Question

Explain the statutory requirements for the different types of reorganizations.

Answer 1

Continuity of business enterprise is the statutory requirements applicable to all types of acquisitive reorganizations.

There are two alternative test to ensure that Continuity of business enterprise are met. The acquiring corporation could either:-

• continue the target corporation's historic business or
• use a significant portion of T's historic business assets in a business.

Alternative test No. 1 (Business Continuity):- The requirement that acquiring continue target historic business is satisfied, if the acquiring company continues the business target company has been engaged in. If acquiring is in the same line of business as target, then acquiring must continue Target's actual business. If Target has more than one line of business, then acquiring need to continue only one of Target's several significant lines of business. "Significant" line of business is to be determined by considering "all the facts and circumstances. A corporation's "historic business" is the business it has conducted most recently. However, it cannot be a business that the corporation entered into so recently that conduct of the business is part of the plan of reorganization.

Alternative test No. 2 (Asset Continuity):- This test requires that Acquiring company use a significant portion of Target's "historic business assets" in a business. Acquiring does not need to use Target's historic business assets in the same business as Target used them, but Acquiring must use them in some business. For example, Acquiring use milk-delivery trucks to deliver dry cleaning would satisfy the test. A corporation's historic business assets are the assets used in its historic business. Business assets include not only tangible assets, but also stock, securities, and intangible operating assets such as goodwill, patents, and trademarks. The test is that Acquiring must use a "significant portion" of Target's historic business assets.