General Construction INC (GC) is a design / construction corporation,incorporated in the state of Delaware. They have come to you becausethey are considering an expansion of operations into the serviceindustry. GC has identified a target in the engineering services sector,Great Engineering Inc. (GEI). GEI designs and troubleshoots
infrastructure projects such as roads and buildings, so the CEO believesit is great fit.GEI has the following assets:
cash: $200,000 basis and $200,000 FMV
equipment: $250,000 basis and 350,000 FMV
supplies booked as inventory: $0 basis and $50,000 FMV
Investments: $250,000 basis and $800,000 FMV
Customer Lists: $0 basis and $600,000 FMV
Totals: $700,000 basis and $2,000,000 FV
Your client further informs you that Alice, the founder of GEI, stillowns 75% of the shares, and her original partner, Sam, owns anadditional 15%. The remainder is owned by extended family andfriends, none of which own more than 1% of the company. Alice andSam are apparently open to selling to GC, but the other minorityshareholders are opposing a transaction, as they like the dividends theyare receiving.Your meeting discusses various strategies with GC's lawyers on thephone. After some contemplation GC agrees to offer GEI a stock forstock acquisition format. Alice and Sam believe the combined companywill be profitable, so they agree.
Transaction format proceeds as follows: Alice and Sam agree toexchange all of their GEI shares in return for 5 shares of newlyauthorized GC voting stock for each GEI share exchanged. The GCvoting stock Alice receives in return is valued at $1.5 million and thestock Sam receives is valued at $300,000. As part of the transaction,
GC is considering buying out the minority shareholders (other thanSam) for cash. The current plan is to retain GEI as a subsidiary, but GCwants your advice on structure alternatives as well as results.


1. What are the tax consequences to GC, GEI (target), Alice and Sam?What issues did you consider in arriving at your conclusion?
2. What happens to the minority shareholders?
3. What happens to GEI's liabilities, known and unknown, andcreditors?
4. Would the results change if the parties agreed to a stock-for-stockdeal where Alice and Sam exchange all their shares in return for fiveshares of newly authorized GC voting stock and one share of newlyauthorized GC nonvoting stock for each GEI share surrendered?
5. What if the exchange was for four shares of newly authorized votingstock and a ten-year 8% bond for each share surrendered? Assumethe value of the packages received is still $1.5 million for Alice and$300,000 for Sam.
6. How would your advice/answer change in question 1 above if GCpaid $200,000 in cash to buy out the dissenting minorityshareholders?
7. Finally, what is the result if GEI is liquidated by GC 2 months afterthe acquisition closes?