IRS Rules on Glatfelter-Berry Global RMT Transaction

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

The corporate division of the Internal Revenue Service (IRS) Office of Chief Counsel has been strongly criticized for announced changes under consideration regarding rulings on tax-free spin-offs following a changing of the guard of its leadership.^[1] So it’s worth noting evidence of increased flexibility indicated in a private letter ruling (PLR) released October 11.^[2]  We believe the PLR in question involves the planned merger of a to-be-spun-off division of the Berry Global Group, Inc. (NYSE:  BERY) (Berry) with the Glatfelter Corporation (NYSE:  GLT) (Glatfelter) in a Reverse Morris Trust (RMT) transaction expected to close in the second half of 2024,^[3]subject to (among other things) approval by Glatfelter (not Berry) shareholders at a special meeting scheduled for October 23.^[4]

According to a proxy statement/prospectus dated September 20,^[5]the plan is for Berry to transfer certain assets and liabilities constituting the global nonwovens and hygiene films business (the HHNF business, whose products are used in the diaper, feminine care and protective underwear markets) to Spinco (Treasure Holdco, Inc.) at which point a wholly owned subsidiary of Berry (Berry Global, Inc. or BGI) will distribute 100 percent of the shares of Spinco to Berry, which will then distribute 100 percent of the Spinco shares out to Berry shareholders.  In connection with the separation, Spinco will pay Berry (Remainco) some $1.1 billion (the Special Cash Payment).

Then, after undergoing a reverse stock split at a to-be-determined ratio (ranging from 1-for-3 to 1-for-15), Glatfelter will combine with Spinco in an RMT effected by two back-to-back mergers:  the First Merger, where a wholly owned subsidiary of Glatfelter will merge with and into Spinco, with Spinco surviving; and the Second Merger, where Spinco will merge with and into another wholly owned subsidiary of Glatfelter (Treasure Merger Sub II, LLC or Second Merger Sub, which will be a disregarded entity for tax purposes) with Second Merger Sub surviving.

One of the conditions of the merger transaction was that Berry receive a PLR from the IRS confirming that the distribution and certain related transactions will qualify for tax-free treatment, which it ultimately obtained, according to an August 8 disclosure by Glatfelter.

Some notable features of the deal include:

• The transaction is expected to be tax-free to Berry, Glatfelter and their respective shareholders
• After the First Merger, former Berry stockholders will own approximately 90 percent of the post-merger combined entity Glatfelter (which will change its name to Magnera Corporation, ticker symbol MAGN) as a result of the Spinco distribution and subsequent RMT, meaning that the transaction will not run afoul of section 355(e). That provision generally requires that the shareholders of the spun-off entity (in this case, Berry) retain a majority interest in the post-merger combined entity in order to effect what amounts to a tax-free “sale” of an unwanted business unit.

Berry plans to repay existing debt in an amount equal to the Special Cash Payment.  Glatfelter will retire all of its debt other than existing senior notes due in 2029.^[6] More precisely, the public company spin-off will be preceded by a contribution of the HHNF business by a Berry subsidiary (Internal Remainco) to Spinco in exchange for the SpinCo stock and Special Cash Payment, followed by Internal Remainco’s distribution of the Spinco stock to Berry and repayment of Internal Remainco third party debt in an amount equal to the Special Cash Payment (Internal Spin-off).  This tax basis will be at least $1.1 billion.  Internal Remainco’s receipt of the cash payment is tax-free because it will be treated as using the proceeds to repay its debt.^[7]

We also noticed a couple of interesting points regarding the PLR itself, mainly involving the IRS accepting variation in representations otherwise required by their published Revenue Procedure.  While this RMT transaction directly presents the IRS with application of the Section 355(e) anti-Morris Trust rules—complied with because the Berry shareholders will own approximately 90 percent of the post-merger stock—the IRS needed to obtain representations negating a Section 355(e) problem that could otherwise arise, the same as for any other spin-off ruling.

As a standard matter, the IRS requires the categorical negation of a Section 355(e) problem, with a representation mirroring the language of Section 355(e)(2)(A) that a 50-percent-or-greater stock interest in Remainco or Spinco will not be acquired by any persons as part of a plan that includes the spin-off.^[8] This approach puts the onus entirely on the taxpayer to bear the risk that any subsequent transaction might be considered part of a plan.  Extensive regulations lay out criteria for determining whether such a plan exists, which guide tax advisors as they work to ensure that any acquisitive transactions are at a safe distance from being part of a plan with a spin-off[9] In this PLR, the IRS permitted the taxpayer to make a singular factual representation that ties in with the Section 355(e) regulations, namely, that (other than with respect to the RMT transaction covered by the ruling) there were not and will 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.  Indeed, the regulations do provide that, in the case of an acquisition after a spin-off, the two transactions can only be part of a plan if there was an agreement, understanding, arrangement or substantial negotiations regarding the acquisition or a similar acquisition at some point during the two-year period ending on the date of the spin-off.^[10] This suggests an interesting degree of flexibility on the IRS’s part in departing from published requirements, and an ability to obtain a greater amount of “insurance” from the ruling than might otherwise be the case.

We noticed another instance in this PLR where the IRS allowed the taxpayer to make a limited factual representation instead of the categorical legal representation provided for in the Revenue Procedure.  One of the statutory requirements for a tax-free spin-off is that the transaction not be principally a “device” for the distribution of earnings and profits.  Accordingly, the IRS ordinarily requires an unequivocal representation that the transaction “will not be used principally as a device. . . .”  Here, however, instead of the taxpayer bearing the responsibility of ensuring that the transaction could not be viewed as a device, the IRS accepted some factual representations regarding the nature of the assets of the two companies and the absence of planned sales of stock of the two companies, and implicitly (by issuing the tax-free ruling) concluded itself that there was no device.  These factual representations connect with a listing of factors in regulations that indicate whether or not there is a device.^[11] We see here an indication that the IRS is willing to provide its “insurance” on this and perhaps other issues, rather than force taxpayers to retain that risk.

^{[1] Proposed regulations are being drafted following the issuance of Rev. Proc. 2024-24 and Notice 2024-38.  Mark Schneider took over as IRS Associate Chief Counsel (Corporate) in June 2023.  See, e.g., New York State Bar Association on March 4, 2024 (Report No. 1491 on Procedural Guidance for Private Letter Rulings on Divisive Reorganizations) and July 30, 2024 (Report No. 1497 on Changes to Spin-Off Standards).}

^{[2] LTR 202441010 (https://www.irs.gov/pub/irs-wd/202441010.pdf).}

^{[3] Glatfelter disclosed on Aug. 8, 2024 that Berry received a favorable private letter ruling from the IRS regarding the qualification of the spin-off and the merger as tax-free transactions under the Internal Revenue Code. LTR 202441010 was dated July 5, 2024, and the facts (subject to redactions) seem to match.  Press Release, Glatfelter, Glatfelter Reports Second Quarter 2024 Results ~ Received Required Antitrust Regulatory Clearances and IRS ruling for Announced Merger ~ ~ Achieved Meaningful Year-over-Year EBITDA Improvement ~ (Aug. 8, 2024) (https://www.sec.gov/ix?doc=/Archives/edgar/data/0000041719/000004171924000030/glt-20240808.htm).}

^{[4] Press Release, Berry, Berry Global and Glatfelter Announce Date of the Glatfelter Shareholder Meeting in Connection with the Proposed Merger of Berry’s Health, Hygiene and Specialties Global Nonwovens and Films Business with Glatfelter (Sept. 20, 2024) (https://ir.berryglobal.com/news-releases/news-release-details/berry-global-and-glatfelter-announce-date-glatfelter-shareholder).}

^{[5] https://www.sec.gov/Archives/edgar/data/41719/000110465924101145/tm2412884-18_424b3.htm}

^{[6] https://www.glatfelter.com/wp-content/uploads/Berry-Global-and-Glatfelter-Investor-Presentation-Feb-2024.pdf}

^{[7] IRC §361(b)(3).}

^{[8] Rev Proc. 2017-52, Appendix Section 3, representation 29.}

^{[9] Treas. Reg. §1.355-7.}

^{[10] Treas. Reg. §1.355-7(b)(2).}

^{[11] See Treas. Reg. §1.355-2(d).}