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EXHIBIT 8
[XXXXXXX & XXXXXXX XXXXXXXXXX]
June 18, 1998
Xx. Xxxxx Xxxxxx
Chief Financial Officer
Colonial BancGroup, Inc.
P.O. Box 1109
Montgomery, AL 36101
Dear Xx. Xxxxxx:
For valid business reasons, FirstBank (Acquired Bank), CBG Acquisition Corp.
(CBG Corp), and The Colonial BancGroup, Inc. (BancGroup) have entered into an
Agreement and Plan of Merger (Agreement) on May 5, 1998. Pursuant to your
request, our letter addresses the income tax consequences of the proposed
transaction as outlined below. We will address whether the merger will qualify
as a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986 (I.R.C.). We will also address additional income tax consequences
to Acquired Bank, BancGroup, and shareholders.
BACKGROUND
Acquired Bank operates as a Texas state bank with its principal office in
Dallas, Texas. BancGroup, a Delaware corporation, is a bank holding company with
a wholly-owned subsidiary CBG Corp, a Texas business corporation.
CERTAIN TERMS OF THE MERGER
At the effective date of the merger, Acquired Bank will merge with and into CBG
Corp, with Acquired Bank as the surviving corporation. Pursuant to the terms of
the transaction, each share of common stock of Acquired Bank outstanding and
held by Acquired Bank's shareholders other than shares held by shareholders who
perfect their dissenter's rights, will be converted by operation of law and
without any action on the part of the parties or the holders thereof into shares
of BancGroup common stock at the rate of $123.53 divided by the market value as
determined by the agreement..
No fractional shares of BancGroup common stock will be issued. Instead, each
holder of shares of Acquired Bank stock having a fractional interest arising
upon the conversion of such shares into shares of BancGroup common stock shall,
at the time of surrender of the certificates previously representing Acquired
Bank stock, be paid by BancGroup an amount in cash. Any shareholder of Acquired
Bank who does not vote in favor of the Agreement and who complies with certain
procedures relating to the rights of dissenting shareholders will be entitled to
receive payment for the fair value of his or her Acquired Bank stock.
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REPRESENTATIONS OF PARTIES
- BancGroup and Acquired Bank intend that the merger will qualify for
federal income tax purposes as a "reorganization" within the meaning of
I.R.C. Section 368(a) of the Code.
- The fair market value of the BancGroup stock received by each
shareholder of Acquired Bank pursuant to the terms of the Agreement
will be approximately equal to the fair market value of Acquired Bank
stock surrendered in the exchange. The terms of the Agreement are the
result of arm's-length negotiations between unrelated parties.
- No stock of CBG Corp will be issued in the transaction.
- There is no plan or intention by the shareholders of Acquired Bank to
sell, exchange, or otherwise dispose of a number of shares of BancGroup
stock received in the transaction that will reduce the Acquired Bank
shareholders' ownership of BancGroup stock to a number of shares having
a value, as of the date of the transaction, of less than fifty percent
of the value of all of the formerly outstanding stock of Acquired Bank
as of the same date. For purposes of this representation, shares of
Acquired Bank stock exchanged for cash, and surrendered by dissenters,
or exchanged for cash in lieu of fractional shares of BancGroup stock
will be treated as outstanding Acquired Bank stock on the date of the
transaction. Shares of Acquired Bank stock and shares of BancGroup
stock held by Acquired Bank shareholders and otherwise sold, redeemed
or disposed of prior or subsequent to the transaction will be
considered in making this representation.
- BancGroup has no plan or intention to sell or otherwise dispose of
Acquired Bank stock or any assets acquired by it, other than
dispositions made in the ordinary course of business. BancGroup has no
plan to liquidate Acquired Bank following the transaction or to merge
Acquired Bank into another corporation.
- Following the merger, BancGroup will continue the historic business of
Acquired Bank or use a significant portion of Acquired Bank's historic
business assets in a business.
- Acquired Bank, BancGroup and Acquired Bank shareholders will pay their
respective expenses, if any, incurred in connection with the
transaction.
- No part of the consideration received by the Acquired Bank shareholders
will be received by them in their capacity as debtor, creditor,
employee, or any way other than as shareholder.
- The fair market value of the assets of CBG Corp transferred to Acquired
Bank will equal or exceed the sum of the liabilities assumed by
BancGroup plus the amount of liabilities, if any, to which the assets
transferred are subject.
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- The total adjusted basis of the assets of CBG Corp transferred to
Acquired Bank will equal or exceed the sum of the liabilities assumed
by Acquired Bank plus the amount of liabilities, if any, to which the
assets transferred are subject.
- After the proposed merger, Acquired Bank will hold assets representing
at least 90 percent of the fair market value of the net assets and at
least 70 percent of the fair market value of the gross assets owned by
both it and CBG Corp immediately prior to the proposed merger. Amounts
used by Acquired Bank to pay reorganization expenses and all redemption
and distributions except for normal regular dividends made by Acquired
Bank will be included as assets of Acquired or CBG Corp respectively,
immediately prior to the transaction.
- The compensation to be paid by BancGroup to the officers and employees
of Acquired Bank under any stock option, consulting, employment or
noncompete agreement will be at a rate equal to the fair market value
of the services actually performed and will be commensurate with
amounts paid to third parties bargaining at arm's length for similar
services. In addition none of the compensation to be received by the
shareholder-employees of Acquired Bank will be part of the
consideration for their target stock.
- An amount of voting common stock of Acquired Bank which constitutes
control of Acquired Bank within the meaning of Section 368(c) of the
Code was acquired in the transaction solely for voting stock. Section
368(c) defines control as the ownership of stock possessing at leat 80
percent of the total combined voting power of all classes of stock
entitled to vote and at least 80 percent of the total number of shares
of all other classes of stock of the corporation.
- At the time of the merger, Acquired Bank will not have outstanding any
warrants, options, convertible securities, or any other right pursuant
to which any person could acquire stock in Acquired Bank.
TAX CONSEQUENCES TO ACQUIRED BANK, CBG CORP, AND BANCGROUP
The merger of CBG Corp with and into Acquired Bank will constitute a merger
within the meaning of I.R.C. Sections 368(a)(1)(A) and 368(a)(2)(E), provided
that the merger qualifies as a statutory merger pursuant to state law. Acquired
Bank, CBG Corp, and BancGroup will each be "a party to the reorganization"
within the meaning of I.R.C. Section 368(b) of the Code. Based upon I.R.C.
Sections 357(a) and 361(a), CBG Corp will recognize no gain or loss when it
transfers its assets to Acquired Bank in a constructive exchange solely for
BancGroup's stock and the assumption by Acquired Bank of CBG Corp's liabilities.
Pursuant to I.R.C. Section 1032 of the Code, no gain or loss will be recognized
by BancGroup or Acquired Bank upon the acquisition by Acquired Bank of the
assets of CBG Corp in exchange for BancGroup common stock and the assumption of
CBG Corp's liabilities. Acquired Bank's basis in the assets acquired in the
transaction will be equal to the basis of the assets in the hands of
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CBG Corp immediately before the transaction per I.R.C. Section 362(b). I.R.C.
Section 1223(2) provides that Acquired Bank's holding period for each CBG Corp
asset received in the merger will include the period during which the asset was
held by CBG Corp immediately before the transaction. The basis of Acquired Bank
stock in the hands of Colonial BancGroup will be BancGroups's basis in CBG Corp
stock adjusted as if BancGroup had acquired the Acquired Bank assets (and any
liabilities assumed or to which the Acquired Bank assets were subject) directly
from Acquired Bank in a transaction in which BancGroups's basis in the Acquired
Bank assets was determined under section 362(b), and BancGroup then had
transferred the Acquired Bank assets (and liabilities) to CBG Corp in a
transaction in which BancGroup's basis in the CBG Corp stock was adjusted under
section 358.
Pursuant to I.R.C. Section 381(a), Acquired Bank will succeed to and take into
account the items of CBG Corp described in I.R.C. Section 381(c), subject to the
conditions and limitations of I.R.C. Sections 381, 382, 383, 384, and 1502 and
the regulations thereunder. Acquired Bank will succeed to and take into account
the earnings and profits, or deficit in earnings and profits, of CBG Corp as
provided by I.R.C. Section 382(c)(2) of the Code and Section 1.381(c)(2)-1 of
the Regulations. BancGroup will succeed to and take into account the earnings
and profits, or deficit in earnings and profits, of Acquired Bank as provided by
I.R.C. Section 382(c)(2) of the Code and Section 1.381(c)(2)-1 of the
Regulations.
TAX CONSEQUENCES TO ACQUIRED BANK SHAREHOLDERS
I.R.C. Section 354 states that a shareholder who receives solely BancGroup
common stock in exchange for Acquired Bank common stock will recognize no gain
or loss on the exchange, except with respect to cash received in lieu of a
fractional interest in BancGroup common stock. I.R.C. Section 358 of the Code
provides that the shareholder's tax basis in the BancGroup common stock received
in the exchange will be the same as the basis of the Acquired Bank common stock
surrendered, decreased by the amount of cash (if any) received by the
shareholder and increased by the amount of gain (if any) recognized in the
exchange. I.R.C. Section 1223 of the Code provides that such shareholder will
include the period during which Acquired Bank stock was held in his holding
period for the BancGroup common stock received in the exchange.
The payment of cash in lieu of fractional shares of BancGroup common stock will
be treated as if the fractional shares were issued as part of the exchange and
then redeemed by BancGroup. These cash payments will be treated as having been
received as distributions in full payment in exchange for the stock redeemed as
provided in I.R.C. Section 302(a) of the Code. Generally, any gain or loss
recognized upon such exchange will be capital gain or loss, provided the
fractional share constitutes a capital asset in the hands of the exchanging
shareholder. The shareholders will recognize capital gain or loss equal to the
difference between the cash received and the basis of the fractional share
interest that would have been issued.
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Holders of shares of Acquired Bank Common Stock who receive cash upon the
exercise of any appraisal rights will incur a taxable transaction for federal
income tax purposes. Such a shareholder will recognize gain or loss measured by
the difference between the tax basis for his or her shares and the amount of
cash received pursuant to I.R.C. Section 1012 of the Code (unless the receipt of
cash is treated as a dividend, as described below).
In certain circumstances, the receipt of solely cash by an Acquired Bank
shareholder could be treated as a dividend (to the extent of the shareholder's
ratable share of applicable earnings and profits) if the shareholder
constructively owns shares of Acquired Bank Common Stock that are exchanged for
BancGroup Common Stock in the Merger. Generally, a shareholder constructively
owns stock that is owned by members of the shareholder's family, and by certain
controlled or related partnerships, estates, trusts and corporations, pursuant
to the constructive ownership rules of I.R.C. Section 318 of the Code, as well
as any shares that the shareholder has an option to acquire.
The receipt of solely cash by an Acquired Bank shareholder in exchange for his
stock will not be treated as a dividend if such exchange or receipt results in a
meaningful reduction or a substantially disproportionate reduction in the
shareholder's ownership interest or results in a complete termination of the
shareholder's interest, taking into account, in each case, the constructive
ownership rules described above. A complete termination of a shareholder's
interest will occur if, after the receipt of cash in exchange for stock, the
shareholder owns no shares of stock in BancGroup. Thus, a shareholder who
receives solely cash for all of the stock actually owned by him will generally
qualify for capital gain treatment under the complete termination test if none
of the shares constructively owned by him are exchanged in the merger for
BancGroup Common Stock and the shareholder does not otherwise own, actually or
constructively, any shares of BancGroup Common Stock after the merger.
Where the complete termination of interest test is not satisfied with respect to
a particular shareholder (because, for example, Acquired Bank shares owned by a
related party are exchanged for BancGroup Common Stock in the merger), that
shareholder will nonetheless generally be entitled to capital gain treatment if
the receipt of cash in exchange for his shares results in a "substantially
disproportionate" reduction or a "meaningful" reduction in his ownership
interest. I.R.C. Section 302 of the Code provides that a shareholder's reduction
in ownership interest should normally be "substantially disproportionate," and
capital gain treatment should normally result, if (1) the shareholder owns less
than 50% of the total combined voting power of all classes of stock immediately
after the merger, and (2) the shareholder's proportionate stock interest in
BancGroup immediately after the merger is 20% or more below what his
proportionate interest in BancGroup would have been if he had received solely
BancGroup Common Stock in the merger.
The compensation to be paid by BancGroup to the employee/shareholders of
Acquired Bank under any employment agreement will be taxable as ordinary income
to the
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employee/shareholders. No opinion is rendered regarding the application of
Section 280G of the Internal Revenue Code.
Acquired Bank shareholders who constructively own stock in Acquired Bank should
consult a tax advisor regarding the characterization of cash payments received
in the reorganization in exchange for Acquired Bank stock as either capital gain
income or dividend income.
SUMMARY
The merger of CBG Corp and Acquired Bank will qualify as a tax-free
reorganization within the meaning of I.R.C. Sections 368(a)(1)(A) and
368(a)(2)(E), provided that the merger qualifies as a statutory merger pursuant
to state law. Acquired Bank's basis in CBG Corp's assets will be the same as CBG
Corp's basis in its assets before the merger. Acquired Bank shareholders will
retain a substituted basis in the shares of BancGroup stock received in the
merger decreased by the amount of cash received and increased by the amount of
gain recognized in the transaction. The only taxable consequences will be to
those shareholders who receive cash in lieu of fractional shares, those
shareholders who receive solely cash in the exchange upon perfecting their
dissenter's rights, and those shareholders who receive compensation for services
as employees. Shareholders receiving cash must examine their actual and
constructive ownership of Acquired Bank and BancGroup stock for purposes of
determining the tax consequences of the cash payments.
If you have any questions or comments, please call Xxxxxx Xxx or Xxxx Xxxxxx at
(000) 000-0000.
Very truly yours,
/s/ Xxxxxxx & Xxxxxxx L.L.P.
Xxxxxxx & Xxxxxxx L.L.P.
