Berry Global to Combine with Amcor in Un-“Planned” Post-Spin Transaction

By Stuart E. Leblang, Michael J. Kliegman and Amy S. Elliott

After spinning off one of its divisions November 4, ¹ Berry Global Group, Inc. (NYSE: BERY) (Berry or Berry Global) announced November 19²that it plans to combine with Amcor plc (NYSE: AMCR) (Amcor) in an all-stock transaction valued at $8.4 billion.  Both Berry and Amcor primarily manufacture and market plastic packaging products for consumer goods.  Following the planned deal, which is expected to close in the middle of 2025, current Amcor and Berry shareholders are expected to own approximately 63 percent and 37 percent of the combined entity (to be named Amcor plc), respectively.³

Under the terms of the transaction, ⁴ which is subject to shareholder approvals ⁵ (among other closing conditions), Berry shareholders will receive 7.25 Amcor shares for each Berry share held upon closing.  The transaction will be structured as a so-called reverse subsidiary merger (also referred to as a reverse triangular merger) whereby Merger Sub,⁶a Delaware corporation and wholly owned subsidiary of Amcor, will merge with and into Berry, with Berry surviving as a wholly owned subsidiary of Amcor.  According to the merger agreement, the parties intend for the transaction to qualify as a tax-free reorganization for U.S. federal income tax purpose (under Internal Revenue Code (IRC) Section 368).  In this case, Amcor is acquiring 100 percent control of Berry (which satisfies the 80-percent control threshold) ⁷ solely for voting stock. ⁸ 

Amcor is incorporated and domiciled for tax purposes in Jersey, Channel Islands (although its global headquarters are in Switzerland).  The combined entity will be headquartered in Switzerland, although it expects to maintain a significant presence in Indiana (where Berry, currently a U.S. taxpayer incorporated in Delaware, is headquartered).

Because Berry shareholders will be exchanging their shares in a U.S. corporation for shares in a foreign corporation, the outbound transaction must further meet the requirements of Section 367 (and the regulations thereunder) in order to be tax-free to Berry shareholders.  In general, regulations under Section 367 require that transferors of U.S. stock not acquire more than 50 percent of the stock of the foreign acquiror (which is satisfied in this case, with Berry shareholders only obtaining 37 percent of the combined entity); ⁹ U.S. persons who are officers or directors of the U.S. company or 5 percent shareholders may not own more than 50 percent of the stock of the foreign acquiror; and (iii) the foreign acquiror must satisfy a rigorous active trade or business test, as well as a “substantiality” test comparing the value of the foreign company’s business to that of the U.S. company. ¹⁰ 

We expect that counsel has tested the transaction (and Amcor in particular) in relation to these tests and expects the transaction to pass muster.  Note also that if the Section 367 tests are met, any Berry shareholder that will own at least 5 percent of the voting power or value of Amcor following the merger must enter into a five-year gain recognition agreement (GRA) in order to obtain tax-free treatment. ¹¹ 

Anti-inversion rules under Section 7874 generally provide adverse tax consequences where a domestic corporation becomes a foreign-parented company, usually by way of a stock-for-stock exchange with a new or preexisting foreign corporation. ¹²  There is more complexity in the regulations, but generally, there is not a proscribed inversion unless the shareholders of the acquired domestic corporation will own at least 60 percent of the stock of the foreign corporation.  Given the post-merger ownership percentages indicated here, this is not likely going to be a problem.

Meanwhile, let us return to the fact that the proposed merger was announced less than three weeks after Berry Global consummated a tax-free spin-off of its global nonwovens and hygiene films business (the HHNF business, whose products are used in the diaper, feminine care and protective underwear markets) in a Reverse Morris Trust (RMT) transaction.  Given that the Berry Global shareholders will own 37 percent of the post-merger Amcor, the merger would cause the prior spin-off to be taxable to Berry Global if the Amcor merger and the spin-off were part of a single plan. ¹³ 

As we discussed in our October 29 report, which is appended, in connection with its ruling request from the Internal Revenue Service (IRS), Berry Global represented that (other than with respect to the RMT transaction covered by the ruling) there were not and would not be any agreement, understanding, arrangement or substantial negotiations during the two-year period ending on the date of the spin-off regarding an acquisition of either post-spin company.¹⁴

Although it is common to wait at least six months following consummation of a spin-off to commence negotiations for a post-spin M&A transaction,¹⁵ Berry Global and Amcor apparently decided that—provided they could document the absence of an “agreement, understanding, arrangement or substantial negotiations” toward their deal during the two-year period ending on November 4—they could commence serious negotiations immediately following the spin-off. ¹⁶   Presumably, they identified where the line lay between preliminary discussions and those that are proscribed by the regulations, having (we would guess) engaged in the former prior to November 4.  According to the regulations, substantial negotiations generally require discussions of significant economic terms, e.g., the exchange ratio. ¹⁷ 

As is common in tax-free spin-off transactions, Berry Global, Spinco and Glatfelter entered into a Tax Matters Agreement.  That agreement restricts Glatfelter’s ability to enter into certain transactions during the two-year period following the spin-off, including transactions that, combined with the RMT transaction, would dilute Berry Global shareholders’ ownership to less than 55 percent.  Notably, the Tax Matters Agreement does not appear to subject Berry Global to such a restriction, presumably because the onus of any corporate tax would be primarily on Berry Global. ¹⁸ 

Finally, returning to the tax-free status of the proposed merger, the likely appropriate reorganization provision is the reverse subsidiary merger, one requirement of which is that—following the merger—the surviving corporation will hold substantially all of the pre-merger properties of the pre-merger companies.  A distribution of assets, including a tax-free distribution, can call into question whether the “substantially all” requirement is met.¹⁹ It is possible that counsel will come to a view that, from a quantitative standpoint, the spin-off is not of sufficient size to prevent Berry Global from satisfying the “substantially all” test.  But in fact, since there is no cash in the transaction, it is likely that they can alternatively view the transaction as a tax-free “B” reorganization, which requires that Amcor acquire stock of Berry Global solely in exchange for Amcor voting stock and that Amcor control (80 percent test) Berry Global immediately after the transaction. ²⁰ 

^{[1] Press Release, Berry, Berry Completes Spin-Off and Merger of its Health, Hygiene and Specialties Global Nonwovens and Films Business (Nov. 4, 2024) (https://www.berryglobal.com/en/news/articles/15716-berry-completes-spinoff-and-merger-of-its- health-h).  Our prior report on the spin-off, which is appended, is entitled “IRS Rules on Glatfelter-Berry Global RMT Transaction” (Oct. 29, 2024).}

^{[2] Joint Press Release, Berry and Amcor, Amcor and Berry to Combine in an All-Stock Transaction, Creating a Global Leader in Consumer and Healthcare Packaging Solutions (Nov. 19, 2024) (https://ir.berryglobal.com/static-files/f62a2039-2d30-42ce- 8524-0a8b9fa5d2ea).}

^{[3] Id.}

^{[4] For the Agreement and Plan of Merger by and among Amcor, Merger Sub and Berry dated as of Nov. 19, 2024, see https://www.sec.gov/ix?doc=/Archives/edgar/data/1378992/000110465924120632/tm2428859d3_8ka.htm.}

^{[5] Berry stockholders must adopt the Merger Agreement and Amcor shareholders must approve the issuance of Amcor ordinary shares to be used for merger consideration, according to Berry’s Form 8-K filed Nov. 19, 2024 (https://www.sec.gov/ix?doc=/Archives/edgar/data/1378992/000110465924120311/tm2428859d1_8k.htm).}

^{[6] Aurora Spirit, Inc.}

^{[7] The control threshold is ownership of stock possessing at least 80% of the total combined voting power of all classes of stock entitled to vote and at least 80% of the total number of shares of all other classes of stock of the corporation (IRC §368(c)).}

^{[8] IRC §368(a)(2)(E).}

^{[9] Treas. Reg. §1.367(a)-3(c)(5).}

^{[10] Treas. Reg. §1.367(a)-3(c)(1)(iv).}

^{[11] Treas. Reg. §1.367(a)-3(c)(1)(iii)(B).}

^{[12] IRC §7874.}

^{[13] IRC § 355(e).}

^{[14] Supra, Note 1 (and a copy of our prior report is appended).}

^{[15] Treas. Reg. §1.355-7(d) provides several “no plan” safe harbors.  The first of these covers a spin-off not motivated by a corporate business purpose involving an acquisition (such as a Morris Trust or RMT), and there is no agreement, understanding, arrangement or substantial negotiations concerning the acquisition during the period beginning one year before and ending six months after the spin-off.}

^{[16] Treas. Reg. §1.355-7(b)(2).}

^{[17] Treas. Reg. §1.355-7(h)(1)(iv).}

^{[18] Berry Form 8-K, Exhibit 99.1 Information Statement of Treasure Holdco., Inc., page 212, dated and filed Nov. 4, 2024 (https://www.sec.gov/ix?doc=/Archives/edgar/data/1378992/000110465924113965/tm2427366d1_8k.htm).}

^{[19] See Helvering v. Elkhorn Coal Co., 95 F.2d 732 (4th Cir. 1938).  Also on November 25 the company entered into an agreement to sell its specialty tapes business for $540 million.  Size aside, the law is clear that a sale of assets for cash that is not distributed to shareholders is not taken into account in the “substantially all” test.  Rev. Rul. 88-48.}

^{[20] Rev. Rul. 678-448.}