1 Nov. 2019
To the Manager, Mr. B
Re: Section 351 control requirement in relation to your exchange with Mr. S
Dear Mr. B:
This letter is written in response to your question on Section 351 of control requirement in relation to your exchange with Mr. S. After selling half of your stock for Notorious Corporation to Mr. S, he has received a higher percentage of ownership, but there are still some issues regarding the control. The decision to sell a substantial stock of Notorious Corporation to Mr. S effectively gives him a controlling stake in this business. In this regard, Under Section 351 control requirement, it is stated that the major stockholder will gain control in ownership regardless of who paid more for the stock (Cornell University Law School). The code does not recognize loss or gain in the stock transfer procedure, and thus the main concern is on who owned more than 80% of the company’s stock. This is the main factor that will be addressed in this case. Furthermore, please allow me to state that we truly appreciate your decision to retain our services in handling this matter.
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First, it was noted that the exchange with Mr. S was conducted pursuant to a binding agreement that had been concluded before the transaction was made. This means that the role of this agreement in the conclusion of the transaction with Notorious Corporation cannot be excluded completely. The fact that you, Mr. B owned 90% of the stock prior to your exchange with Mr. S gives you a full control over the organization immediately after the stock exchange. The company thus effectively is under your control up to this point. The Sections 351 and 368 both recognize the percentage of stock owned over the value of property exchanged for it (Cornell University Law School). The basic rule is that loss and gain are not recognized when transferred in exchange for stock in a corporation. This means that both you and Mr. S are considered as equal transferors who had something to offer. Besides, the value of their offers is decided upon by the corporation whose stock they were given in exchange for the property that was transferred. In this case, you got the larger portion of the stock and that automatically puts you in control.
According to the Section 351 of control requirements, the person or persons with over 80% stock of the corporation at hand takes the control over it. This means that prior to your transaction with Mr. S you were completely in control once the corporation was passed to the new stock owners. At this point, it is important to appreciate that there has so far not been any point or context in which Mr. S owned more than 80% of the company stock. Even with half of your stock, he only has 55% of the company stock, and this is way below the required 80%. This effectively excludes the exchanges from qualifying under section 351 of control requirements. The transferors may have transferred half of their stock but they did not transfer the control. This means that you solely and strongly remain the control in your hands unless you are willing to sell the rest of your stock, so that Mr. S can have at least 80% of them. Alternatively, you could seek to repurchase the stock from Mr. S in order to retain control over the corporation.
In case you have any more questions or concerns regarding this subject or any other, please feel free to contact me stating the issues that you would want us to explore. This will give us an opportunity to ameliorate the outstanding problems canvased above before our client escalates the matter to different the adjudicatory levels. We can also arrange a meeting so that I can further elaborate the contents of this letter in person if you please.
Rajf, Sundale & Sundale Incorporated