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EXHIBIT 8.1
October 6, 1997
Penske Motorsports, Inc.
00000 Xxxx Xxxxx Xxxxx
Xxxxxxx, XX 00000-0000
North Carolina Motor Speedway, Inc.
X.X. Xxx 000
0000 Xxxxx X.X. Xxxxxxx 0
Xxxxxxxxxx, XX 00000
RE: Agreement and Plan of Merger
Dated as of August 5, 1997
----------------------------
Dear Sir or Madam:
You have asked for our opinion regarding certain Federal income tax
consequences of the merger (the "Merger") of North Carolina Motor Speedway,
Inc., a North Carolina corporation ("NCMS"), into Penske Acquisition Inc., a
North Carolina corporation ("Acquisition") and wholly-owned subsidiary of
Penske Motorsports, Inc., a Delaware corporation ("PMI"), pursuant to the above
Agreement and Plan of Merger among NCMS, Acquisition and PMI (the "Merger
Agreement"). For purposes of rendering our opinion, we have examined
originals, copies or certified copies of all such documents as we have deemed
relevant and necessary. We have with your approval assumed the authenticity of
all documents submitted to us as originals, and the conformity to original
documents of all documents submitted to us as copies.
Background
This opinion is based upon the following assumed facts, which have been
certified to us by you:
1. In early 1997, PMI resolved to attempt to acquire the North
Carolina Speedway operated by NCMS so as to add it to PMI's racetrack
operations. The plan adopted was to acquire most of the outstanding shares of
stock of NCMS in exchange for PMI
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voting common stock and the remaining shares for cash, in a transaction that
would qualify as a reorganization under Internal Revenue Code ("IRC") Sections
368(a)(1)(A) and 368(a)(2)(D).
2. On April 1, 1997, as a first step in the planned combination of PMI
and NCMS, PMI, Acquisition and the principal shareholder of NCMS, Xxx. Xxxxxx
X. XxXxxx ("XxXxxx"), entered into a Stockholder Option and Voting Agreement
(the "Option Agreement") pursuant to which, among other things, XxXxxx granted
Acquisition an option to require her to vote in favor of a merger of NCMS with
Acquisition or PMI in which her 1,461,378 shares of NCMS -- amounting to
approximately 65.3% of the outstanding shares -- would be exchanged for not
less than 906,542 shares of PMI common stock and $1.4 million cash to be held
in escrow pending the merger. The Option Agreement further provided that in
the event of XxXxxx'x death, her estate would have an option to require the
principal shareholder of PMI to arrange for a secondary offering of her PMI
shares at a price not less than $30 per share or, if such an offering could not
be accomplished for at least $27 million worth of such shares, to purchase such
shares for the greater of their then fair market value or $30 per share (which
obligation is supported by a $27 million letter of credit).
3. In April of 1997, the parties also entered into an Amended and
Restated Stockholder Option and Voting Agreement (the "Amended Option
Agreement"), providing PMI with an option to proceed with an exchange of PMI
stock for XxXxxx'x NCMS shares in advance of the consummation of the
contemplated merger.
4. In May of 1997, PMI resolved to proceed with the exchange of PMI
shares for XxXxxx'x shares, so as to enhance the likelihood of the subsequent
merger. On May 15, 1997, the exchange was consummated, with XxXxxx receiving
906,542 PMI shares for her NCMS shares (the "XxXxxx Exchange"). At that time,
the parties executed a First Amendment to the Amended Option Agreement, under
which the put option provided to XxXxxx'x estate in the Option Agreement was
expanded so as to apply also to XxXxxx herself after the first anniversary of
the acquisition of her NCMS shares by PMI.
5. The trading range of PMI shares on May 15, 1997 was from $30 to
$31.50 per share.
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6. In July of 1997, the PMI board resolved to proceed with the merger
of NCMS into Acquisition, under which each of the remaining shareholders of
NCMS will, at such shareholder's election, receive for each NCMS share (i)
$19.61 cash or (ii) PMI shares worth $19.61 based on recent average closing
prices. On August 5, 1997, the board of NCMS also resolved to proceed with the
merger, and the Merger Agreement was executed. On that same day, however,
litigation was commenced by a minority shareholder of NCMS attempting to enjoin
the Merger. For purposes of this opinion, we assume that the litigation will
be resolved, that the shareholders of NCMS will vote their approval of the
Merger, and that the Merger will be duly consummated this year.
7. Meanwhile, prior to the date hereof, the parties have executed a
Second Amendment to the Amended Option Agreement, under which the earliest date
on which XxXxxx could exercise the full put option was deferred until the third
anniversary of the acquisition of her NCMS shares by PMI, although the put
option could be exercised sooner for up to $5 million in value of her PMI
shares. The Second Amendment also recites that XxXxxx has no current plan or
intention of selling or otherwise disposing of her PMI shares in a taxable
transaction for the foreseeable future. For purposes of this opinion, we have
assumed that the fair market value of XxXxxx'x put option has not at any time
exceeded $5 million.
8. The trading range of PMI shares on October 3, 1997 was from $33.875
to $34.25 per share.
9. In the Merger, Acquisition will acquire 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 NCMS immediately prior to the transaction. (For purposes
of this paragraph, amounts paid by NCMS to the dissenters, amounts paid by NCMS
to shareholders who receive cash or other property, amounts used by NCMS to pay
its reorganization expenses and all redemptions and distributions (except for
regular, normal dividends) made by NCMS since April of 1997 should be
considered as assets of NCMS held immediately prior to the transaction.)
10. Following the Merger, Acquisition will not issue additional
shares of its stock to any party other than PMI.
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11. PMI has no plan or intention to reacquire any of its stock issued
in the transactions.
12. Following the Merger, PMI has no plan or intention to liquidate
Acquisition; to merge Acquisition with or into another corporation; to sell or
otherwise dispose of the stock of Acquisition; or to cause Acquisition to sell
or otherwise dispose of any of the assets of NCMS acquired in the transaction,
except for dispositions made in the ordinary course of business or transfers to
a subsidiary "controlled" by Acquisition within the meaning of IRC Section
368(c).
13. The liabilities of NCMS assumed by Acquisition and the liabilities
to which the transferred assets of NCMS are subject were incurred by NCMS in
the ordinary course of its business.
14. Following the Merger, Acquisition will continue the historic
business of NCMS and use a significant portion of NCMS's business assets in a
business.
15. PMI, Acquisition, NCMS and the shareholders of NCMS will pay their
respective expenses, if any, incurred in connection with the transactions.
16. There is no intercorporate indebtedness existing between PMI and
NCMS or between Acquisition and NCMS that was issued, acquired or will be
settled at a discount.
17. No two parties to the Merger are investment companies as defined in
IRC Section 368(a)(2)(F)(iii) and (iv).
18. NCMS is not under the jurisdiction of a court in a Title 11 or
similar case.
19. The payment of cash in lieu of fractional shares of PMI stock will
be solely for the purpose of avoiding the expense and inconvenience to PMI of
issuing fractional shares and does not represent separately bargained-for
consideration. The total cash consideration that will be paid in the Merger to
NCMS shareholders instead of issuing fractional shares of PMI stock will not
exceed 1% of the total consideration that will be issued in the transaction to
NCMS shareholders in exchange for their shares of NCMS stock. The fractional
share interest of each NCMS shareholder will be aggregated, and no NCMS
shareholder will
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receive cash for fractional shares in an amount greater than the value of one
full share of PMI stock.
20. None of the compensation to be received by any
shareholder-employees of NCMS will be separate consideration for, or allocable
to, any of his or her shares of NCMS stock; none of the shares of PMI stock
received by any shareholder-employees will be separate consideration for, or
allocable to, any employment agreement; and the compensation paid to any
shareholder-employees will be for services actually rendered and will be
commencerate with amounts paid to third parties bargaining at arm's-length for
similar services.
Discussion
There are two issues presented by this Merger that require some
discussion and analysis: first, whether the exchanges under the Merger will
meet the applicable statutory requirements for tax-free reorganization
treatment; and, second, whether the nonstatutory "continuity of interest"
requirement for a reorganization will be met.
1. Statutory Requirements -- Section 368(a)(1)(A) of the IRC defines
the term "reorganization" to include a "statutory merger or consolidation."
This is referred to as an "A" reorganization. Section 368(a)(2)(D) provides
that the acquisition in a merger by one corporation, in exchange for stock of a
corporation which is in control of the acquiring corporation, of
substantially all of the properties of another corporation shall also qualify
as an "A" reorganization provided that no stock of the acquiring corporation is
used in the transaction and the transaction would otherwise have qualified as a
"A" reorganization if the merger had been made directly into the controlling
corporation. Sections 354(a) and 361(a) of the IRC provide for nonrecognition
of gain or loss by corporations that are parties to a reorganization and by the
shareholders of such corporations, on exchanges that occur in pursuance of the
plan of reorganization.
Under the "step transaction" doctrine as applied in King Enterprises,
Inc. v. Xxxxxx Xxxxxx, 000 F.2d 511 (Ct. Cl. 1969), a stock-for-stock exchange
followed (in that case, approximately seven months later) by a merger of the
acquired corporation into the acquiring corporation (or a subsidiary
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thereof) should be classified as pursuant to an "A" reorganization, as long as
both steps are pursuant to one overall plan of reorganization. Thus, even
though the first step in the plan of reorganization is not, by itself, a
statutory merger, as referred to in IRC Section 368(a)(1)(A), the exchanges in
both the first step and the second step are made "in pursuance of the plan of
reorganization" and are therefore eligible for nonrecognition treatment under
IRC Sections 354(a) and 361(a).
The King Enterprises decision was recently followed by the Tax Court in
X.X. Xxxxxxx Corp. v. Commissioner, 104 T.C. 75, 91-99 (1995), in which an
appeal is currently pending in the Second Circuit Court of Appeals. In Seagram,
it was the Internal Revenue Service (the "IRS") that cited King Enterprises and
argued successfully for tax-free reorganization treatment.
We are aware of no authority contrary to King Enterprises. Moreover,
based upon conversations with attorneys in the IRS Chief Counsel's Office, we
believe that they view King Enterprises as reflecting a correct interpretation
of currently applicable law.
Accordingly, in our view, the XxXxxx Exchange and the Merger, as
integral parts of a single plan of reorganization, should be considered
together for purposes of determining whether the Merger qualifies under IRC
Section 368 and the tax consequences to the shareholders and the corporate
parties to the reorganization under IRC Sections 354 and 361.
2. Continuity of Interest -- In addition to the statutory requirements
for a reorganization, another relevant requirement is "continuity of interest."
"Continuity of interest" is met if exchanging shareholders of the acquired
corporation receive, under the plan of reorganization, shares of the acquiring
corporation (or its parent) that constitute, in aggregate, at least 50% of the
fair market value of the consideration received for shares of the acquired
corporation in the transaction. See Xxxx X. Xxxxxx Co. x. Xxxxxxxxx, 000 X.X.
000 (1935) (38% continuity may be sufficient); Helvering x. Xxxxx, 000 X.X. 000
(1935) (45% continuity is sufficient); Rev. Proc. 86-42, 1986-2 C.B. 722 (50%
continuity is sufficient to obtain IRS ruling).
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In this case, more than 50% of the outstanding shares of NCMS have been
exchanged for shares of PMI. In addition, the former majority shareholder of
NCMS, who received those PMI shares, has represented that she has no current
plan or intention of selling or otherwise disposing of any of those PMI shares
in a taxable transaction. The existence of her registration rights and put
option rights under the Second Amendment to the Amended Option Agreement should
not adversely affect the conclusion that there is "continuity of interest" in
this case, because she has no current plan or intention of exercising the
option and, in any event, none of these rights currently limits her upside
potential with respect to PMI shares.
Conclusion
Based upon the foregoing factual assumptions, legal authorities and the
further qualifications set forth below, we are of the opinion that:
(1) The Merger, in conjunction with the prior XxXxxx Exchange, will
constitute a reorganization under IRC Sections 368(a)(1)(A) and 368(a)(2)(D);
(2) NCMS, Acquisition and PMI will be parties to the reorganization;
(3) Each shareholder of NCMS who receives shares of PMI in the Merger
will recognize no gain or loss on the exchange (except in respect of cash
received for fractional shares, as discussed below), and the aggregate basis
of the shares received by such shareholder in the exchange will equal the
aggregate basis of the NCMS shares exchanged therefor (excluding any basis
allocable to shares for which cash is provided or to fractional shares for
which cash is received);
(4) Except as discussed below with respect to fractional shares, an
NCMS shareholder who elects to receive cash in the Merger will recognize gain
on the exchange in an amount equal to the lesser of the amount of such cash and
the excess of (x) such cash and the fair market value of PMI shares also
received over (y) such shareholders' aggregate basis in NCMS shares exchanged;
such shareholder may not recognize a loss on the exchange unless he elects to
receive solely cash;
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(5) The holding period of the shares of PMI received by each NCMS
shareholder in the Merger will include the period during which the NCMS shares
surrendered in exchange therefor were held, provided that such NCMS shares were
held as capital assets at the time of the Merger;
(6) An NCMS shareholder who receives cash in lieu of a fractional PMI
share will recognize gain or loss equal to the difference between the cash
payment received and the holder's tax basis in the NCMS share or portion of a
share exchanged therefor;
(7) Gain or loss on receipt of cash in the Merger will be capital
gain or loss, provided that the NCMS shares were held as a capital asset at the
time of the Merger, will be long-term capital gain or loss if such shares had
been held for more than 18 months at such time and will be mid-term capital
gain or loss if such shares had been held for more than 12 months but not more
than 18 months; and
(8) NCMS, Acquisition and PMI will recognize no gain or loss on the
Merger.
This opinion represents our best legal judgment, but it has no binding
effect or official status of any kind, and no assurance can be given that
contrary positions may not be taken by the IRS or a court concerning the
issues. We express no opinion relating to any Federal income tax matter except
on the basis of the facts described above. Additionally, we express no opinion
on the tax consequences under foreign, state or local laws. In issuing our
opinion, we have relied solely upon existing provisions of the IRC, existing
and proposed regulations thereunder, and current administrative positions and
judicial decisions. Such laws, regulations, administrative positions and
judicial decisions are subject to change at any time. Any such change could
affect the validity of the opinion set forth above. Also, future changes in
Federal income tax laws and the interpretation thereof can have retroactive
effect.
* * *
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement being filed with respect to the Merger and to the
references to our firm in the Proxy Statement that is a part thereof under the
captions "SUMMARY --
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Certain Federal Income Tax Consequences," "THE MERGER -- Certain Federal Income
Tax Consequences," and "LEGAL MATTERS AND EXPERTS." This does not constitute a
consent under Section 7 of the Securities Exchange Act, and in consenting to
such references to our firm we have not certified any part of such Registration
Statement or Proxy Statement and do not otherwise come within the categories of
persons whose consent is required under Section 7 or under the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ DRINKER XXXXXX & XXXXX LLP
DRINKER XXXXXX & XXXXX LLP
WMG:SDDH
