Berry Global – Amcor Disclosures Cast Doubt on Validity of Tax-Free Spin-Off Ruling

By Stuart E. Leblang, Michael J. Kliegman and Amy S. Elliott

We have written two reports (both appended) regarding the November 4, 2024 spin-off by Berry Global Group, Inc. (NYSE: BERY) (Berry Global) and Berry Global’s subsequent planned acquisition by Amcor plc (NYSE: AMCR) (Amcor).¹  The first focused on the spin-off of a division of Berry Global (HHNF) as part of a Reverse Morris Trust (RMT) merger of Spinco with the Glatfelter Corporation (NYSE: GLT) (Glatfelter) and what we believe to be a private letter ruling by the Internal Revenue Service (IRS) approving the transaction. The second involved the surprising announcement of Berry Global’s agreement for Remainco to be acquired by the larger Amcor just two weeks after consummation of the spin-off, as a result of which Berry Global shareholders would only hold 37 percent of the combined entity.²

In the second report we expressed our assumption that, despite the extraordinarily close proximity between the spin and merger agreement, Berry Global would be able to demonstrate that its Section 355(e) representation in the ruling (discussed below) was valid. However, after having reviewed the proxy statement disclosures regarding the interactions leading up to the merger announcement, we think there are significant doubts about the validity of the IRS ruling and questions about the corporate tax consequences of the spin-off.

Section 355(e),³ often referred to as the Anti-Morris Trust rule, generally provides that where an otherwise qualifying tax-free distribution under Section 355 occurs as part of a plan resulting in the shareholders of the parent corporation not continuing to own a majority of the outstanding stock of both post-spin companies, the parent company will recognize taxable gain on the spin­off. Detailed regulations provide guidance as to the existence of the proscribed plan. On the whole, these are extraordinarily useful and liberal rules.⁴

As we discussed in our October 29, 2024 report, in connection with its IRS ruling request, Berry Global represented that (other than with respect to the RMT transaction covered by the ruling) there were not and would not be⁵ any agreement, understanding, arrangement or substantial negotiations during the two-year period ending on the date of the spin-off regarding an acquisition of either post-spin company.⁶ We noted that this was a more fact-specific representation than the one ordinarily prescribed, which is a more categorical statement that there will not be a transaction resulting in a 50-percent-or-greater change of ownership of either post-spin company that was part of a plan with the spin-off.⁷

Particularly in light of this representation, we stated in our December 27, 2024 report that it must be the case that serious negotiations toward a business combination between Berry Global and Amcor must have begun immediately after the spin-off occurred on November 4, 2024. However, on January 23, 2025, Amcor and Berry Global filed a joint proxy statement to approve the merger, which included an extensive recitation of the discussions and correspondence between the two companies leading up to eventual execution of a merger agreement.⁸ This history strongly contradicts what is contained in the Section 355(e) representation made to the IRS.

The representation’s phraseology is a term of art in the regulations. A key term here is “substantial negotiations,” as to which the regulations provide: “Substantial negotiations in the case of an acquisition . . . generally require discussions of significant economic terms, e.g., the exchange ratio in a reorganization . . . by one or more officers or directors acting on behalf of Distributing or Controlled . . . or by another person or persons with the implicit or explicit permission of one or more of such officers, directors . . . .”⁹

There is lots of evidence that this standard was met prior to the spin-off. To cite just one of the many problematic facts disclosed in the proxy, on October 29, 2024, the Berry Board “directed Mr. Sterrett [Chairman of the Berry Board] to inform Mr. Konieczny [Amcor Interim CEO] that the Berry Board was willing to transact at a fixed exchange ratio of 6.7 shares of Amcor Ordinary Shares for each share of Berry Common Stock in order to deliver to Berry stockholders the equivalent of approximately $74 in value per share of Berry Common Stock . . . .”¹⁰

Leaving aside the substantive question whether the Amcor merger following the spin-off ran afoul of Section 355(e), it seems that there could well have been a breach of the representation in the ruling. Without going deep into IRS procedures, we note that the IRS may retroactively revoke a private letter ruling where there has been a misstatement of controlling facts.¹¹ If the IRS were to revoke the ruling, it would presumably only be with respect to the ruling that the distributing corporation does not recognize gain or loss on the spin-off. Other rulings, especially nonrecognition to the shareholders, would presumably remain in place.

We should note a few things regarding the ruling. One, we do not know for sure that the private letter ruling to which we have referred in our three reports was issued with respect to the Berry Global spin-off. Our educated guess has been that it is, and that guess is shared by other commentators.¹² Second, the ruling, released to the public on October 11, 2024, was issued back on July 5, 2024, before discussions commenced between Berry Global and Amcor. It is quite possible that Berry Global’s counsel has subsequently sought a supplemental ruling from the IRS that takes into account the facts regarding pre-spin negotiations regarding the Amcor merger that occurred after issuance of the ruling. Such a supplemental ruling request might seek to voluntarily withdraw the corporate nonrecognition/355(e) aspect of the ruling or might possibly make alternative arguments as to why Section 355(e) should not apply. Given the lag of three months or longer between issuance of a ruling and its release to the public, it is quite possible that a supplemental ruling may have been issued, to which we do not yet have access.

And that brings us to the merits of the main question, whether Berry Global’s planned merger with Amcor that was substantially negotiated before consummation of the November spin-off will require Berry Global to recognize gain on the spin-off under Section 355(e). From an outside investor’s standpoint, there has been no disclosure of this risk by Berry Global, including listing of risk factors in the proxy statement. It is very possible that management evaluated the risk and potential cost of this tax against the benefits of the Amcor transaction and both companies decided it was it was an acceptable cost to bear.

Berry Global’s circumstances do not come within any of the Section 355(e) regulation’s safe harbors. We note that it has been common practice when considering possible business combinations with either Remainco or Spinco following a tax-free spin-off to wait a “respectable” period of time following consummation of the spin-off before commencing serious discussions about a deal.¹³ Outside of a safe harbor, we are told that the question of there being a “plan” requires a look at all facts and circumstances, weighing listed factors indicating existence of a plan against factors weighing against a plan. Where an acquisition occurs following a spin-off, an agreement, understanding, arrangement or substantial negotiations regarding the acquisition or a similar acquisition during the two years prior to the spin is the first listed plan factor, and the weight accorded to this depends on the nature, extent and timing of the agreement, etc. Further, if an agreement, understanding or arrangement regarding such acquisition exists at the time of the spin, then such factor is to be given “substantial weight.”¹⁴

There are two non-plan factors listed that are relevant here. One is that the spin-off was motivated by a business purpose other than to facilitate the acquisition or a similar acquisition.¹⁵ The second, which we find more forceful, is that the distribution would have occurred at approximately the same time and in similar form regardless of the acquisition.¹⁶ In fact, the regulation states that while pre-spin negotiations tend to show there is a plan, where the spin-off is motivated by a business purpose not involving the acquisition, and the spin-off would have occurred “at approximately the same time and in similar form regardless of whether the acquisition or a similar acquisition was effected, . . . the taxpayer may be able to establish that the distribution and the acquisition are not part of a plan.”¹⁷

We will be surprised if the IRS ends up issuing an updated “no-355(e) problem” ruling after being exposed to the facts of the pre-spin negotiations, but it would be an interesting prospect if they did.¹⁸ We think it more likely that Berry Global, and ultimately Amcor, will end up relying on an opinion of counsel on the issue, and take their chances on examination of the corporate return down the road.¹⁹

For the rest of us, we will look for a revocation or supplemental ruling on Section 355(e), and in any case, need to consider whether the Overton window regarding post-spin acquisitions has moved from six months after the spin to any time following public announcement. Importantly, many of us have looked to the Section 355(e) “plan” criteria as being relevant to consideration of post-spin sales as to the “device” and continuity of interest requirements. It will be an interesting question whether, if deciding to actively negotiate a sale while a spin-off is pending is permissible under Section 355(e), it is similarly permissible when considering whether the spin-off is a “device” that would preclude tax-free Section 355 status.

One or more authors may have positions in stocks referred to in this article. Akin Gump may represent individuals or entities that may have positions in stocks referred to in this article.

Akin Gump Strauss Hauer & Feld LLP has a full tax team closely following developments in this area. Please feel free to contact any of them with any questions.

^{1 “IRS Rules on Glatfelter-Berry Global RMT Transaction” (Oct. 29, 2024) and “Berry Global to Combine with Amcor in Un-‘Planned’ Post-Spin Transaction” (Dec. 27, 2024).}

^{2 Joint Press Release, AMCOR and BERRY GLOBAL, Amcor and Berry Global Shareholders Overwhelmingly Approve Combination (Feb. 26, 2025) (https://ir.berryglobal.com/news-releases/news-release-details/amcor-and-berry-global-shareholders-overwhelmingly-approve).}

^{3 IRC §355(e).}

^{4 Treas. Reg. §1.355-7.}

^{5 The private letter ruling was dated July 5, 2024, and was based on taxpayer submissions to the IRS dated March 28, 2024; May 9, 2024; and June 14, 2024.}

^{6 The full text of the representation, in LTR 202441010 (https://www.irs.gov/pub/irs-wd/202441010.pdf), is: “Except as described in the Proposed Transaction and the Substantial Negotiations, there was not and will not be any agreement, understanding, arrangement, or substantial negotiations at any point during the two-year period ending on the date of the distribution regarding an acquisition of either Internal Distributing or Controlled (including a predecessor or successor within the meaning of Treas. Reg. § 1.355-8) or a similar acquisition.”}

^{7 The standard §355(e) representation (no. 29 from Rev. Proc. 2017-52) is: “Stock representing a 50-percent or greater interest (within the meaning of §355(d)(4)) in Distributing or Controlled (including a predecessor or successor within the meaning of §1.355-8T (or successor regulations)) will not be acquired by any person or persons in a plan or series of related transactions (within the meaning of §1.355-7) that includes the Distribution.”}

^{8 BERRY GLOBAL, Definitive Proxy Statement (Schedule 14A), see “Background of the Merger,” beginning on page 47 (Jan. 23, 2025) (https://www.sec.gov/Archives/edgar/data/1378992/000110465925005608/tm254177-1_defm14a.htm).}

^{9 Treas. Reg. §1.355-7(h)(1)(iv).}

^{10 Supra, note 8 at 55.}

^{11 Rev. Proc. 2025-1, §11.05 (https://www.irs.gov/irb/2025-01_IRB#REV-PROC-2025-1).}

^{12 See Jasper Cummings, Sleuthing Morris Trust Transactions, TAX NOTES (Jan. 29, 2025) and Robert Willens, Is Two Weeks Enough to Separate a Spinoff From an Acquisition, TAX NOTES (Feb. 3, 2025).}

^{13 Safe Harbor I is most often referred to, generally requiring at least a six-month wait post-spin plus no substantial negotiations during the one year prior to and the six months following the spin (Treas. Reg. §1.355-7(d)(1)).}

^{14 Treas. Reg. §1.355-7(b)(3)(i).}

^{15 Treas. Reg. §1.355-7(b)(4)(v). Interestingly, though the spin-off was in fact to facilitate an RMT transaction involving Spinco, this would not be considered a “similar acquisition” under the regulation (Treas. Reg. §1.355-7(h)(12)).}

^{16 Treas. Reg. §1.355-7(b)(4)(vi).}

^{17 Treas. Reg. §1.355-7(b)(2).}

^{18 We disagree with a commentator who wrote about the issue and stated the view that there is little risk on Section 355(e), relying on Rev. Rul. 2005-65 (https://www.irs.gov/pub/irs-drop/rr-05-65.pdf), which involved a merger that occurred after announcement but prior to (this is a significant difference) consummation of the spin-off. The facts of that ruling are nearly the same as in Safe Harbor V (Treas. Reg. §1.355-7(d)(5)), which also involved a pre-spin merger, except that in the ruling, the CEO of the outside merger partner became CEO of the distributing corporation, which is not allowed under the regulation’s safe harbor. We do not find this ruling very relevant here. See Robert Willens, Berry Global Group’s Spinoff Is Not in Jeopardy, TAX NOTES (Feb. 4, 2025).}

^{19 Because Berry Global is a September year-end company, we do not yet have an audited financial statement that might give a clue as to whether, from an accounting standpoint, it is providing a reserve for this issue. We do, as noted above, see that it is not mentioned among the risk factors in the proxy statement. We will see during the next few months whether there is a supplemental ruling and/or a revocation of the ruling. Our guess is that the company obtained a strong enough opinion of tax counsel on the Section 355(e) issue to allow them to avoid providing for the corporate tax in its financial statements. We also note that with a strong opinion, tax insurance would likely be available. Even if insurance were purchased, it would not, in itself, eliminate the need to provide for the tax in the financial statements.}