Control Group Question

[Brian Haynes]

If there is a parent company A that owns 100% of the stock of B and where B then owns 100% of the stock of C, it is clear that A,B and C are all members of the same control group as a chain of parent-subsidiaries. If there is a reorganization where the stock of C is distributed out to the 40 shareholders of A (I think this is referred to as a split-off?), at the end of the transaction you will have A still owned by the same 40 shareholders and C will be owned individually by the same 40 shareholders. I believe that this would be considered a mere change in form with no withdrawal liability trigger. Am I correct in my belief that A and C will not be members of the same control group after the reorganization since they are no longer parent-subsidiaries and are not a brother-sister group since (assuming this is correct) 5 of the 40 shareholders (even assuming the application of the attribution rules) do not own at least 80% of A or C? Thus, after the reorganization C will not be potentially liable for A's future withdrawal liability? I understand that a pension fund may argue that the transaction has a principal purpose to evade or avoid liability. Does the exclusion of certain interests in determining brother-sister groups apply under Regulation 1.414©-3© so that if any of the 40 shareholders of A and C are employees of either A or C and their stock is subject to restriction on the employee's right to dispose of the stock which run in favor of A or C (assuming that the same 5 or fewer shareholders own at least 50% of A and C)? If one of the shareholders of A and C is not a person (for example, is a corporation) is that interest likewise excluded in making the brother-sister determination. Thanks for your help, it has been a while since a had to dive so deeply into the control group rules.

[Mike Preston]

Contact Derrin Watson.

[Brian Haynes]

Thank you. I have also posted my question in his Column.

[Peter Gulia]

Brian, your outline of the questions is on track; you or your associate need to step through the details of the facts to make sure that your thinking hangs together.

Also, consider (if you haven't already done so) whether separating C from B-A affects any other employee-benefit plan that your client cares about. If after the changes C continues to participate in some A-B-C employee-benefit plan, does doing so make the plan a multiple-employer plan? If so, what consequences does that attract under ERISA and securities law?

To improve your client's defense against an assertion that "a principal purpose" of B's and A's distribution of C's shares was "to evade or avoid [withdrawal] liability", try to find another economic purpose for separating the ownership of C from B-A. Perhaps the business of C is somewhat different from the business of B-A and so might attract different investors?