirror stock, $ 15.0
million of2005 U.S. Tax Ct. LEXIS 28">*185 marketable securities and $ 22.3 million of other
assets. On October 9, 1998, the Company completed the
divestiture of Mosby, Inc. to Harcourt General, Inc. in a
transaction valued at $ 415.0 million. Concurrently with the
closing of the Mosby, Inc. transaction, the Company became the
sole manager of Eagle Publishing Investments, LLC (Eagle
Publishing). At December 31, 1998, the assets of Eagle
Publishing were $ 377.2 million of cash and cash equivalents,
$ 34.5 million of marketable securities and $ 20.1 million of
other assets. * * * The Company intends to deploy the assets of
both LLCs to finance acquisitions and investments, including
purchases of the Company's common stock, and does not intend to
use those funds for the Company's general working capital
purposes. For financial reporting purposes, Eagle New Media and
Eagle Publishing are consolidated with the financial results of
the Company.
The portion of part II of Times Mirror's 1998 Form 10-K that comprised the notes to the company's consolidated financial statements included the following:
Note2005 U.S. Tax Ct. LEXIS 28">*186 4 -- Reorganization
During the third quarter of 1998, the Company completed the
disposition of Matthew Bender in a tax-free reorganization with
Reed Elsevier plc. The disposition of Matthew Bender was
accomplished through the merger of an affiliate of Reed Elsevier
with and into Matthew Bender with Matthew Bender as the
surviving corporation in the merger. As a result of the merger,
TMD, Inc., a wholly-owned subsidiary of Times Mirror, received
all of the issued and outstanding common stock of CBM
Acquisition Parent Co. (MB Parent). MB Parent is a holding
company that owns controlling voting preferred stock of Matthew
Bender with a stated value of $ 61,616,000 and participating
stock of Matthew Bender. MB Parent is also the sole member of
Eagle New Media Investments, LLC (Eagle New Media). Affiliates
of Reed Elsevier owned voting preferred stock of MB Parent with
a stated value of $ 68,750,000 which affords them voting control
over MB Parent, subject to certain rights held by Times Mirror
with respect to Eagle New Media. Concurrently, with the2005 U.S. Tax Ct. LEXIS 28">*187 closing
of the merger, the Company became the sole manager of Eagle New
Media and controls 125 T.C. 110">*177 its operations and assets. At December 31,
1998, the assets of Eagle New Media were $ 605,786,000 of cash
and cash equivalents, $ 752,956,000 (13,362,000 shares) of Series
A common stock of Times Mirror, $ 14,952,000 of marketable
securities and $ 22,270,000 of other assets. The consolidated
financial statements of the Company include the accounts of
Eagle New Media.
* * * * * * *
The Company intends to deploy the assets of both LLCs to finance
acquisitions and investments, including purchases of the
Company's common stock, and does not intend to use those funds
for the Company's general working capital purposes.
* * * * * * *
Note 13 -- Capital Stock and Stock Purchase Program
* * * * * * *
Treasury Stock. Treasury stock includes shares of Series
A common stock and Series A preferred stock owned by2005 U.S. Tax Ct. LEXIS 28">*188 affiliates
as well as Series A common stock purchased by the Company as
part of the stock purchase program. Approximately 13,262,000 * *
* shares of Series A common stock included in treasury stock are
owned by Eagle New Media * * *
Stock Purchases. During 1998, the Company and Eagle New
Media purchased 16,355,000 common shares for a total cost of
$ 947,203,000. * * *
* * * * * * *
In connection with the Company's ongoing stock purchase program,
in October 1998, the Company's Board of Directors authorized the
purchase over the next two years of an additional 6,000,000
shares of common stock. The aggregate remaining shares
authorized for purchase at December 31, 1998 was approximately
1,100,000 shares. The Company believes that the purchase of
shares of its common stock is an attractive investment for Eagle
New Media which will enhance Times Mirror shareholder value as
well as to offset dilution from shares of common stock issued
under the Company's stock-based employee compensation and
2005 U.S. Tax Ct. LEXIS 28">*189 benefit program. In February 1999, the Board of Directors
authorized the purchase of an additional amount of up to
6,000,000 shares of its Series A common stock.
* * * * * * *
Note 21 -- Subsequent Events
* * * * * * *
In February 1999, Eagle New Media Investments, * * * LLC, an
investment affiliate of the Company, acquired Newport Media,
Inc., a publisher of shopper publications in the Long Island and
New Jersey areas, for approximately $ 132,000,000.
Efrem Zimbalist III, who had succeeded Unterman as chief financial officer of Times Mirror, signed Times Mirror's 1999 125 T.C. 110">*178 Form 10-K on March 29, 2000. Part I contained the following statements:
ITEM 1. BUSINESS.
GENERAL
* * * * * * *
During 1999, Times Mirror engaged in several strategic
transactions including the acquisition by an investment
affiliate of Newport Media, Inc., a publisher of shopper
publications in the New York and New Jersey areas, 2005 U.S. Tax Ct. LEXIS 28">*190 ValuMail,
Inc., a shared mail company that distributes preprinted
advertising in Connecticut and Massachusetts, and Airspace
Safety Analysis Corporation, a provider of airspace utilization
and Federal Aviation Administration compliance services for the
telecommunications and aviation industries. * * *
In September 1999, Times Mirror, its affiliates and its largest
stockholders, the Chandler Trusts, completed a transaction that,
for financial reporting purposes, reduced Times Mirror's
outstanding common stock by 12.4 million shares and reduced
Times Mirror's then outstanding Series C Preferred Stock by
501,000 shares. * * *
The annual report referred to various investment activities in newspaper publishing as directly engaged in by Times Mirror. The annual report contained no reference to Reed as having any interest in the "affiliate" actually engaged in the investment activity.
Part II of Times Mirror's 1999 Form 10-K contained, among other information, management's discussion and analysis of the company's financial condition and results of operations, audited consolidated financial statements2005 U.S. Tax Ct. LEXIS 28">*191 for Times Mirror, and the notes to the company's consolidated financial statements. The portion of part II that comprised management's discussion and analysis of Times Mirror's financial condition and results of operations contained the following statements:
Overview
* * * * * * *
1999 Recapitalization
In September 1999, the Company completed a recapitalization
transaction with its largest shareholders, the Chandler Trusts,
in which the Company, including certain of its affiliates, and
the Chandler Trusts each contributed assets worth $ 1.24 billion
to TMCT II, LLC, a newly formed limited liability company. The
1999 recapitalization resulted in a net effective reduction, for
financial reporting purposes, in the number of shares of125 T.C. 110">*179 the
Series A and C common stocks by 12.4 million shares and in the
Company's Series C-1 and C-2 preferred stocks by 501,000 shares.
* * *
* * * * * * *
Liquidity and Capital Resources
* * * In 1999, funds from the Company's2005 U.S. Tax Ct. LEXIS 28">*192 investment affiliates
created as part of the 1998 divestitures of the Company's legal
and medical publishing businesses, as well as proceeds from new
debt issuances were used to finance the 1999 recapitalization
and acquisitions. In the second half of 1998, the company
utilized a portion of the investment affiliates resources for
share purchases and acquisitions. * * *
* * * * * * *
Dispositions
* * * * * * *
In July 1998, the Company completed the divestiture of Matthew
Bender in a tax-free reorganization and the sale of the
Company's 50% ownership interest in Shepard's to Reed Elsevier
plc. The two transactions were valued at $ 1.65 billion in the
aggregate. In October 1998, the Company completed the
divestiture of Mosby, Inc. to Harcourt General, Inc. in a
transaction valued at $ 415.0 million. Concurrently with the
closing of the Matthew Bender and Mosby, Inc. transactions, the
Company became the sole manager of Eagle New Media Investments,
2005 U.S. Tax Ct. LEXIS 28">*193 LLC (Eagle New Media) and Eagle Publishing Investments, LLC
(Eagle Publishing). A substantial portion of the assets of Eagle
New Media and Eagle Publishing were utilized in connection with
the 1999 recapitalization (see Note 2). The Company intends to
deploy the assets of both Eagle New Media and Eagle Publishing
to finance acquisitions and investments, including purchases of
the Company's common stock, and does not intend to use those
funds for the Company's general working capital purposes.
Common Share Purchases
During 1999, the Company and Eagle New Media purchased 3.2
million shares of the Company's Series A common stock which more
than offset 2.0 million shares issued as a result of the
exercise of stock options * * *.
The Company believes that the purchase of shares of its common
stock is an attractive investment for Eagle New Media which will
also enhance Times Mirror shareholder value as well as offset
dilution from shares of common stock issued under the Company's
stock-based employee compensation and benefit programs. 2005 U.S. Tax Ct. LEXIS 28">*194 The
Company and its affiliates expect to make share purchases
primarily to offset stock option exercises, during the next two
years in the open market or in private transactions, depending
on market conditions, and such purchases may be discontinued at
any time. * * * As of December 31, 1999, the Company and its
affiliates are authorized to purchase 3.9 million shares of
Series A common stock.
125 T.C. 110">*180 The LLC's Financial Statements for the Fiscal Years Ended December 31, 1999 and 1998
On April 6, 2000, Udovic faxed to Fontaine a copy of the LLC's unaudited financial statements for the fiscal years ended December 31, 1999 and 1998. A statement of operations was part of these financial statements. On the statement of operations, the LLC reported $ 2,435,000 and $ 10,132,000 of dividend income attributable to its Times Mirror stock for 1998 and 1999, respectively.
Included with the LLC's financial statements were notes that contained, in pertinent part, the following comments:
Note 1 -- Basis of Preparation
* * * The Company's sole manager is The Times Mirror Company who
controls its operations and assets. 2005 U.S. Tax Ct. LEXIS 28">*195 The Company began operations
on July 31, 1998.
* * * * * * *
Note 2 -- Cash and Cash Equivalents, Marketable Securities,
Available-for-sale Securities and Investments
* * * * * * *
Investments in Times Mirror stock are reported at cost, as they
are restricted from sale because the Company is considered an
affiliate of Times Mirror. The fair value of the Times Mirror
stock based on its quoted market price was $ 1,015,186,000 and
$ 742,666,000 at December 31, 1999 and 1998, respectively. * * *
* * * * * * *
Note 4 -- 1999 Recapitalization
In September 1999, the Company and certain of its affiliates
participated in a transaction (1999 recapitalization) involving
agreements with Times Mirror Company's largest shareholders,
Chandler Trust No. 1 and Chandler Trust No. 2. The 1999
recapitalization resulted in the formation of a new limited
liability company, TMCT II, LLC (TMCT II).
2005 U.S. Tax Ct. LEXIS 28">*196 Pursuant to the TMCT II contribution agreement, the Company
contributed a total of $ 233,252,000 in cash and cash
equivalents.
On May 31, 2000, the board of directors of MB Parent accepted and approved the LLC's financial statements for the fiscal years ended December 31, 1999 and 1998.
IRS Determinations
On August 14, 2002, the IRS sent to petitioner a statutory notice of deficiency with respect to petitioner's Federal 125 T.C. 110">*181 income tax for 1998. In the statutory notice of deficiency, the IRS made the following determinations regarding the Bender transaction:
1. $ 1,375,000,000 is the amount realized in 1998 under Code
section 1001 by TMD in exchange for the 100% common stock
interest in MB [Bender].
2. In 1998, TMD must recognize capital gain in the amount of
$ 1,322,035,840, as computed below. * * * TMD's exchange of its
100% common stock interest in MB is ineligible for
nonrecognition treatment under Code
series of prearranged transactions that included the merger of
Bender Mergersub into MB failed to qualify as a "reorganization"
under
In addition, the IRS explained the basis for its determinations under the following headings: "A. TMD CASHED OUT ITS INVESTMENT IN MB", "B. TMD FAILED TO EXCHANGE ITS MB COMMON STOCK FOR STOCK OF MB PARENT WORTH AT LEAST $ 1.1 BILLION", and "C. AFTER THE MERGER, POST-MERGER MB, THE SURVIVING CORPORATION FAILED TO HOLD 'SUBSTANTIALLY ALL' OF ITS PROPERTIES AND THE PROPERTIES OF THE 'MERGED' CORPORATION". Under the last heading, the notice elaborated:
D. TMD RECEIVED CONSIDERATION OTHER THAN VOTING STOCK.
To qualify as a reorganization under Code
only voting stock may be used by the acquiring corporation. The
merger of Bender Mergersub into MB could not qualify as a "B"
reorganization if TMD received, in exchange for its MB common
stock, any consideration other than voting stock (" boot").
In exchange for its MB common stock, TMD received MB Parent
common stock and constructively received the rights to manage
Eagle I, which it assigned to TM. Immediately after the merger,
Eagle I's sole asset was $ 1.375 billion in cash. The provisions
of the Eagle I LLC2005 U.S. Tax Ct. LEXIS 28">*198 Agreement, coupled with the broad powers
granted to the manager, gave TM direct access to and control
over the $ 1.375 billion.
The rights to manage Eagle I were not voting stock, had
substantial value, and were constructively received by TMD in
exchange for its MB common stock. Since TMD received boot in
exchange for its interest in MB, the merger of Bender Mergersub
into MB failed to qualify as a reorganization under Code
368(a)(1)(B).
The notice also determined that section 269 applies to deny nonrecognition treatment of the Bender transaction.
During trial of this case, the parties agreed that TMD's adjusted basis in its Bender common stock was $ 78,454,130 as of July 31, 1998, rather than the $ 52,964,160 amount that 125 T.C. 110">*182 had been determined by the IRS in the statutory notice of deficiency.
ULTIMATE FINDINGS OF FACT
The primary consideration received by Times Mirror, through TMD, for transferring control over the operations of Bender to Reed was control over $ 1.375 billion paid by Reed, through MB Parent, to the LLC.
The agreements and corporate organization documents2005 U.S. Tax Ct. LEXIS 28">*199 entered into by Times Mirror and Reed negated any meaningful fiduciary obligations between Times Mirror and Reed with respect to Times Mirror's control over the cash or Reed's operation of Bender.
The MB Parent common stock held by TMD had a value of less than $ 1.1 billion and less than 80 percent of the $ 1.375 billion paid by Reed.
The Bender transaction effected a sale of Bender by TMD to Reed.
OPINION
Times Mirror and its advisers intended that the Bender transaction2005 U.S. Tax Ct. LEXIS 28">*200 qualify as a tax-free "reverse triangular merger" under
125 T.C. 110">*183 Respondent contends that the Bender transaction does not qualify as a reverse triangular merger because TMD received more than qualifying stock of MB Parent and the transaction thus fails to satisfy the "exchange" requirement of
Alternatively, and in order to assert reliance on certain rulings of respondent, petitioner argues that the Bender transaction qualifies under
(1) In general. -- For purposes of parts I and II and this part,
the term "reorganization" means --
* * * * * * *
(B) the acquisition by one corporation, in exchange solely
for all or a part of its voting stock (or in exchange
solely for all or a part of the voting stock of a
corporation which is in control of the acquiring
corporation), of stock of another corporation if,
immediately after the acquisition, the2005 U.S. Tax Ct. LEXIS 28">*202 acquiring
corporation has control of such other corporation (whether
or not such acquiring corporation had control immediately
before the acquisition);
Petitioner's alternative position would not require valuation of the MB Parent common stock. It would, however, require us to conclude that Times Mirror's control over the cash in the LLC was not part of the consideration received in the Bender transaction because it was not intended by Times Mirror or Reed to be a "separate asset".
125 T.C. 110">*184 Respondent argues that the Bender transaction did not qualify under
In form, at the conclusion of the Bender transaction, TMD was the holder of MB Parent common stock and no longer owned Bender common stock. Determination of whether the MB Parent common stock had a value of $ 1.1 billion or, in the alternative, whether the sole consideration exchanged for the Bender common stock was the MB Parent common stock requires a factual analysis of the totality2005 U.S. Tax Ct. LEXIS 28">*203 of the Bender transaction. Because the same facts lead us to our conclusions on both theories, we do not need to decide whether petitioner is too late in asserting its
Factual Analysis of the Bender Transaction
Not surprisingly, the parties differ significantly in their descriptions of the Bender transaction. While paraphrasing portions of the record, the parties cannot resist characterizing events in a manner consistent with their respective positions. Petitioner emphasizes the formalities of the multicorporate structure, which undeniably was intended and carefully designed to comply with the requirements for a tax-free reorganization under
Respondent does not deny that there was a business purpose for the Bender transaction, i.e., the desire of Times Mirror to get out of the legal publishing business because of the trends in that market. Pointing to specific aspects and results of the transaction, however, respondent argues:
All of the unusual features of the Bender Transaction structure,
2005 U.S. Tax Ct. LEXIS 28">*204 the creation of a dormant intermediary company (MB Parent) and
an enslaved LLC (Eagle I), the interlocking tiers of redeemable
Bender and MB Parent voting preferred stock that transferred
virtually complete control over Bender to Reed, and the
provisions of the LLC Agreement, that transferred absolute
control over the cash to the manager (TM), were united to a
single purpose: segregate and seal off TM's interest in the cash
and Reed's interest in Bender, one from the other.
The substance of the Bender Transaction is a swap. TM gave up
Bender for the right to control and distribute to itself at will
$ 1.375 billion of cash. 125 T.C. 110">*185 Reed gave up $ 1.375 billion of cash for
ownership and control of Bender. This is hardly the kind of
readjustment of continuing interests in property under modified
corporate form that marks a real reorganization. * * *
The proposed findings of fact set forth in the briefs of the parties cannot be adopted as our findings because they lack objectivity either by omission or in argumentative descriptions. Rather than attempting to reconcile the parties' characterizations2005 U.S. Tax Ct. LEXIS 28">*205 of particular events, we have reviewed the entire record and related in great detail the contemporaneous statements of the parties to the Bender transaction, the contractual terms, the subsequent conduct of the parties to the transaction, and the representations of Times Mirror to shareholders and to regulatory bodies. The form of the transaction includes the totality of the contractual arrangements and is not limited to the design, characterization, and labels put on the arrangements by the Times Mirror tax advisers. In analyzing the terms and provisions of the contractual arrangements, we have considered the interpretation of the parties to them, as demonstrated by their conduct.
Times Mirror's View of the Bender Transaction
Times Mirror, for good business reasons, decided to take advantage of the existing trends in legal publishing and the strong desire of Wolters Kluwer and Reed to acquire Times Mirror's interest in Bender and Shepard's. The bidders agreed to the CJV "reorganization" structure promoted by PW and GS and endorsed by GD& C and E& Y because that was the only way they could acquire their target.
Times Mirror was anxious to have the significant proceeds of its divestiture2005 U.S. Tax Ct. LEXIS 28">*206 of Bender to spend on repurchasing its own stock and diversifying into other emerging areas. After the proposed structure of the divestiture was presented to the competing bidders, at the board meeting on April 24, 1998, the board of directors was told:
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 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 125 T.C. 110">*186 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
company2005 U.S. Tax Ct. LEXIS 28">*207 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.
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 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 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 with2005 U.S. Tax Ct. LEXIS 28">*208 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 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.
In a memorandum dated April 29, 1998, E& Y recorded the following:
Times Mirror has entered into an agreement with Reed Elsevier
for the sale of Matthew Bender for $ 1,375,000,000 and the sale
of Times Mirror's interest in Shepard's Inc. for $ 225,000,000.
The sale of Matthew Bender is structured as a reorganization in
which the $ 1,375 million proceeds from the sale will end up in
an LLC whose ownership is as shown in the attached chart.
Through the various shareholder2005 U.S. Tax Ct. LEXIS 28">*209 agreements, certificates of
incorporation and the LLC management agreement, Times Mirror has
total control over the assets and operations of the LLC and Reed
Elsevier has total control over the assets and operations of
Matthew Bender. The structure is designed to result in no tax
due by Times Mirror on the profit from the sale of Matthew
Bender.
* * * * * * *
125 T.C. 110">*187 Consolidation
* * * Times Mirror controls the assets of the LLC through the
management agreement, which specifically states that Times
Mirror has no fiduciary duty to the holder of Acquisition Parent
and may use its discretion as to the use of the assets. Times
Mirror may have the LLC buy its own debt instruments or Times
Mirror stock, make business acquisitions or any other
transaction to the benefit of Times Mirror. The only limitation
is that Times Mirror may not upstream LLC assets to itself.
Times Mirror has the ability to ensure that the Board of
Directors2005 U.S. Tax Ct. LEXIS 28">*210 of Acquisition Parent may not do anything that may
affect the control or viability of the LLC. Certain board
actions require the unanimous vote of the Board. These include:
o the incurrence of indebtedness or guarantees of indebtedness
of Acquisition Parent
o the sale, transfer or other disposition, pledge or assignment
of any portion or all of its LLC interest
o the issuance of any other securities of Acquisition Parent
All of these factors indicate that Times Mirror not only
controls the assets of the LLC, but also is the beneficiary of
all of the ownership risks and rewards of the LLC. * * *
We cannot improve on the descriptions of the Bender transaction in the above contemporaneous statements of the participants. Little more would be required to conclude that the Bender transaction was, in substance, a sale. The issue in this case, however, is to determine whether the "reorganization" structure satisfies the requirements of
Fiduciary Obligations Among the Parties
In the context of the dispute2005 U.S. Tax Ct. LEXIS 28">*211 over the value of the MB Parent common stock received by TMD, as discussed below, petitioner argues that Times Mirror, as manager of the LLC, had fiduciary obligations that precluded unlimited use of the LLC's cash and prevented a conclusion that TMD or Times Mirror realized the proceeds of a sale of Bender. Respondent contends that Times Mirror's only fiduciary obligation under the management agreement was to itself. The LLC agreement dated July 28, 1998, contained provisions including the following:
125 T.C. 110">*188 9. Management.
a. The Manager shall have the sole right to manage the business
of the Company and shall have all powers and rights necessary,
appropriate or advisable to effectuate and carry out the
purposes and business of the Company, and no Member or other
person other than the Manager shall have any authority to act
for or bind the Company or to vote on or approve any of the
actions to be taken by the Company (unless otherwise expressly
required by the Act or other applicable law). Notwithstanding
the foregoing, the Initial Manager shall not take any action in
respect of or on behalf of2005 U.S. Tax Ct. LEXIS 28">*212 the Company, other than the opening
of one or more bank accounts in the name of the Company, the
appointment of an agent for service of process for the Company
and the performance of other ministerial duties in connection
with the organization and formation of the Company. Accordingly,
as of the Effective Time of the Merger, the Company shall have
no liabilities or obligations other than pursuant to this
Agreement.
* * * * * * *
e. Without limiting the generality of the foregoing, to the
fullest extent permitted by law, including
the [Delaware Limited Liability Company] Act, and without
creating any duties or obligations of the Manager by implication
or otherwise, it is expressly acknowledged and agreed that to
the extent the Manager owes any fiduciary duties or similar
obligations to the Initial Member [MB Parent] under any
principles of law or equity or otherwise, such duties and
obligations shall be owed solely to the holders of the Initial
Member's [MB Parent's] 2005 U.S. Tax Ct. LEXIS 28">*213 common equity and not to the holders of
any other class of the Initial Member's [MB Parent's] equity.
Petitioner's brief, in attacking respondent's valuation experts, asserts:
The LLC Agreement was written with the understanding that the
manager, TM, would be the 100% indirect owner of the MBP [MB
Parent] Common. * * *
* * * * * * *
* * * the management authority and the MBP Common were not owned
by two parties; TM was not only the manager, but also the 100%
indirect owner of the MBP Common, which was directly owned by a
holding company which TM had created to hold TM's
property. The rights to be valued are in fact the rights held by
one party. * * *
Petitioner does not point to any provision in the documentation of the transaction that restricts Times Mirror's use of the LLC's cash, although petitioner asserts limitations under Delaware law. Representations of Times Mirror to its shareholders indicated that the cash in the LLC would not be used for working capital but would be used for repurchase of 125 T.C. 110">*189 stock and strategic investments. However, 2005 U.S. Tax Ct. LEXIS 28">*214 nothing in the documents contains this restriction on the use of cash for working capital, which was a management decision consistent only with tax advice given to Times Mirror. The advisers, Shefter and Behnia, had made it clear to Reed before the transaction that "the LLC agreement will not contain any restrictions on the use of the cash." In any event, cash is fungible. Use of the LLC's cash in Times Mirror's ambitious stock repurchase program obviously freed up other resources to be used for working capital.
Reed's vice president of taxes, Fontaine, who negotiated the structure on behalf of Reed, testified:
Q [Counsel for petitioner] And what was Reed's position with
regard to nonvoting common stock in the structure?
A [Fontaine] Reed did not like the fact that it was common
stock. We were hoping that it would be changed to a preferred
stock because of issues surrounding fiduciary duties.
Q Could you elaborate?
A Generally speaking, a common shareholder is owed a fiduciary
duty, and because Matthew Bender at the time would have had a
common shareholder of MB Parent, and indirectly TMD, 2005 U.S. Tax Ct. LEXIS 28">*215 that that
would be -- there would be a fiduciary duty ultimately to Times
Mirror as a result of that shareholding as to the operations of
Matthew Bender.
Q What was the result of those negotiations?
A The nonvoting common stock was changed to nonvoting
participating preferred stock.
Thus, the parties understood that they were deliberately negating any fiduciary obligations owed to Reed with respect to the cash or owed to Times Mirror or TMD with respect to Bender operations.
Times Mirror's understanding of its rights with respect to the cash was described in its report to the board on October 8, 1998, as follows:
Since the July Board meeting, we have continued to sharpen our
focus on our intended use of the proceeds from the Mosby and
Matthew Bender dispositions as well as our continuing
significant free cash flow. It had not been our assumption that
we would immediately turn around and use these resources as a
war chest to finance a major acquisition program, and over the
past several months we tested this presumption by examining in
detail the prospect for2005 U.S. Tax Ct. LEXIS 28">*216 value creation and the acceleration of
earnings growth through acquisitions. * * *
All subsequent reports to the board, the shareholders, and the SEC represented that the cash proceeds of the divestiture 125 T.C. 110">*190 of Bender were controlled by Times Mirror and were being used for Times Mirror's strategic repurchase of stock and new acquisitions. Although petitioner disputes the legal significance of these representations, it has never suggested that the representations were not entirely consistent with the terms of the documentation of the Bender transaction.
In 1999, Times Mirror, as manager of the LLC, effected a $ 21,160,000 cash dividend on MB Parent's common stock. Reed agreed to the amendments to MB Parent's corporate documents because Reed had unequivocally given up any interest in the $ 1.375 billion or in the earnings on that amount.
Consideration for the Transfer of Bender to Reed
For purposes of
Q [Counsel for petitioner] From your perspective as chief
financial officer of Times Mirror, was Times Mirror's management
authority over the assets of the LLC a separate part of the
consideration Times Mirror received for Matthew Bender?
A [Unterman] Not at all. It was all one deal.
Q Could you explain your response, please?
A Well, the economic asset was the cash that was in MB parent,
and2005 U.S. Tax Ct. LEXIS 28">*218 the LLC was a way of assuring that the cash would be
invested in a manner that was parallel of Times Mirror's
interests at all times.
125 T.C. 110">*191 Under the combined terms of the management agreement, MB Parent's restated certificate of incorporation, MergerSub's certificate of incorporation, the MB Parent stockholders agreement, and the MergerSub shareholders agreement, all incidents of ownership of the $ 1.375 billion were shifted to Times Mirror as of July 31, 1998.
Examination of the voting, dividend, redemption, and liquidation provisions of the documents, quoted at length in our findings, confirms respondent's view that only Times Mirror had a continuing economic interest in the cash, and only Reed had a continuing economic interest in Bender. The structure of MB Parent and the dividend provisions assured that any dividends paid to MB Parent from the operations of Bender would be paid to Reed as dividends on MB Parent's preferred stock. Moreover, when the structure was ultimately unwound, TMD would own MB Parent and the LLC and Reed would own Bender.
The foregoing factual analysis demonstrates that the consideration received by TMD, as the investment subsidiary of Times2005 U.S. Tax Ct. LEXIS 28">*219 Mirror, was not common stock in MB Parent but was control over the cash deposited in the LLC. In relation to the arguments over expert testimony, as discussed below, petitioner asserts that the common stock and the management authority cannot be valued separately because it would have been unthinkable to transfer them separately. But this argument does not aid petitioner's case. Recognizing that no one would separately purchase either the common stock or the management authority confirms respondent's argument that common stock was not the only consideration for the transfer and that the common stock, viewed alone, did not have the value necessary for the transaction to qualify under the reorganization provisions of the Internal Revenue Code.
Valuation of MB Parent Common Stock
Petitioner argues that Times Mirror and Reed "conclusively" agreed that the MB Parent common stock was worth $ 1.375 billion. In the context of the entire agreement, however, the description of the consideration in the merger agreement as common stock was merely a recital consistent with the intended tax effect. We have examined the corporate governing documents to determine whether the MB Parent 125 T.C. 110">*192 common stock2005 U.S. Tax Ct. LEXIS 28">*220 possessed the requisite value for purposes of
The factual analysis of the transaction compels the conclusion that the management authority over the cash in the LLC had far more value to Times Mirror than the MB Parent common stock and thus represented the bulk of the consideration. For completeness, we discuss briefly the expert testimony and the context of petitioner's effective concession that the MB common stock and the management authority over the LLC were inseparable, which we conclude establishes that common stock was not the sole consideration for the Bender transaction.
Petitioner's expert, Michael Bradley (Bradley), used a "net asset value approach" to determine that MB Parent's common stock was worth $ 1.375 billion. Using an "avoided costs approach", Bradley determined that the management authority might have a fair market value ranging from $ 9.2 million to $ 44.1 million. Bradley, however, gave no apparent consideration to the contractual aspects of the Bender transaction and assumed -- contrary to any reasonable expectation or2005 U.S. Tax Ct. LEXIS 28">*221 contractual possibility -- the immediate dissolution of MB Parent, Bender, and the LLC as of July 31, 1998, the date of the transaction. Bradley and petitioner's other experts, in rebuttal to respondent's experts, asserted that, if separated from economic ownership of the common stock of MB Parent, the management authority had no value to a hypothetical purchaser.
Respondent presented three experts who had separately valued the management authority and the MB Parent common stock. Alan C. Shapiro (Shapiro) provided an opinion of the fair market value of the common stock immediately after the merger. Like Bradley, Shapiro began with a determination of net asset value. Shapiro, however, reviewed all of the contractual arrangements and corporate governing documents and concluded that the MB Parent common stock should be discounted substantially for lack of control over the assets. Using various assumptions, such as the net value of MB Parent's assets after liabilities and the scope of fiduciary responsibilities by the manager, Shapiro concluded that the fair market value of the MB Parent common stock ranged 125 T.C. 110">*193 from a negative number, through worthless, to a maximum of $ 337 million.
Respondent2005 U.S. Tax Ct. LEXIS 28">*222 also presented the testimony of William R. Zame (Zame), an economics and mathematics professor, who applied game theory principles to determine the value of the MB Parent common stock uncoupled from the management rights over the LLC. Zame acknowledged that his computed value was not the same as fair market value. He did, however, recognize that:
[because] the common stock of MB Parent represents a derivative
claim to the resources of Eagle I, by analyzing the nature of
that derivative claim it is possible to determine the amount a
rational, well-informed investor might be willing to pay for
this claim, keeping in mind that there are other competing
claims to the resources of Eagle I. It is value in this sense
that this report estimates.
Zame applied probabilities to various assumptions and determined the most plausible estimates of the value of the MB Parent common stock as a fraction of the value of the LLC's assets. His analysis concluded that the "upper bounds of the stand-alone value" of the MB Parent common stock ranged from .595 to .800 of the value of the LLC.
Another of respondent's experts, Michael J. Barclay2005 U.S. Tax Ct. LEXIS 28">*223 (Barclay), addressed the value of the management authority from a financial standpoint. Barclay also considered alternative assumptions about fiduciary duty and concluded that, without a fiduciary duty from the manager to the LLC, MB Parent, or the MB Parent common stockholder, the management authority would have a value approaching $ 1.375 billion. Assuming a fiduciary duty, Barclay opined that the management authority would have a value of 40 percent of $ 1.375 billion.
Referring to Bradley's report, petitioner asserts:
Respondent's valuation approach caused his experts to value
rights that did not exist: common stock in an entity managed by
an unrelated, hostile manager, and a management authority giving
unconstrained powers to an unrelated, hostile manager.
Respondent's experts assumed a hypothetical transaction with no
resemblance to the actual transaction or rights. * * *
Petitioner claims that the management authority was an uncompensated obligation, not an asset, assigned to Times Mirror as the "residual claimholder" of the LLC's assets.
125 T.C. 110">*194 It is indeed unlikely that the authority of Times Mirror under the management agreement2005 U.S. Tax Ct. LEXIS 28">*224 would be separated from TMD's ownership of the MB Parent common stock in the real world. However, separation of the management authority from the putative holder of the cash is part of the structure adopted by Times Mirror so that it could maintain its position that the only consideration received by TMD in the Bender transaction was the MB Parent common stock. Times Mirror and its advisers created the scenario that makes it necessary to value the MB Parent common stock at least as a portion of the total consideration. To support its statutory argument, petitioner is asking us to give effect to a fictional separation of the MB Parent common stock transferred to TMD from the management authority transferred to Times Mirror. Additionally, petitioner's criticism of respondent's experts' valuation applies equally to petitioner's valuation, i.e., petitioner's experts ignore relevant facts concerning the property to be valued.
We do not need to reach any judgment about the fiduciary obligations that may or may not exist under Delaware law. It is enough to observe that there is uncertainty on that subject, which uncertainty affects value. See
Pertinent Precedents
Respondent invites us to adopt a broad-based approach and apply the "spirit" of the reorganization provisions in order to deter the type of abuse that respondent perceives the Bender transaction to be. We need not and do not accept 125 T.C. 110">*195 respondent's invitation. We are, however, mindful of the precedents and judicial homilies that support respondent's position.
The source of most "substance over form" arguments, of course, is
The legal right of a taxpayer to decrease the amount of what
otherwise would be his taxes, or altogether avoid them, by means
which the law permits, cannot be doubted. But the question for
determination is whether what was done, apart from the tax
motive, was the thing which the statute intended. * * *
[
Gregory involved a purported statutory reorganization and thus is particularly applicable here. Petitioner argues, however, that "In the 70 years since Gregory was decided, no court has applied substance-form principles to override technical compliance supported by business purpose and true economic effect." Indeed, in Gregory, the Supreme Court disregarded the form of a transaction as having no independent significance. Before elaborating on the application of this principle and "true economic effect" in this case, we acknowledge the so-called progeny of Gregory.
Respondent cites
Respondent also relies on another "reorganization" case,
In addition to cases cited above, respondent relies on the legislative history of the reorganization provisions, various legislative attempts to prevent abuse, and cases discussing continuity of proprietary interest as "the judicial bulwark and backstop for limiting deferral [nonrecognition] to the kinds of transactions that Congress intended should qualify." See
Petitioner does not address Minn.Tea Co. or West Coast Mktg. Corp. Petitioner relies on
In
125 T.C. 110">*197 Esmark Inc. involved a series of related transactions
culminating in a tender offer and redemption of a part of the
taxpayer's stock in exchange for certain2005 U.S. Tax Ct. LEXIS 28">*230 property. The
Commissioner, seeking to apply the step transaction doctrine,
sought to recharacterize the tender offer/redemption as a sale
of assets followed by a self-tender. While it is true that we
held that each of the preliminary steps leading to the tender
offer/redemption had an independent function, we also held that
the form of the overall transaction coincided with its
substance, and was to be respected. In the case before us,
petitioner would have us respect the independent significance of
DuPont's tender offer, but disregard the overall transaction,
which included the merger. That result would, of course, be
inconsistent as an analogy with the result in Esmark,
Inc. We therefore decline petitioner's request that we apply
Esmark, Inc. to the facts of this case. [Id. at
94.]
We believe that the
Petitioner relies primarily on two aspects2005 U.S. Tax Ct. LEXIS 28">*231 of the documentation to conclude that the Bender transaction qualifies as a tax-free reorganization. The first is the form by which MB Parent common stock flowed to TMD and by which Bender preferred stock flowed to MB Parent. We agree with respondent that this case is more like West Coast Mktg. Corp. than like Esmark, Inc. There are differences, of course. MB Parent was not intended to be, and has not been, liquidated as promptly as the intermediary in West Coast Mktg. Corp. Additionally, MB Parent was putatively formed by the acquirer rather than by the party divesting itself of the property. Given the terms of MB Parent's governing documents and the structure of its several classes of stock, however, it has no more function than the intermediary in West Coast Mktg. Corp. By contrast to the facts in Esmark, Inc., here there is no uncontrolled participation by persons who are not parties to the contractual arrangement, such as the public shareholders in Esmark, Inc., to give substantive economic effect to the existence of MB Parent. To disregard the existence of MB Parent is not to ignore any meaningful step in the transfer of Bender from Times Mirror to Reed.
Second, petitioner asserts2005 U.S. Tax Ct. LEXIS 28">*232 that "the evidence conclusively establishes that the parties valued the MBP Common at $ 1.375 billion." Petitioner argues that the agreement of the parties as to value was the result of arm's-length negotiations between Times Mirror and Reed. The arm's-length 125 T.C. 110">*198 negotiation, however, led to the parties' agreeing to adopt the form of tax-free reorganization, which required a recital that the common stock was the consideration being exchanged for the Bender stock. That language was consistent with Times Mirror's tax objectives, which were accepted by Reed when Reed concluded that it could not acquire the Bender stock without agreeing to those terms. While terms negotiated between the parties may produce evidence of value, they are not conclusive. Cf.
Once petitioner acknowledges and asserts that the MB Parent common stock cannot be2005 U.S. Tax Ct. LEXIS 28">*233 separated from the authority of Times Mirror, the "ultimate claimholder", to manage the cash in the LLC, the putative 20-percent voting power of the common stock in MB Parent and the bare title of MB Parent in the LLC should be disregarded. MB Parent clearly serves no purpose and performs no function apart from Times Mirror's attempt to secure the desired tax consequences. In this context, we agree with respondent's reliance on
As we indicated at the beginning of our factual analysis, our understanding of the Bender transaction gives full effect to all of the contractual terms other than the labels assigned. As we indicated in our discussion of the dispute over valuation of the common stock, we agree that it is unrealistic to separate the common stock in MB Parent from the authority to manage $ 1.375 billion in cash held by Times Mirror through the management agreement. Thus, we are simply looking at the operative terms of the Bender transaction by analyzing2005 U.S. Tax Ct. LEXIS 28">*234 the respective rights of the parties to it as interpreted by them before, on, and after July 31, 1998.
The evidence compels the conclusion that Times Mirror intended a sale, assured that it would receive the proceeds of sale for use in its strategic plans, used the proceeds of sale 125 T.C. 110">*199 in its strategic plans without limitation attributable to any continuing rights of Reed, and represented to shareholders and to the SEC that it had full rights to the proceeds of sale. None of these actions were inconsistent with the contractual terms. Thus, we need not "substitute respondent's version" for "what actually transpired." We deal only with what actually transpired and give effect to the legal documentation of the Bender transaction, with key points emphasized by the terms of the documents and the statements made by Times Mirror representatives about what was accomplished in the Bender transaction.
In a different but analogous context, the Court of Appeals for the Seventh Circuit has stated:
The freedom to arrange one's affairs to minimize taxes does not
include the right to engage in financial fantasies with the
expectation that the Internal Revenue Service and2005 U.S. Tax Ct. LEXIS 28">*235 the courts
will play along. The Commissioner and the courts are empowered,
and in fact duty-bound, to look beyond the contrived forms of
transactions to their economic substance and to apply the tax
laws accordingly. That is what we have done in this case and
that is what taxpayers should expect in the future. * * *
[
1985), affg.
From any perspective, the "true economic effect" (petitioner's words, quoted above) of the Bender transaction was a sale. Because the consideration paid by the buyer, to wit, unfettered control over $ 1.375 billion in cash, passed to the seller from the buyer, the Bender transaction does not qualify as a reorganization under
Evidentiary Matters
The extensive stipulations2005 U.S. Tax Ct. LEXIS 28">*236 of the parties included certain documents to which objections were made with the understanding that the objections would be discussed in the posttrial briefs. Respondent objected on relevance, materiality, and hearsay grounds to four articles concerning the failed merger between Reed and Wolters Kluwer. Petitioner 125 T.C. 110">*200 did not address these materials in the briefs, and we have not relied on them in our findings. The relevance and hearsay objections will be sustained.
Petitioner objects to certain exhibits proposed by respondent, consisting of documents provided to respondent by petitioner or its representatives during the audit and during pretrial negotiations and preparation. Petitioner objects to the materials on the grounds of relevance, relying on
Petitioner objected at trial and renews on brief an objection to the testimony of Brian Huchro (Huchro), a senior staff accountant in the Division of Enforcement at the SEC who testified on SEC reporting requirements of publicly held companies. Huchro was identified in the trial memorandum and submitted a report as a rebuttal witness to Arthur C. Wyatt (Wyatt), whose report had been submitted by petitioner. At the time of trial, petitioner decided not to call Wyatt and then raised objection to Huchro's testimony. We do not rely on Huchro's report in our findings of fact. The representations made by Times Mirror in various SEC filings are recounted only to show that such representations were made, and we need not draw any conclusions about what was required by the SEC or the relationship of SEC rules to Generally Accepted Accounting Principles.
We have considered the arguments of the parties that were not specifically addressed in this Opinion. Those arguments are irrelevant to our decision. In view of our resolution of the primary2005 U.S. Tax Ct. LEXIS 28">*238 issue, we do not address respondent's alternative argument under section 269. To reflect the foregoing and to 125 T.C. 110">*201 provide for resolution of the Mosby issues, neither tried nor addressed in this opinion,
An appropriate order will be issued.
