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Without a doubt, the most complicated transaction that I was participated in during my years of practice involved a Reverse Morris Trust structure.  While the deal team cornered the market on Excedrin trying to sort the mechanics of that transaction out, it proved to be a terrific deal for all parties involved. This Sidley memo (p.2) discusses the RMT structure and points out that it can solve some of the major problems associated with a spin-off, including the need to build a new management and governance infrastructure and the risk that post-deal acquisitions of stock could taint the tax-free nature of the deal. This excerpt provides an overview of the advantages of an RMT:

In a Reverse Morris Trust, a publicly traded company(Remainco) separates the non-core business by a tax-free spin-off of the entities that ownthat business (Spinco) to the stockholders of Remainco and then immediately combines Spinco with another publicly traded company (which we refer to as Merger Partner) in a stock-for-stock merger. As in a traditional spin-off, prior to the spin-off, Spinco typically incurs debt and uses the proceeds to fund a cash dividend to Remainco. When the transactions have closed, the stockholders of Remainco own 100% of the stock of Remainco and a portion of the stock of Merger Partner, Remainco has the cash proceeds of the dividend paid by Spinco, and Merger Partner owns Spinco. As with both a carve-out cash sale and a spin-off, the Reverse Morris Trust provides the opportunity for a “re-rating” of the Remainco stock following the transaction.

A Reverse Morris Trust also provides all the tax-efficient benefits of a spin-off that are not present in a carve-out sale for cash. That is, the separation from Spinco is tax-free to Remainco, and the receipt of the Spinco stock and subsequent exchange for Merger Partner stock is tax-free to the Remainco/Spinco stockholders. At the same time, the combination of Spinco and Merger Partner both reduces the dyssynergies that are present in a spin-off and creates opportunities for synergies and economies of scale that are often present in strategic combinations.

Moreover, the restrictions on subsequent M&A transactions involving the stock of Remainco and Spinco are often less of a concern following a Reverse Morris Trust. This is principally because Spinco/Reverse Morris Trust Partner (RMT Partner) will have just engaged in a transformative M&A transaction and will therefore be focused on integrating the operations of the combined company and less likely to be in a position or have the desire to engage in a subsequent transformative M&A transaction in the near-to-medium term.

The memo goes on to discuss the considerations that need to be taken into account when seeking the right RMT partner, as well as the complex mechanics associated with an RMT transaction.  It’s a really good overview of the transaction process, although I do wish they’d mentioned the Excedrin issue!

– John Jenkins