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EXHIBIT 8.1
Xx. Xxxxx Xxxxxx
Chief Financial Officer
Colonial Bancgroup, Inc.
P.O. Box 1109
Montgomery, AL 36101
Dear Xx. Xxxxxx:
For valid business reasons, First Central Bank (Acquired Bank) and The Colonial
Bancgroup, Inc. (Bancgroup) have entered into an Agreement and Plan of Merger
(Agreement) on September 9, 1997. 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 Florida state bank with its principal office in St.
Petersburg, Florida. Bancgroup, a Delaware corporation, is a bank holding
company with subsidiary banks in Florida (Colonial Bank), Alabama, Georgia and
Tennessee.
CERTAIN TERMS OF THE MERGER
At the effective date of the merger, Acquired Bank will merge with and into
Colonial Bank, with Colonial 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 a rate $62.46 divided
by the market value of Bancgroup common stock as determined by the Agreement. On
the effective date and as a result of the merger, Bancgroup will assume all the
outstanding options of Acquired Bank, whether or not vested or exercisable. Each
such option will cease to represent a right to acquire Acquired Bank common
stock and will, instead, represent a right to acquire Bancgroup common stock on
substantially the same terms applicable to the Acquired Bank options except as
specified in 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 Colonial Bank 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.
- 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 Corporation 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 Acquired Bank transferred to Bancgroup
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.
- The total adjusted basis of the assets of Acquired Bank transferred to
Bancgroup 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.
- If nonqualified stock options to purchase Acquired Corporation common stock
are exchanged for nonqualified stock options to purchase BancGroup common stock,
then the difference between the option price and fair market value of BancGroup
common stock subject to options immediately after the exchange will be equal to
(or greater than) the difference between the option
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price and the fair market value of Acquired Corporation common stock subject to
options immediately before the exchange. All other terms of the BancGroup
nonqualified stock options will be the same as those of Acquired Corporation's
nonqualified stock options.
- Any incentive stock options acquired from Acquired Bank as a part of the
merger and reissued by Bancgroup will be issued at substantially the same terms,
so as not to create material modification as defined in I.R.C. Section 424.
- Colonial Bank will acquire "substantially all" of the assets of Acquired Bank
as part of the merger. Generally, the "substantially all" requirement will be
satisfied if there is a transfer of assets representing at least 90% of the fair
market value of the net assets and at least 70% of the fair market value of the
gross assets held by Acquired Bank immediately prior to the transfer.
TAX CONSEQUENCES TO ACQUIRED BANK, COLONIAL BANK, AND BANCGROUP
The merger of Acquired Bank with and into Colonial Bank will constitute a merger
within the meaning of I.R.C. Sections 368(a)(1)(A) and 368(a)(2)(D), provided
that the merger qualifies as a statutory merger pursuant to state law. Acquired
Bank, Colonial Bank, 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), Acquired Bank will recognize no gain or loss when it
transfers its assets to Colonial Bank in a constructive exchange solely for
Bancgroup's stock and the assumption of Acquired Bank's liabilities by
Bancgroup. Acquired Bank will also not recognize any gain or loss upon the
receipt of cash in the exchange if it distributes such property as part of the
plan of reorganization under I.R.C. Section 361(b).
Pursuant to I.R.C. Section 1032 of the Code, no gain or loss will be recognized
by Bancgroup or Colonial Bank upon the acquisition by Colonial Bank of the
assets of Acquired Bank in exchange for Bancgroup common stock and the
assumption of Acquired Bank's liabilities. Colonial Bank's basis in the assets
acquired in the transaction will be equal to the basis of the assets in the
hands of Acquired Bank immediately before the transaction per I.R.C. Section
362(b). I.R.C. Section 1223(2) provides that Colonial Bank's holding period for
each Acquired Bank's asset received in the merger will include the period during
which the asset was held by Acquired Bank immediately before the transaction.
The basis of Colonial Bank stock in the hands of Bancgroup will be increased by
an amount equal to the basis of the Acquired Bank assets acquired by Colonial
Bank and decreased by the sum of the amount of liabilities of Acquired Bank
assumed by Colonial Bank and the amount of liabilities to which the assets of
Acquired Bank are subject.
Pursuant to I.R.C. Section 381(a), Colonial Bank will succeed to and take into
account the items of Acquired Bank 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. Colonial Bank 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
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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.
Holders of shares of Acquired Bank Common Stock who receive cash upon the
exercise of any appraisal rights will be subject to 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.
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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.
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.
CONVERSION OF ACQUIRED CORPORATION OPTIONS INTO BANCGROUP OPTIONS
INCENTIVE STOCK OPTIONS
The assumption and conversion of Acquired Corporation incentive stock options,
whether vested or exercisable, into rights to acquire BancGroup common stock
pursuant to the terms of the Agreement shall not be considered the granting of a
new option as long as the following requirements of I.R.C. Section 424 are met.
I.R.C. Section 424 provides that the excess of the aggregate fair market value
of the shares subject to the options immediately after the substitution or
assumption over the aggregate option price of such shares is not more than the
excess of the aggregate fair market value of all shares subject to the option
immediately before such substitution or assumption over the aggregate option
price of such shares. Section 424 also provides that the new option or the
assumption of the old option must not give the employee additional benefits
which he did not have under the old option. If the terms of the old option are
modified, extended, or renewed, such modification, extension, or renewal shall
be considered the granting of a new option which may disqualify the option as an
incentive stock option.
NONQUALIFIED STOCK OPTIONS
The assumption and conversion of Acquired Corporation nonqualified stock options
into BancGroup nonqualified stock options pursuant to the merger will not result
in current federal income tax consequences if neither the nonqualified options
to purchase shares of Acquired Corporation stock nor the substituted options to
purchase BancGroup stock have a readily ascertainable value. I.R.C. Section
83(e) provides that I.R.C. Section 83 does not apply to the transfer of an
option without a
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readily ascertainable fair market value. The regulations under Section 1.83-7
state that if an option is not actively traded on an established market, the
option does not have a readily ascertainable fair market value when granted
unless a taxpayer can show that the option is transferable by the optionees; the
option is exercisable immediately in full by the optionee; the option or
property subject to the option is not subject to any restriction or condition
that has a significant effect upon the fair market value of the option; and, the
fair market value of the option privilege is readily ascertainable under the
provision for determining fair market value in the case of options not actively
traded on an established market.
SUMMARY
The merger of Colonial Bank 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)(D), provided that the merger qualifies as a statutory merger pursuant
to state law. Colonial Bank's basis in Acquired Bank's assets will be the same
as Acquired Bank'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 deal. The only taxable consequences will be
to those shareholders who receive cash in lieu of fractional shares and those
shareholders who receive solely cash in the exchange upon perfecting their
dissenter's rights. 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.
The assumption and conversion of Acquired Bank's qualified and nonqualified
options by Bancgroup is a tax-free event to the shareholders of Acquired Bank,
assuming certain requirements of Section 424 are met and the nonqualified
options do not have a readily ascertainable fair market value.
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.
