Which of the following statements best describes the continuity of interest principle as it applies to a tax-deferred acquisition?
A)Continuity of interest requires each shareholder to receive at least 40 percent of the consideration received in equity of the acquirer.
B)Continuity of interest requires shareholders in the aggregate to receive at least 40 percent of the consideration received in equity of the acquirer.
C)Continuity of interest requires each shareholder to receive at least 80 percent of the consideration received in equity of the acquirer.
D)Continuity of interest requires shareholders in the aggregate to receive at least 80 percent of the consideration received in equity of the acquirer.

Question

Quizplus · Accepted Answer

The continuity of interest principle in a tax-deferred acquisition requires that shareholders in the aggregate receive a significant portion of the consideration in the form of equity of the acquiring company. While the specific percentage can vary by jurisdiction and specific tax rules, the principle is that a substantial part of the consideration must be in the form of stock to ensure that the shareholders of the acquired company maintain a continuing interest in the combined entity, thus allowing the transaction to qualify as a tax-deferred reorganization. Option B correctly captures the essence of this principle without specifying an exact percentage, which can vary.

Which of the Following Statements Best Describes the Continuity of Interest