Taking into account legal, financial, tax, and other practical considerations, a holding company is the most appropriate acquisition vehicle for this transaction. In light of recent events and Monster’s pending and threatened litigation, TCCC’s highest priority objectives with respect to an acquisition vehicle, include minimizing risk and insulating the company from Monster’s known and unknown contingent liabilities.
On October 17, 2012, Wendy Crossland and Richard Fournier (“Plaintiffs”) filed suit against Monster in a wrongful death action for person injuries allegedly suffered as a result of the December 23, 2011 death of their 14-year-old daughter. Plaintiffs allege that the decedent died “following her ingestion of a toxic amount of caffeine and other stimulants through her consumption of two (2) 24-oz. “MONSTER ENERGY” drinks within a 24-hour period.” Crossland also requested the release of the Food and Drug Administration’s (“FDA”) adverse incident reports, which link Monster energy drinks to five reported deaths.
Additionally, Monster is a named defendant in class action lawsuits, which could result in a multi-million payout for compensatory damages, as well as penalties and fees associated with punitive damages. Furthermore, the company is subject to litigation in the normal course of business, including claims from terminated distributors. Even though Monster claims that such litigation is not likely to have a material adverse effect on the company’s financial position or results of operations, it is impossible to predict the outcome of such litigation. As such, TCCC needs to structure the acquisition of Monster in a risk adverse manner.
Accordingly, TCCC shall adopt a holding company framework to acquire Monster, which will be structured as a C-type corporation (“C-Corp”). The benefits of a C-Corp include the following: (1) shares are easily transferred, (2) shares are easily exchanged, and (3) it facilitates the consolidation with the parent company.
Even though partnerships and joint ventures provide for sharing risk and insulating the acquirer from the target’s liabilities, a holding company is preferred for this transaction. First, TCCC wants effective control over Monster. Second, there is substantial equity in Monster’s brand name and a holding company will be the least disruptive to its current identity. Third, this acquisition vehicle minimizes the reporting requirements to shareholders that would be required if TCCC set up an LLC or LLP.
This acquisition vehicle had potential drawbacks as a holding company structure can create tax problems for shareholders and could subject Monster’s operating earnings to triple taxation. TCCC, however, has structured the deal such that it may be treated as a non-taxable event. Tax related considerations are addressed the following sections.