INSIGHT: Liberty Expedia Holdings Will Merge With and Into Expedia Group

Expedia Group Inc. will simplify its ownership structure, possibly increase its value, and avoid tax in an upstream merger that will eliminate its parent, Liberty Expedia Holdings Inc.

Liberty Expedia Holdings, Inc. (LEH) was “split-off” from Liberty Interactive in 2016. See The Willens Report, Liberty Interactive Will Effect A “Split-Off” Of Liberty Expedia Holdings, Bulletin, June 13, 2016. At the time of the split-off, and currently, LEH’s principal asset is stock in Expedia Group, Inc. (EGI). As of the April 16 Form 8-K filing with the Securities and Exchange Commission, LEH reported ownership of 11.1 million shares of EGI common stock, and 12.8 million shares of EGI class B (high vote) common stock. This translated into ownership of 16.2% of the value of EGI’s outstanding stock and 53% of the total combined voting power of all classes of EGI stock entitled to vote. It was always anticipated that the “end game” here would be a “downstairs” merger of LEH with and into EGI. That prediction has now come to fruition.

Thus, EGI and LEH recently announced that they have entered into a definitive agreement “under which EGI has agreed to acquire LEH in an all-stock transaction.” In particular, EGI, to implement the transaction, will form “Merger LLC,” a disregarded entity. Merger LLC, in turn, will form Merger Sub. At the effective time, Merger Sub shall be merged with and into LEH. In the merger, LEH shall continue as the surviving corporation and become, momentarily at least, a wholly owned subsidiary of Merger LLC. Immediately thereafter, LEH, the surviving corporation in the merger, will be merged with and into Merger LLC and the separate corporate existence of the surviving corporation shall thereupon cease. Merger LLC will continue as the surviving corporation in this “upstream merger.” Thus, when the dust settles, given the disregarded entity status of Merger LLC, the assets of LEH, i.e., stock in EGI, will be held by EGI.

Leaving nothing to chance, the merger agreement provides: “The Merger shall be mutually interdependent with and a condition precedent to the Upstream Merger. … The Merger and the Upstream Merger are both undertaken pursuant to a single integrated plan, and, for U.S. federal income tax purposes, it is intended that the Combination (the Merger and the Upstream Merger, taken together, are referred to as the Combination) shall qualify as a reorganization within the meaning of Section 368(a)of the Internal Revenue Code.”

In connection with the merger, each share of LEH Series A common stock will automatically be converted into the right to receive a number of shares of EGI common stock equal to the exchange ratio. Each share of LEH Series B common stock will be similarly converted. The exchange ratio is equal to 0.360 of a share of EGI common stock.

Tax Treatment

There is no doubt that the merger and the upstream merger will be treated, for federal income tax purposes, as a “single statutory merger” of LEH with and into Merger LLC. Internal Revenue Service Revenue Ruling 2001-46 provides that an acquisition merger and an upstream merger are properly viewed as a single statutory merger where, when the transactions are so viewed, the result is a reorganization. The single statutory merger, as the parties intend, will qualify as an ’A’ reorganization (Section 368(a)(1)(A)).

The merger satisfies the continuity of interest requirement since the sole consideration conveyed in the merger is stock of the issuing corporation. Moreover, the merger satisfies the continuity of business enterprise requirement since the historic business of a holding company which merges, downstream, with and into its operating subsidiary, is the historic business of such operating subsidiary. See Rev. Rul. 85-197. It is a condition of the deal that counsel provides an unqualified opinion to the effect that “the transactions contemplated by this agreement will not cause the split-off to fail to qualify as a tax-free distribution under Section 355 and Section 361 to Qurate (the successor to Liberty Interactive) and the holders of Liberty Ventures Common Stock that received LEH Common Stock in the split-off.” There is no doubt that such opinion will be forthcoming since it seems clear, given the amount of time that has elapsed since the split-off, that the split-off and the combination are not “part of a plan (or series of related transactions)” within the meaning of Section 355(e).

We were quite surprised that the LEH shareholders were charged such a steep price for EGI’s agreement to effectuate the combination. As a result of the transaction, EGI “expects to retire approximately 3.1 million net shares and former holders of LEH common stock are expected to own (only) approximately 14% of EGI.” We were under the impression that the merger was going to be undertaken at net asset value and were surprised to see the size of the “fee” that EGI exacted. This gives us an indication of the fee that Alibaba might have demanded from Altaba in connection with the downstream transaction that many were expecting to see. Presumably, the fee there was multiples of the EGI fee, a price that Altaba could not stomach.

At one time the IRS would have said that the elimination of the holding company (Liberty) was a taxable transaction, because it could have been accomplished by the liquidation of Liberty. A liquidation, of course, would be a taxable transaction. See Sections 331 and 336.

The IRS used to take the position that where, as here, there were two ways of accomplishing a legitimate business result (i.e., the elimination of a holding company), one of which clearly creates a taxable transaction, one is equally subject to tax liability if he or she chooses the other unless there is an adequate business reason for the particular method used.

The courts rejected this position, finding that this “is not the rule of the statute, the Regulations, nor … the decisions.” See Commissioner v. Estate of Gilmore. One is perfectly free to select the more tax-efficient method for accomplishing an objective that could also have been achieved by means of a less tax-efficient alternative.

The IRS seems to have abandoned this theory. In Rev. Rul. 70-223, involving a company that purchased all of the stock of another company and then sought to combine the businesses of the two companies, the agency said, “there are good business reasons for combining the businesses of X and Y. … It was decided to merge X into Y rather than liquidate Y in order to obtain the more favorable tax treatment afforded by the reorganization provisions…. Since X may accomplish its objective of combining the businesses by either liquidating Y or by merging into Y, it may choose whichever form it desires for the transaction…. Accordingly, the merger is a reorganization….”

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Robert Willens is president of the tax and consulting firm Robert Willens LLC in New York and an adjunct professor of finance at Columbia University Graduate School of Business.