Liberty Media and SiriusXM Agree to RMT Deal

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

Liberty Media Corporation (Liberty Media) announced^[1]December 12 that it entered into a definitive agreement with Sirius XM Holdings Inc.  (NASDAQ:  SIRI) (SiriusXM) whereby Liberty Media would separate off its 83.5-percent^[2]stake in SiriusXM via a newly formed SplitCo (New SiriusXM), a subsidiary of which would then combine with SiriusXM (in a so-called Reverse Morris Trust or RMT transaction), eliminating the Liberty SiriusXM tracking stock and the drag associated with the current majority stockholder structure.  Both the SiriusXM Special Committee and SiriusXM’s Board of Directors have signed off on the deal, and the parties expect the transaction to be completed early in the third quarter of 2024.

Since it was first proposed in September, there have been a few changes and clarifications to the terms of the deal:

• Public (minority) shareholders of SiriusXM will now only receive shares in New SiriusXM (at a one-for-one ratio).^[3]
• The $0.55 of cash per share to compensate public SiriusXM shareholders for debt in SplitCo has been removed.
• But instead of only collectively owning about 16 percent of New SiriusXM after the transaction, the public (minority) shareholders of SiriusXM will now own some 19 percent of the newly combined entity.⁴ 
• Each share of Liberty SiriusXM tracking stock (no matter the series—so high vote gets the same amount of per-share consideration as low vote and no vote) will get an estimated 8.4 shares of New SiriusXM common stock (as opposed to 10.3 shares).^[5]
• The transaction will reportedly only require a majority vote of the Liberty SiriusXM tracking stock (LSXM) holders—and no shareholder vote (including one requiring approval by a majority of the minority) will be required at SiriusXM.⁶ 
• Greg Maffei is expected to serve as Chairman of the Board of New SiriusXM.

The disclosures further state that “[a]t or prior to the closing of the Split-Off, Liberty Media and New Sirius will enter into other agreements, including, but not limited to, a tax sharing agreement.”  Additional information on this agreement is expected to be disclosed in New SiriusXM’s Form S-4 registration statement, which has not yet been released.

As we wrote about back when the deal was first proposed (that report ⁷ is appended), there is a question as to whether Liberty Media’s ownership of SIRI satisfies the active trade or business (ATB) requirement under Section 355.  Although one condition of the deal is that both Liberty Media and New SiriusXM receive tax opinions from their respective tax counsel, based on our review of the reorganization agreement⁸ and the merger agreement, ⁹ the parties are not seeking a private letter ruling on the transaction from the Internal Revenue Service (IRS).  They nevertheless intend for both the contribution (of the SiriusXM stock to SplitCo) and the redemption (of the Liberty SiriusXM tracking stock for shares in SplitCo) to qualify as tax-free under Section 355.

As highlighted, the details of the transaction structure and intended tax treatment have been clarified.  As we expected, SplitCo will become New SiriusXM.  A merger subsidiary of SplitCo (Merger Sub) will merge with and into SiriusXM with SiriusXM surviving.  Pursuant to the merger, SiriusXM will become a wholly owned subsidiary of SplitCo, and the public shares of SiriusXM will be exchanged for shares in SplitCo (New SiriusXM).

The companies’ tax analysis as made clear in the public documents involves characterizing Liberty Media’s contribution of its SiriusXM stock to SplitCo and the SplitCo-SiriusXM public merger as an integrated tax-free exchange under Section 351 of the Internal Revenue Code (IRC).  Although the reverse subsidiary merger of Merger Sub into SiriusXM can qualify as a tax- free reorganization on its own, ¹⁰ there is clear authority to treat it as a transfer by the public SiriusXM shareholders of their SiriusXM stock to SplitCo in exchange for SplitCo stock. ¹¹  Provided this occurs pursuant to an integrated plan with Liberty Media’s contribution of the SiriusXM stock to SplitCo in exchange for SplitCo stock, both Liberty Media and the SiriusXM shareholders can be treated as “co-transferors” in a single tax-free transaction under Section 351.  Section 351 generally provides that where one or more persons transfer property to a corporation in exchange for the corporation’s stock, the exchange is tax-free provided the transferors—as a group—possess “control” of the transferee corporation immediately after the transaction, with control defined as at least 80 percent of the voting power and 80 percent of each class of nonvoting stock. ¹² 

It remains the case that Liberty Media’s contribution of its SiriusXM stock to SplitCo followed by the distribution of SplitCo stock to holders of Liberty SiriusXM tracking stock in redemption of their tracking stock is intended to qualify as a tax-free split-off under Sections 368 and 355.

Strictly following the order of the steps—Liberty Media’s contribution to SplitCo, the distribution of SplitCo stock in redemption, and then the merger with SiriusXM (these are essentially the steps of a Morris Trust or Reverse Morris Trust spin-off and merger)—technically, it would be necessary for SplitCo to satisfy the ATB requirement prior to the post-split merger.  On a stand-alone basis, the ATB test would focus solely on SplitCo’s ownership of an 83.5-percent interest in SiriusXM, more than 4 percent of which was acquired by Liberty Media in taxable transactions during the previous five years.

If, instead, SplitCo’s ATB status can be viewed following its acquisition of SiriusXM in a tax-free transaction, then what we see is SplitCo’s being engaged in the SiriusXM business and not having acquired it, or a controlling interest in it, in a taxable transaction during the previous five years. ¹³ 

Although the order of the legal steps in fact involves a split-off preceding the merger, it is useful from an ATB standpoint to view the transaction as if the merger had preceded the split-off.  If it had been practical to follow this order, the merger would have diluted Liberty Media’s ownership in SplitCo preceding the split-off.  Because Liberty Media would still own 80 percent control of SplitCo as required by the Section 355 rules generally, this “recast” would do no harm to the transaction’s meeting the Section 355 requirements while solidifying the ATB analysis.

The Section 355 rules look for SplitCo to have a qualifying ATB “immediately after” the stock distribution. ¹⁴  The Section 351 tax-free exchange rules essentially look at the transferor group and control of the transferee corporation “immediately after” the transfers. ¹⁵  As such, where the SiriusXM merger is “fully wired” to occur immediately following the split-off, it is very appropriate to test ATB following the merger.

^{[1] Joint Press Release, Liberty Media and SiriusXM, Liberty Media and SiriusXM Announce Transaction to Simplify Ownership Structure of SiriusXM (Dec. 12, 2023) (https://www.sec.gov/Archives/edgar/data/1560385/000110465923125188/tm2332678d1_ex99-1.htm).}

^{[2] As of Oct. 27, 2023, SiriusXM had 3,838,939,821 shares outstanding.  At the time the deal agreement was announced, Liberty Media held 3,205.8 million shares of SiriusXM attributed to LSXM—of 83.5% of the total outstanding; https://www.sec.gov/ix?doc=/Archives/edgar/data/0000908937/000090893723000027/siri-20230930.htm; https://www.sec.gov/Archives/edgar/data/1560385/000110465923125188/tm2332678d1_ex99-1.htm.}

^{[3] The one-for-one ratio didn’t change, just the lack of additional cash.  On a Dec. 12, 2023, investor call on the transaction, Liberty Media CEO Greg Maffei explained that because Liberty Media owns 83.5% of SIRI: “if you get a premium, you lose 83.5% of it.  If you accept a discount, you gain 83.5% of it.  So everything naturally gravitated in this transaction toward one-to-one.”}

^{[4] Compare https://www.sec.gov/Archives/edgar/data/1560385/000110465923103728/tm2326859d3_425.htm to https://www.sec.gov/Archives/edgar/data/1560385/000110465923125188/tm2332678d1_ex99-1.htm}

^{[5] The exchange ratio of 8.4 assumes the Net Liabilities Share Adjustment and the adjusted fully diluted shares of LSXM were calculated as of June 30, 2024.  Supra, Note 1.  Press Release, Liberty Media, Liberty Media Corporation Proposes Combination with Sirius XM Holdings Inc. (Sept. 26, 2023) (https://www.sec.gov/Archives/edgar/data/1560385/000110465923103728/tm2326859d3_425.htm).}

^{[6] The press release states that “[a] subsidiary of Liberty Media owning a majority of the outstanding shares of SiriusXM has delivered a written consent approving the transaction on behalf of SiriusXM stockholders.”}

^{[7] “Liberty Media Proposes to Split, Merge Stake with SiriusXM” (Nov. 22, 2023).}

^{[8] Reorganization Agreement, dated Dec. 11, 2023, by and among Liberty Media, SiriusXM and Liberty Sirius XM Holdings Inc.  (https://www.sec.gov/Archives/edgar/data/1560385/000110465923125392/tm2332448d1_ex10-1.htm).}

^{[9] Agreement and Plan of Merger, dated Dec. 11, 2023, by and among Liberty Media, SiriusXM, SplitCo and Radio Merger Sub, LLC (https://www.sec.gov/Archives/edgar/data/1560385/000110465923125392/tm2332448d1_ex2-1.htm).}

^{[10] IRC §368(a)(2)(E).}

^{[11] See Rev. Rul. 67-448.}

^{[12] IRC §368(c).}

^{[13] Even if one were to deconstruct the portions of Liberty Media/SplitCo’s ownership in SiriusXM, as we have done in our previous discussions of the issue, following the tax-free acquisition of the 16.5% public interest, the combination of portions owned for more than five years and those acquired in tax-free transactions exceeds 80%.}

^{[14] IRC §355(b)(1).}

^{[15] 15 IRC §351(a).}