R&A COUNSELS L.L.

P
DATED-09/03/2020

TO:
MR. ANDREAS FIBIG

(CHIEF EXECUTIVE OFFICER AND CHAIRMAN)

INTERNATIONAL FLAVOURS&FRAGRANCES

REPORT ON MORRIS TRUST TRANSACTION

In order to enter into a deal with Dupont De Nemours Inc., you have asked that we provide you
a comparative summary of merger agreement and plan between Dupont De Numours Inc. and
International Flavours and Fragrances. Inc. Dated December 15,2019. While we explained our
analysis on merger agreement you had several doubts regarding morris trust transaction. We
hope that this report will solve all your queries and it helps in taking a rational and calculated
decision.

We hope to serve you in future.

MORRIS TRUST TRANSACTION

In a Morris Trust transaction, a regular tax-free spin-off to shareholders is immediately followed

by a pre-arranged tax-free acquisition by a strategic buyer of the newly spun company (SpinCo).
After the transaction is complete, the so-called "acquirer" has a minority (less than 50%) equity
interest in the combined company.

HISTORY

Reverse Morris trusts originated as a result of a ruling in a lawsuit against the Internal Revenue
Service which created a tax loophole to avoid taxes when selling unwanted assets.

The original Morris Trust structure was the result of a favorable ruling by the United States
Court of Appeals for the Fourth Circuit in 1966 in the case of Commissioner v. Mary Archer W.
Morris Trust. The original Morris Trust structure is similar to the above Reverse Morris Trust
structure. Instead of a former subsidiary merging with a target company, however, the parent
company would merge with the target company.

Often, the sole or primary business purpose for a spin-off is to shed an unwanted business and
thereby facilitate the planned acquisition of a “wanted” business.

In Commissioner v. Mary Archer W. Morris Trust, 697 F.2d 794 (“Morris Trust”), the
distributing corporation (“Distributing”) was engaged in two businesses: banking and insurance.
Distributing transferred the insurance business to a new corporation and spun off the stock of the
new corporation to its shareholders. Distributing then merged, for valid, non-tax business
reasons, with another bank. The court determined that the continuity of stockholder interest
requirement was satisfied because the historic shareholders of Distributing received 54% of the
stock of the merged corporation, and, as a result, the transfer was a nontaxable spin-off. The
perception became that, due to the lack of a continuing interest by the historic shareholders, the
Morris Trust rule was being used as a device to transfer unwanted corporate assets without
incurring a tax at the corporate level.
TRANSACTION STRUCTURE

There are two type of Morris Trust transactions: the Regular Morris Trust and the Reverse
Morris Trust. The latter is the more commonly used structure and involves the seller (ParentCo)
spinning off the assets wanted by the buyer (the wanted assets) into a new company (SpinCo),
which is immediately acquired by the buyer in a tax-free reorganization. In a Regular Morris
Trust, ParentCo spins off the assets not wanted by the buyer (the unwanted assets) into SpinCo,
and the buyer immediately acquires ParentCo (without SpinCo) in a tax-free reorganization.

The Reverse Morris Trust appears to be the more logical structure to accomplish the tax-free
business combination. However, if the net assets wanted by the buyer include liabilities in excess
of the seller's inside basis in those assets, while the unwanted assets do not, the Regular Morris
Trust is a more tax-efficient structure.
WHEN TO USE A REGULAR MORRIS TRUST

Suppose the ParentCo wants to spin off a subsidiary in which the seller's inside tax basis is low
(perhaps the subsidiary was grown organically or acquired in a stock acquisition), and have the
spun business (SpinCo) acquired in a subsequent Morris Trust transaction.

Prior to the spin-off, ParentCo also wishes to delever by "pushing down" debt to the subsidiary.
However, if the amount of debt ParentCo pushes down to the subsidiary exceeds ParentCo's
inside basis in the subsidiary's wanted assets, ParentCo will have a negative inside basis in the
subsidiary just prior to the spin-off. The subsequent spin-off would then be taxable to the extent
that ParentCo's inside basis is negative, and ParentCo would recognize a gain equal in amount to
the negative basis.

However, ParentCo itself is not subject to this negative basis restriction, and may be levered
beyond its basis in the wanted asset basis without adverse tax consequences triggered by a
subsequent spin-off. So, to achieve maximum monetization, ParentCo would instead incur a loan
and spin off the unwanted assets, including the cash borrowings, into SpinCo. The buyer then
acquires ParentCo, along with its new debt, in a Regular Morris Trust. SpinCo is then renamed to
assume the previous corporate identity of ParentCo.

REVERSE MORRIS TRUST

A reverse Morris trust (RMT) is a tax-optimization strategy in which a company wishing to spin-
off and subsequently sell assets to an interested party can do so while avoiding taxes on any
gains from such asset disposal.

The newly merged company holds the unwanted asset, which the parent company has effectively
sold tax-free.

The subsidiary spin-off offers an opportunity to the parent company to raise capital, monetize its
interest in the segment being spun off, and thereby reduce debt. Companies resort to Reverse
Morris Trust deals as they offer the combined benefits of mergers and spin-offs.
MODEL OF REVERSE MORRIS TRUST

The reverse Morris trust starts with a parent company looking to sell assets to a third-party
company. It is a form of organization that allows an entity to combine a subsidiary that was spun
off with a strategic merger or combination with another company free of taxes, provided that all
legal requirements for spinoff are met. The parent company creates a subsidiary, and that
subsidiary and the third-party company merge to create an unrelated company. The unrelated
company then issues shares to the original parent company's shareholders. If those shareholders
control at least 50.1% of the voting right and economic value in the unrelated company, the
reverse Morris Trust is complete. The parent company has effectively transferred the assets, tax-
free, to the third-party company.

The key feature to preserve the tax-free status of a reverse Morris trust is that after its formation,
stockholders of the original parent company own at least 50.1% of the stock by vote and value of
the combined or merged firm. This makes the reverse Morris trust only attractive for third-party
companies that are about the same size or smaller than the spun-off subsidiary.

Also, the third-party company in a reverse Morris trust has more flexibility in acquiring control
of its board of directors and appointing senior management, despite a non-controlling stake in the
trust.

Generally speaking, a Reverse Morris Trust is the preferred structure, absent monetization needs
that call for a Regular Morris Trust, because it is a mechanically simpler transaction that often
avoids state transfer and similar taxes.

EXAMPLE

Procter & Gamble Co. was planning to sell its Pringles line of snacks to Diamond Foods Inc. in a
leveraged, reverse Morris Trust split-off. The Pringles business was to be transferred to a
separate subsidiary which would assume approximately $850 million of debt. The two
companies were unable, however, to finalize the deal and, in February 2012, Procter & Gamble
found another buyer in the Kellogg Company.
Procter & Gamble used a similar transaction structure when it sold Folgers coffee to J.M.
Smucker in 2008. Procter & Gamble used the same transaction structure with the sale of 43 of its
beauty brands on July 9, 2015 to Coty, Inc.

TAX IMPLICATIONS

To qualify for tax-free treatment, the spin-off must meet the conditions of Section 355 described
in our lesson on spin-offs. Specifically, under Section 355(e), known as the anti-Morris Trust
rule, a corporation that distributes stock of a subsidiary to its shareholders in an otherwise tax-
free spin-off recognizes a taxable gain if 50% or more of the vote or value of either the
distributing corporation's stock or stock of the spun subsidiary is acquired as part of a plan that
includes the spin-off. Section 355(e) considers such an acquisition occurring 2 years before or
after the spin-off as "part of a plan". However, if it can be demonstrated that the acquisition and
spin-off were not part of a plan, no such tax will be imposed.

The implication of the anti-Morris Trust rule is that the acquirer must be smaller than the target
company, so that it ends up with a minority (less than 50%) stake in the combined company. If a
potential acquirer is only slightly larger than the target, however, it may be possible to either
shrink the value of the acquirer via a dividend or share repurchase, or increase the value of the
target by shifting leverage to the parent prior to the spin-off.

In any case, the distributing corporation should obtain a private letter ruling from the IRS in
support of tax-free treatment of a contemplated Morris Trust transaction before proceeding with
the transaction.
ANTI-MORRIS TRUST RULES

For a while after that, companies kept implementing this type of tax-dodging transaction, but
Congress moved to eliminate it in 1997 by passing the so-called “anti-Morris Trust” regulations
that specifically closed the loophole. The rules are outlined in Internal Revenue Code Section
355(e) and Treasure Regulations 1.355-7.

Under these rules, a spin-off will be taxable at the corporate level (but potentially not at the
shareholder level) if the distribution is part of a plan (or series of related transactions) pursuant to
which one or more persons acquire 50% or more of the stock of either the distributing company
or the spun-off company.

As a result, while it is still possible to effect a Morris Trust transaction (distributing) or Reverse
Morris Trust transaction (spin-off), the shareholders of the merger partner must receive less than
50% of the stock of the combined company (meaning that the merger partner must be smaller
than the company with which it combines).

VIOLATING THE ANTI-MORRIS TRUST RULE

If SpinCo is acquired following the spin-off in a transaction not satisfying Section 355(e)
requirements, ParentCo recognizes a taxable gain equal to the FMV of SpinCo stock distributed
less ParentCo's outside basis in that stock. On the other hand, if ParentCo is so acquired
following the spin-off, it recognizes a taxable gain equal to the FMV of the assets distributed less
its inside basis in those assets.

In either case, no tax is levied at the shareholder level because the spin-off itself remains non-
taxable. So, even if the anti-Morris Trust rule is violated, there is only one level of tax. Recall
that a taxable spin-off, by comparison, involves two levels of tax. However, if other provisions
of Section 355 are violated by the acquisition, the tax-free nature of the spin-off itself could be
compromised, resulting in two levels of tax.
MORRIS TRUST VS. STRAIGHT SPIN-OFF

From the perspective of ParentCo's shareholders, a Morris Trust business combination is

generally preferable to a straight spin-off because the Morris Trust includes the incremental
benefit of synergies.

WHY AREN'T MORRIS TRUSTS MORE COMMON?

The Morris Trust structure has a clear advantage over straight spin-offs: synergies. So why does
the frequency of spin-offs far exceed that of Morris Trusts? There are a number of reasons.

The difficulty in finding a strategic buyer that is smaller than the target, but not so small as to
make the transaction unfeasible, is a big reason why Morris Trusts are not more common. If a
potential buyer is too small to undertake a Morris Trust transaction alone, it might consider
partnering with a financial sponsor (e.g. private equity investor) to fund the acquisition, but this
adds another layer of complexity to an already complex transaction.

The combined company's board and management team composition may be a sticking point in
negotiations between buyer and seller. The acquirer naturally wants its management team to
remain largely intact and seeks a majority number of board seats because, after all, it is
technically the buyer. From the seller's and/or target's perspective, however, the acquirer is a
minority participant in the combined business with little authority to dictate board or
management team composition.

Additionally, a Morris Trust transaction represents an enormous change in the corporate

structure of the buyer. Even if the deal is expected to be accretive to a prospective buyer's
shareholders, the buyer's management team and/or its shareholders may have serious
reservations about undertaking such a large (relative to the size of the buyer) transaction,
especially when uncertainty surrounds the expected synergies.

Submitted by:

Ritu(16llb095)

Aditya(16llb0)