Explain 302(b)(2)'s requirement of "substantially disproportionate with respect to the shareholder" for a redemption to be...

Explain 302(b)(2)'s requirement of "substantially disproportionate with respect to the shareholder" for a redemption to be treated as an exchange (aka stock ownership testes).

Expert Solution

AS per 302(b)(2), redemption is considered as substantially disproportionate if:

1.Immediately after the redemption the the holding of a shareholder owns less than 50% of the voting power of all other classes of voting stock.

2. a shareholder outstanding proportionate ownership of the voting stock after redemption goes below 80% of the proportionate ownership before such redemption.

Example : Company A has got 1000 Shares of common stock.

These shares are held by 4 brothers B1, B2, B3 & B4 in the ratio of 25% each.

Suppose the Company redeems the shares say 150 from B1, 40 from B2, 20 from B3, 75 from B4, then for a redemption to be said disproportionate for any shareholder, the shareholder must own 80% of 25%, ie 20% less than that before the redemption.

In the above case, if any shareholders holding goes below 250*20% = 50 shares , then the same is said to be substantially disproportionate.

This will squarely apply in the case of B1 and B4 in the above example quoted.

ekkarill92 answered 6 months ago

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