Grubhub Sale Unlikely to Disqualify Prior Tax-Free Merger

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

Grubhub Sale Unlikely to Disqualify Prior Tax-Free Merger

News reports indicate that Just Eat Takeaway.com NV (LSE:  JET; AMS:  TKWY) (Just Eat Takeaway) is considering selling Grubhub in the wake of disappointing results for the recently acquired U.S. subsidiary.^[1]This is remarkable news in light of the fact that Just Eat Takeaway only completed the $7.3 billion^[2]acquisition^[3]of Grubhub Inc. less than a year ago, in June of 2021.^[4]This follows pressure that began shortly after the acquisition from Just Eat Takeaway investor Cat Rock Capital Management LP (Cat Rock) to divest all or part of Grubhub.^[5]In an April 25, 2022 open letter to shareholders in advance of the May 4, 2022 annual general meeting, Cat Rock wrote that Just Eat Takeaway “management made a capital allocation mistake when it decided to buy Grubhub in June 2020 with minimal synergies only two months after tripling the Company’s size with the Just Eat acquisition.”^[6]In an October 25, 2021 letter to the board of directors, Cat Rock specifically called for Just Eat Takeaway to dispose of Grubhub either “through a sale, or, if necessary, through a spin-off that could be an effective precursor to a future sale.”^[7]

We wrote about the transaction early on in a June 26, 2020 report (which is appended),^[8]and, as we suggested, the all-stock transaction was intended to qualify as a tax-free reorganization for U.S. tax purposes.^[9]One of the requirements for a merger to qualify as a reorganization is satisfaction of the continuity of business enterprise (COBE) rules.  Those rules generally require that the acquiring company continue the target corporation’s business, such that a disposition of the historic business conducted by the target corporation that occurs as part of the plan of reorganization may disqualify the transaction from reorganization treatment.^[10]

Would a divestiture by Just Eat Takeaway of its recently-acquired Grubhub subsidiary call into question whether the merger was disqualified from tax-free treatment for failure to satisfy the COBE requirements?  We think the answer should be no, for either of two reasons.  One, the COBE regulations indicate that “[t]he fact [the acquirer] is in the same line of business as [the target] tends to establish the requisite continuity, but is not alone sufficient.”^[11]With the core strategic business of Just Eat Takeaway being online food delivery, we think it would be treated as continuing the business of Grubhub, notwithstanding the “not alone sufficient” language in the regulations.  Nevertheless, given the fact that, without Grubhub, Just Eat would not be operating in the United States, this may be a weaker argument than where the acquirer was already operating in the same geographic market.

Second, the continuity requirement is tied to what is planned in connection with the reorganization transaction, and even a hostile Internal Revenue Service agent would presumably not suggest that Just Eat went to the trouble to acquire Grubhub while harboring a plan to turn around in short order and dispose of it.

^{[1] Ivan Levingston, Just Eat Weighs Grubhub Sale in Tough Food Delivery Market, Bloomberg, April 20, 2022 (https://www.bloomberg.com/news/articles/2022-04-20/just-eat-takeaway-considers-selling-grubhub-as-sales-slump).}

^{[2] Kate Conger, Adam Satariano and Michael J. de la Merced, Just Eat Takeaway to Acquire Grubhub for $7.3 Billion, N.Y. Times, June 10, 2020 (https://www.nytimes.com/2020/06/10/technology/uber-grubhub-just-eat.html).}

^{[3] The acquisition was effected by way of a merger in which Old Grubhub was merged with and into Checkers Merger Sub II, Inc., the separate corporate existence of Old Grubhub ended and Checkers Merger Sub II, Inc. changed its name to Grubhub Inc.}

^{[4] Press Release, Grubhub, Just Eat Takeaway.com completes acquisition of Grubhub (June 15, 2021) (https://www.prnewswire.com/news-releases/just-eat-takeawaycom-completes-acquisition-of-grubhub-301312124.html).}

^{[5] Takeaway.com shareholder repeats call to divest Grubhub, REUTERS, Nov. 10, 2021 (https://www.reuters.com/business/takeawaycom-shareholder-repeats-call-divest-grubhub-2021-11-10/).}

^{[6] Press Release, CAT ROCK, Cat Rock Capital Issues Open Letter to Just Eat Takeaway.com (‘JET’) Shareholders (April 25, 2022) (https://www.businesswire.com/news/home/20220424005055/en/Cat-Rock-Capital-Issues-Open-Letter-to-Just-Eat- Takeaway.com-%E2%80%9CJET%E2%80%9D-Shareholders).}

^{[7] Press Release, CAT ROCK, Cat Rock Capital Sends Letter to Just Eat Takeaway.com (‘JET’) Board Urging Sale or Spin-Off of Grubhub by End of 2021 (Oct. 25, 2021) (https://www.businesswire.com/news/home/20211025005332/en/Cat-Rock-Capital- Sends-Letter-to-Just-Eat-Takeaway.com).}

^{[8] “Just Eat Takeaway to Acquire Grubhub in All-Stock Deal” (June 26, 2020).}

^{[9] This is indicated in the recitals to the Agreement and Plan of Merger, dated as of June 10, 2020, which is an annex to the Grubhub definitive proxy statement (http://edgar.secdatabase.com/179/114036121016935/filing-main.htm#tANNEXA1).}

^{[10] Treas. Reg. §1.368-1(d).  It is likely that the legal opinion concluding that the acquisition qualified under the reorganization rules was based on a representation that Just Eat intended to continue the business of Grubhub.}

^{[11] Treas. Reg. § 1.368-1(d)(2)(i).}