4. Ambiguities: If you find the facts given to be insufficient to answer a question, state any additional factual assumptions you deem necessary and answer the question as though your assumptions were a part of it. However, do not make the mistake of changing the question by changing the given facts. Some of the necessary facts may be missing; part of your assignment is to identify what additional facts you need, ask for them, and discuss precisely how those additional facts would change your answers and recommendations.
5. Due Date: Your answers to this Final Project are due no later than 5:00 p.m. Friday, December 17, 1999. They must be personally handed to me in my office, Room 545, by that time. They may not be left for me with anyone else, such as my faculty secretary or the security guard or the receptionist, left in my mailbox, e-mailed to me, or delivered in any other manner. I will be in my office on the afternoon of the 17^th; please contact me at (614) 236-6273, (614) 323-8216, or sdaicoff@law.capital.edu to arrange another delivery time.

Graylin Pressley is the general counsel of Viodyne Products, Inc. (Viodyne), a Delaware Subchapter C corporation. She seeks your advice as to the tax consequences and the preferred manner of structuring a proposed acquisition of Datavax Business Systems, Inc. (Data), an Ohio corporation.

Viodyne is a health care corporation that primarily serves as a middleman between doctors and insurance companies paying for medical benefits of their insureds. Viodyne processes insurance claims and manages the payment flows to the individual physicians providing medical services to the insureds. Viodyne handles an incredible number of such claims, for a number of different insurance companies and countless numbers of physicians throughout the United States. Data is a smaller company than Viodyne that provides similar services as Viodyne, just on a much smaller scale. Data also has another, small line of business; it operates a website dedicated to allowing physicians to connect with various insurance companies for the purposes of becoming a "network provider" under the company’s network and assessing the limits of various insurance coverages for various illnesses and conditions.

In a conference with Ms. Pressley, you learn that Viodyne believes that it would enhance its own operations to acquire Data’s business; however, Viodyne is not really interested in acquiring the website business, but is willing to if it is necessary in order to maximize favorable tax consequences of the acquisition. If it does acquire the website portion of Data's business, however, Viodyne is concerned about possible future contingent liabilities arising from the website business. Apparently, Data has engaged in some activities through its website that may have infringed on software copyrights and sold some products through its website in ways that might have violated certain consumer protection laws. Clearly, Viodyne wants to protect its assets against any possible future claims against Data arising from these two situations.

Viodyne’s stock is publicly traded on the New York Stock Exchange. It has two classes of stock outstanding, $1 par value common stock and $10 par value voting preferred stock. Viodyne has many shares of both common and preferred stock which are authorized but unissued. It can issue new shares of either type of stock; however, assume that, due to federal securities laws, any such newly issued unregistered shares cannot be registered or sold by their holders on the stock market until two years after their issuance. Data is a Subchapter S corporation whose stock is privately owned by five individuals, three of whom are related to each other. The other two shareholders are employees of Data. Data’s common stock is held 40% by Sarah True, 30% by her husband, Donald True, and 20% by their son, Noah True. The other 10% is held equally (i.e., 5% each) by two employees of Data, Rob Herbert and Gus Grand. Sarah and Donald are nearing retirement and would prefer to receive cash for their Data stock; Noah intends to continue working in Data’s business and does not have an immediate need for cash. Rob and Gus also intend to continue working in Data’s business, albeit in different areas (see below re: Gus) and thus also do not have immediate needs for cash.

Viodyne’s net worth is about $20M and it has about $2M in cash and marketable securities. Data’s net worth is about $1M, including the website assets. The website portion of Data’s business is worth about $200K. Data has about $160K in marketable securities and cash (i.e., liquid assets). Gus Grand spends about 80% of his time managing and running the website business and would like to continue working in that part of Data’s business. If the website business is not acquired by Viodyne, then Grand will probably dissent from any merger or share exchange proposed between Viodyne and Data (e.g., exercise his state law shareholder dissenters' rights). He will then probably insist on receiving cash in exchange for his Data stock.

Data’s assets (inclusive of the website business assets) consist of $160K of cash and marketable securities (with adjusted basis close to their fair market value), accounts receivable with a zero adjusted basis and fair market value of $200K, contract rights with a zero adjusted basis and a fair market value of $400K, goodwill worth $100K with a zero adjusted basis, and a building and equipment worth $140K with an adjusted basis of $60K (assume $80K in previous depreciation deductions on the building and equipment). Assume that Data has no liabilities.

97 Points: Advise Graylin Pressley of Viodyne as to the various options, taxable and taxfree, for acquiring Datavax and the advantages and disadvantages of each option. Then, make your recommendation as to the best way to accomplish all of Viodyne’s goals. It is possible that no single type of reorganization will satisfy all of Viodyne’s objectives. Even if you ultimately conclude that one type of acquisition is best, please fully discuss the consequences of all other options available for this transaction. Also list any additional facts that you need in order to render more precise advice on this proposed acquisition. Finally, briefly discuss what the purchase price (or, alternatively, full amount of consideration) should be for the acquisition of Data by Viodyne, in each of the feasible alternatives you identify. For this portion, you are limited to twenty typed pages, double-spaced, with one-inch margins top, bottom, and sides, and font no smaller than 12 characters per inch (12 cpi).

3 points: Write (i.e., draft) no more than one, double-spaced, typed page of contractual representations and warranties that you will advise Viodyne to ask Data and its shareholders to make, in order to ensure the desired tax treatment of the acquisition for Viodyne. (This means the kind of undertakings you would add to an acquisition agreement, signed by both parties. It means the promises you will want Data and its shareholders to make to Viodyne, in order to be assured of the tax treatment you are attempting to achieve.) Again, your answer must have one-inch margins top, bottom, and sides, and font no smaller than 12 characters per inch (12 cpi). This part is only worth 3 points; do not overkill this portion of the project.