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During the past year, oil prices have been at an all time low,
sending some countries such as Russia, who rely on oil revenue, to
experience difficult economic conditions due to serious drops in the
value of their currency. But countries like Russia are not the only
victims that are harmed by lower oil prices. Oil companies revenues
are also negatively impacted. In reaction, corporations take measures
to lower losses as well as increase revenue in the future by taking on
mergers with leaders in the energy industry. In 1999 during the last oil
crisis, Exxon merged with Mobil to create the largest merger in the oil
industry. Today Royal Dutch Shell is acquiring British Gas Group in a
merger that is comparable in size to the Exxon-Mobil merger.
Royal Dutch Shell is a leading oil corporation, headquartered in
the Netherlands and incorporated in the United Kingdom.

Shells

Primary purpose of business involves crude oil and natural gas. With
thousands of employees in 70 countries and territories, it is one of the
largest oil corporations and is considered the acquiring corporation in
this merger.

The target corporation is BG Group, a world leader in

natural gas abstraction as well as specializing in liquefied natural gas,

an important asset to Royal Dutch Shell. BG Groups website state,
Most of our sales contracts can be supplied from any of our LNG
sources. In 2017, we will be the largest contracted supplier to China,
1 For tax purposes as well as this paper, both of these corporations will
be considered incorporated in the United States.
2 "Our Business." Shell. N.p., n.d. Web. 20 May 2015. <http%3A%2F
%2Fwww.shell.com%2Fglobal%2Faboutshell%2Four-business.html>.

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the worlds fastest-growing LNG market. We have also delivered to 26
of the 27 countries that currently import LNG.

This means that BG

Group natural gas fields can be considered potential cash cows with
contracts already set up in a country with the second largest
population and largest reliance on natural gas.
Shell is essentially looking to increase its revenue and income to over
come the oil downturn as well as tap a new market for the corporation
of liquefied natural gas or LNG before competitors catch wind of it.
Stated in a video/short piece about LNG, it is a growing energy source
as there is a growing world population with an ever-increasing need for
clean burning energy.

By tapping into this market early, Royal Dutch

Shell could reap the benefits of large earnings in the future. This
justifies the 52% premium that they are paying for the leader in LNG
extraction and exportation, BG Group.
But what does that premium mean to BG shareholders? Shell will
be giving the shareholders of the BG Group cash and stock per share
held. Each share held in BG Group a shareholder will be compensated .
4454 class b Shell stock as well as 3.83 British Pounds or 6.03 USD in
exchange. BG shareholders give up all of their original stocks and the

3 "BG Group at a Glance." BG Group. N.p., n.d. Web. 20 May 2015.

<http://bg-group.com/21/about-us/bg-group-at-a-glance/>.
4 "What Is LNG?" Shell. N.p., n.d. Web. 20 May 2015. <http%3A%2F
%2Fwww.shell.com%2Fglobal%2Ffuture-energy%2Fnatural-gas
%2Fliquefied-natural-gas%2Fwhat-is-lng.html>.

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Target Corporation will transfer BG Group assets to Shell.

These

circumstances qualify this transaction as a type A reorganization under

368 (1)(A). However, this might considered be tax-free or there
might be gain triggered from the boot (cash) as well as the 52%
premium paid to BG Group shareholders on their original shares held in
BG Group? Under Treasury Regulation 1.368-1 there are two specific
provisions that must be meant in order for the reorganization to be taxfree as well as absent of any gain or loss recognized. First, at least
40% of the value of the total consideration paid to shareholders must
be in the form of stock of the Acquiring Corporation. Meaning that
nonstick consideration or boot cannot exceed 60% of the total
consideration. If the boot does however exceed the 60% threshold, it
will not be considered tax-free and gain may be recognized on the boot
received.

6 7

In our case, Shell-BG, the boot of just a bit over 6 USD is not over the
60% threshold and will not be a trigger of gain recognized even though
it is in fact considered boot. Moreover, there might be a question as to
the value of the Acquiring class B stock valued at about 10 USD over
the value of the Target stock. While the stock value may not be
5 Melville, Toby. "Shell to Acquire BG Group for $70bn, Biggest Deal in
10 Yrs." RT Business. N.p., 8 Apr. 2015. Web. 20 May 2015.
<http://rt.com/business/247741-shell-bg-merge-acquisition/>.
6 Treas. Reg. 1.368-2. All regulations are cited as in effect on January
1, 2012.
7 Schler, Michael L. "Basic Tax Issues in Acquisition Transactions."
TAXABLE OR TAX-FREE TRANSACTION? (1999): n. pag. Penn State Law
Review. Penn State. Web. 20 May 2015.

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equivalent in value, there is one important fact to understand why gain
will not be recognized here, that is the shareholders are exchanging a
substantial portion of their investment in BG shares for Royal Dutch
Shell shares, a non-taxable transaction under code section 368(a)(1).
Moreover, not only will the target and acquiring corporations
benefit from this merger but also will those that bet on it that is as long
as future predictions occur. Typically, the share price of the acquiring
company is higher than the share price of the target company. The
share price of the target company will usually rise when the merger is
announced, and the share price of the acquiring company will often
fall. However, this strategy will make money even if the share price of
the acquiring company rises, as long as it doesn't rise as much as the
share price of the target company (so the gap between the two share
prices narrows). The strategy can also make money if the market
reacts badly to the news and the share prices of both the target and
the acquiring company fall, as long as the acquiring company share
price falls more rapidly (so the gap between them narrows).

Even

though all that has been talked about was positive in nature, there are
downsides to a type A reorganization that cannot be avoided.
Under Treasury Regulation 1.368-2, which states definition of terms,
also outlines the requirements of the reorganizations. Under this
8 FLETCHER, LAURENCE. "Merger Surge Tempts Hedge Funds to Make a
Bet." WSJ. N.p., 27 Apr. 2015. Web. 20 May 2015.
<http://www.wsj.com/articles/merger-surge-tempts-hedge-funds-tomake-a-bet-1430134205>.

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definition, all liabilities must be absorbed by the acquiring corporation,
hidden or not, in order for the reorganization to be tax-free.

For BG,

there are a few hidden liabilities that could cost Shell gas fields in the
Central Asia. In BGs 2014 report, there is an agreement between
Kazakhstan and BG Group stating that in the event of change of
ownership at BG, the Kazakhstan government has the right to claim
the gas fields previously owned by BG, eliminating a very large cash
cow that Shell is looking to take over. Shell executives seemed
confident that it would have no trouble getting the rights and receiving
the necessary approvals.

10

With this move forward confidence, Shell

is hopeful on the tax-free reorganization that will reduce losses and

increase future income.
Under Code section 368 (1)(A), this is a statutory merger or type A
reorganization, defined under treasury regulation 1.368-2. Meaning
that there is an acquiring corporation and a target corporation, where
the target corporation shareholders give up original shares in the
target for acquiring shares as well as boot. The target corporation no
longer continues business and transfers assets and liabilities over to
the acquiring corporation. In order to be a tax-free reorganization, the

9 Treas. Reg. 1.368-2. All regulations are cited as in effect on January

1, 2012.
10 WILLIAMS, SELINA. "BG Merger Could Cost Shell a Huge Kazakhstan
Oil Field." MarketWatch. WSJ, 18 May 2015. Web. 20 May 2015.
<http://www.marketwatch.com/story/bg-merger-could-cost-shell-ahuge-kazakhstan-oil-field-2015-05-18>.

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treasury regulations state that the stock consideration given to the
target shareholders must be at least 40% of the total consideration. If
the non-stock consideration or boot exceeds 60%, there is gain
triggered and the reorganization is not considered tax-free and is
instead looked upon as a sale of assets and liabilities. Royal Dutch
Shell being the acquiring corporation and BG Group being the target
corporation. I believe that all the requirements are met in order for
this transaction to be tax-free. A chart will be provided below with a
picture description of the Type A reorganization.

Bibliography
"BG Group at a Glance." BG Group. N.p., n.d. Web. 20 May 2015.
<http://bg-group.com/21/about-us/bg-group-at-a-glance/>.
FLETCHER, LAURENCE. "Merger Surge Tempts Hedge Funds to Make a
Bet." WSJ. N.p., 27 Apr. 2015. Web. 20 May 2015.
<http://www.wsj.com/articles/merger-surge-tempts-hedgefunds-to-make-a-bet-1430134205>.
I.R.C. 368(a)(1), (b); Treas. Reg. 1.368-1(b), -2(b)(1)(i)(B), -2(b)(1)
(ii).

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Melville, Toby. "Shell to Acquire BG Group for $70bn, Biggest Deal in 10
Yrs." RT Business. N.p., 8 Apr. 2015. Web. 20 May 2015.
<http://rt.com/business/247741-shell-bg-merge-acquisition/>.
"Our Business." Shell. N.p., n.d. Web. 20 May 2015. <http%3A%2F
%2Fwww.shell.com%2Fglobal%2Faboutshell%2Fourbusiness.html>.
Schler, Michael L. "Basic Tax Issues in Acquisition Transactions."
TAXABLE OR TAX-FREE TRANSACTION? (1999): n. pag. Penn
State Law Review. Penn State. Web. 20 May 2015.
Treas. Reg. 1.368-1(e)(1), (2)(v) ex.1. All regulations are cited as in
effect on January 1, 2012.
"What Is LNG?" Shell. N.p., n.d. Web. 20 May 2015. <http%3A%2F
%2Fwww.shell.com%2Fglobal%2Ffuture-energy%2Fnatural-gas
%2Fliquefied-natural-gas%2Fwhat-is-lng.html>.
WILLIAMS, SELINA. "BG Merger Could Cost Shell a Huge Kazakhstan Oil
Field." MarketWatch. WSJ, 18 May 2015. Web. 20 May 2015.
<http://www.marketwatch.com/story/bg-merger-could-costshell-a-huge-kazakhstan-oil-field-2015-05-18>.

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BG Group
Assets

Royal Dutch
Shell

British Gas
Group
.4454 Class B
.4454 Class B StockStock and 3.83
and 3.83 British
British Pounds or
Pounds or 6.03 USD6.03 USD

BG Group
Shares

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BG Group
Shareholders