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EXHIBIT 8
TAX OPINION
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December 17, 1996
Fort Brooke Bancorporation
000 Xxxxxxxxxx Xxxxx
Xxxxxxx, Xxxxxxx 00000
Colonial BancGroup
Xxx Xxxxxxxx Xxxxxx
Xxxxx 000
Xxxxxxxxxx, Xxxxxxx 00000
Ladies and Gentlemen:
For various business reasons, Fort Brooke Bancorporation (Acquired
Corporation) and The Colonial BancGroup, Inc. (BancGroup) have entered into an
Agreement and Plan of Merger (Agreement) on November 18, 1996. 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 (Code). We will also address additional income tax
consequences to Acquired Corporation, BancGroup, and shareholders.
BACKGROUND
Acquired Corporation, a Florida corporation, operates as a bank holding company
for its wholly owned subsidiary, Fort Brooke Bank (Bank) and certain other
Subsidiaries, with its principal office in Brandon, 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 Corporation will merge with and
into BancGroup, with BancGroup as the surviving corporation. Pursuant to the
terms of the transaction, each share of common stock of Acquired Corporation
outstanding and held by Acquired Corporation'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 per share price of
$31.50. On the effective date and as a result of the merger, BancGroup will
assume all the outstanding options of Acquired Corporation, whether or not
vested or exercisable. Each such option will cease to represent a right to
acquire Acquired Corporation Common Stock and will, instead, represent a right
to acquire BancGroup common stock
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on substantially the same terms applicable to the Acquired Corporation Options
except as specified in the Agreement.
No fractional shares of BancGroup Common Stock will be issued. Instead, each
holder of shares of Acquired Corporation 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 Corporation Stock, be paid by BancGroup an amount in cash.
Any shareholder of Acquired Corporation 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 Corporation Stock.
Further, after consummation of the merger, BancGroup and Acquired Corporation
anticipate merging two bank subsidiaries, the Bank and Colonial Bank,
BancGroup's Florida Subsidiary Bank. Colonial Bank will be the surviving
entity.
REPRESENTATIONS OF PARTIES
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BancGroup and Acquired Corporation intend that the merger will qualify for
federal income tax purposes as a "reorganization" within the meaning of
Section 368(a) of the Code.
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The fair market value of the BancGroup stock received by each shareholder of
Acquired Corporation pursuant to the terms of the Agreement will be
approximately equal to the fair market value of Acquired Corporation
surrendered in the exchange. The terms of the Agreement are the result of
arm's-length negotiations between unrelated parties.
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There is no plan or intention by the shareholders of Acquired Corporation to
sell, exchange, or otherwise dispose of a number of shares of acquiring stock
received in the transaction that will reduce the Acquired Corporation
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 Corporation as
of the same date. For purposes of this representation, shares of Acquired
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 Corporation stock on the date of the transaction.
Shares of Acquired stock and shares of BancGroup stock held by Acquired
Corporation shareholders and otherwise sold, redeemed or disposed of prior or
subsequent to the transaction will be considered in making this
representation.
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Following the merger, BancGroup will continue the historic business of
Acquired Corporation or use a significant portion of Acquired Corporation's
historic business assets in a business.
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Acquired Corporation, BancGroup and Acquired Corporation Shareholders will pay
their respective expenses, if any, incurred in connection with the
transaction.
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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.
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The fair market value of the assets of Acquired Corporation 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.
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The total adjusted basis of the assets of Acquired Corporation 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.
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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 price and
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.
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Any incentive stock options acquired from Acquired Corporation 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.
TAX CONSEQUENCES TO ACQUIRED CORPORATION AND BANCGROUP
The merger of Acquired Corporation with and into BancGroup will constitute a
merger within the meaning of I.R.C. Section 368(a)(1)(A), provided that the
merger qualifies as a statutory merger pursuant to state law. Acquired
Corporation and BancGroup will
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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
Corporation will recognize no gain or loss when it transfers its assets to
BancGroup in a constructive exchange solely for BancGroup's stock and the
assumption of Acquired Corporation's liabilities by BancGroup. Acquired
Corporation 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 upon the acquisition by BancGroup of the assets of Acquired
Corporation in exchange for BancGroup common stock and the assumption of
Acquired Corporation's liabilities. BancGroup's basis in the assets acquired
in the transaction will be equal to the basis of the assets in the hands of
Acquired immediately before the transaction under I.R.C. Section 362(b). I.R.C.
Section 362(b) provides that BancGroup's holding period for each Acquired
Corporation asset received in the merger will include the period during which
the asset was held by Acquired Corporation immediately before the transaction
based upon I.R.C. Section 1223(2).
Pursuant to I.R.C. Section 381(a), BancGroup will succeed to and take into
account the items of Acquired Corporation 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. BancGroup will succeed to and
take into account the earnings and profits, or deficit in earnings and profits,
of Acquired Corporation 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 BANK AND COLONIAL BANK
The merger of Bank with and into Colonial Bank will constitute a merger within
the meaning of I.R.C. Section 368(a)(1)(A), provided that the merger qualifies
as a statutory merger pursuant to state law. Bank and Colonial Bank 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), Bank will
recognize no gain or loss when it transfers its assets to Colonial Bank's in a
constructive exchange solely for Colonial Bank's stock and the assumption of
Colonial Bank's liabilities by BancGroup. 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 Colonial Bank upon the acquisition by Colonial Bank of the assets of Bank in
exchange for Colonial Bank's common stock and the assumption of 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 Bank immediately
before the transaction per I.R.C. Section 362(b). I.R.C. Section 362(b)
provides that Colonial Bank's holding period for each
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Bank asset received in the merger will include the period during which the
asset was held by Bank immediately before the transaction based upon I.R.C.
Section 1223(2).
Pursuant to I.R.C. Section 381(a), Colonial Bank will succeed to and take into
account the items of 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 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 CORPORATION SHAREHOLDERS
I.R.C. Section 354 states that a shareholder who receives solely BancGroup
common stock in exchange for Acquired Corporation 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
Corporation 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 Corporation 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 Corporation 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 Corporation
shareholder could be treated as a dividend (to the extent of the shareholder's
ratable
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share of applicable earnings and profits) if the shareholder constructively
owns shares of Acquired Corporation 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 Corporation 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 Corporation 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 Corporation shareholders who constructively own stock in Acquired
Corporation should consult a tax advisor regarding the characterization of cash
payments received in the reorganization in exchange for Acquired Corporation
stock as either capital gain income or dividend income.
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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 will disqualify the option as
a statutory stock option.
The shareholders of Acquired Corporation, in lieu of receiving Bancgroup
options, can elect to receive shares of Bancgroup common stock for the
difference between the exercise price of Acquired Corporation options and
$31.50. It is possible that the Internal Revenue Service could argue that a
cashless exercise of incentive stock options is a material modification of the
existing options. If the Internal Revenue Service is successful with this
argument, the entire fair market value of the stock received in conjunction
with the exercise of the options will be taxed as ordinary income. Bancgroup
would be entitled to a corresponding compensation deduction for the same amount.
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 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.
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The shareholders of Acquired Corporation, in lieu of receiving Bancgroup
options, can elect to receive shares of Bancgroup common stock for the
difference between the exercise price of Acquired Corporation options and
$31.50. The cashless exercise of nonqualified stock options does not alter the
timing or character of income recognition. The shareholders of Acquired
Corporation will recognize ordinary income for the fair market value of the
stock received in conjunction with the exercise of the options. Bancgroup
would be entitled to a corresponding compensation deduction of the same amount.
SUMMARY
The merger of Bancgroup and Acquired Corporation will qualify as a tax-free
reorganization within the meaning of I.R.C. Section 368(a)(1)(A). BancGroup's
basis in Acquired Corporation's assets will be the same as Acquired
Corporation's basis in its assets before the merger. The merger of Colonial
Bank and Bank will also qualify as a tax-free reorganization within the meaning
of I.R.C. Section 368(a)(1)(A). Colonial Bank's basis in Bank's assets will be
the same as Bank's basis in its assets before the merger. Acquired Corporation
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 Corporation and BancGroup stock
for purposes of determining the tax consequences of the cash payments. In
addition, the receipt of Bancgroup stock in exchange for Acquired Corporation
incentive stock options may result in the incentive stock options being taxed
as nonqualified stock options.
If you have any questions or comments, please call Xxxxxx Xxx or Xxxx Xxxxxx at
(000) 000-0000.
Very Truly Yours,
Xxxxxxx & Xxxxxxx L.L.P.
