Exhibit 8.1
[ ], 2003
[ ]
Community Bank System, Inc.
5790 Widewaters Parkway
DeWitt, New York 13214-1850
Dear [ ]:
You have requested our opinion regarding certain Federal income tax consequences
of a merger involving Grange National Banc Corporation ("Target"), and Community
Bank System, Inc. ("Acquiring"), pursuant to an Amended and Restated Agreement
and Plan of Merger (the "Agreement") dated as of June 7, 2003, by and between
Target and Acquiring.
In connection with the rendering of this opinion, we have reviewed (1) the joint
proxy statement/prospectus dated [ ] (the "Proxy Statement"), (2) the
Registration Statement on Form S-4 filed with the Securities and Exchange
Commission on [ ] by Acquiring (the "Registration Statement"), and (3) the
Agreement. In addition, we have relied upon representations made by Acquiring
and Target in their representation letters dated [ ] (the
"Representations"). We have not independently verified the accuracy or
completeness of such information. Capitalized terms not otherwise defined in
this letter shall have the meaning set out in the Registration Statement or the
Agreement.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name in the prospectus forming a part of the
Registration Statement. In giving such consent we do not thereby concede that we
are within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations promulgated
thereunder.
Unless otherwise indicated, all section ("Section" or "Section") references are
to the Internal Revenue Code of 1986, as amended (the "Code" or "I.R.C."), and
the regulations promulgated thereunder (the "Regulations" or "Treas. Reg.").
All references to the "IRS" and the "Service" are to the Internal Revenue
Service.
BACKGROUND
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Acquiring is a publicly held bank holding company that was organized in Delaware
in April 1983. Community Bank, N.A. ("Community Bank") is a national banking
association that is wholly owned by Acquiring.
As of the date of the Agreement, the authorized capital stock of Acquiring
consists of 500,000 shares of preferred stock, par value $1.00 per share, none
of which was issued and outstanding; and 20,000,000 shares of common stock, no
par value, of which 13,036,634 shares were issued and outstanding and no shares
were held in Treasury. All outstanding common stock is publicly traded.
Target is a financial holding company organized in Pennsylvania and engaged in
an ongoing business. Grange National Bank ("GNB") is a national banking
association and the principal banking subsidiary of Target.
As of the date of the Agreement, the authorized capital stock of Target consists
of 1,000,000 shares of preferred stock, par value $5.00 per share, of which no
shares were issued and outstanding; and 5,000,000 shares of common stock, of
which 1,635,985 shares were issued and outstanding and 82,754 shares were held
in Treasury. An aggregate of 244,042 shares of Target common stock are reserved
for existing and future grants under the Stock Option Plans, pursuant to which
options to purchase a total of 192,620 shares of common stock are issued and
outstanding on the date of the Agreement (of which options to purchase an
aggregate of 186,606 shares are currently exercisable). Except for such options,
there are no outstanding options, warrants, commitments or any similar rights in
existence for the purchase of, or which encumber in any way, Target's common
stock. All of Target's outstanding common stock is traded in the
over-the-counter market.
PROPOSED REORGANIZATION
For what are represented to be valid business reasons as set forth in the Proxy
Statement, Acquiring proposes to acquire Target in a transaction described in
the Agreement summarized below.
1. On [ ] 2003, Target will merge with and into Acquiring, with Acquiring
being the surviving entity, in accordance with the terms of the Agreement,
which constitutes a plan of reorganization, applicable provisions of The
National Bank Act, and the laws of the states of Delaware and Pennsylvania
(the "Merger").
2. Pursuant to the Merger, the separate corporate existence of Target will
cease. Acquiring will acquire substantially all of the assets and will assume
all of the liabilities of Target.
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3. On the Effective Date of the Merger, the nondissenting shareholders of Target
will be entitled to receive either (i) shares of Acquiring based upon the
Exchange Ratio determined in the Agreement ("All Stock Election"); (ii) cash,
at the rate of $42.50 for each share of Target stock ("All Cash Election");
or (iii) shares of Acquiring equal to 70% and cash equal to 30% of the
aggregate number of Target shares held by a shareholder ("Mixed Election").
4. If holders of more than 45% of Target shares make the All Cash Election or
dissent to the Merger, the number of shares otherwise entitled to cash
consideration pursuant to the All Cash Election will be reduced pro rata and
added to the number of shares entitled to stock consideration so that
aggregate cash consideration does not exceed 45% of the entire merger
consideration.
5. If holders of fewer than 30% of Target shares elect to receive cash, the
number of shares otherwise entitled to all stock consideration would be
reduced pro rata and added to the number of shares entitled to the all cash
consideration so that the aggregate cash consideration is at least 30% of the
entire merger consideration.
6. Dissenting shareholders of Target who perfect their rights will be entitled
to receive cash from Acquiring equal to the fair market value of their shares
of Target.
7. Subsequent to the Merger, GNB, which will have become a wholly owned
subsidiary of Acquiring, will merge into Community Bank under the laws of the
State of Delaware, with Community Bank continuing as the surviving bank.
REPRESENTATIONS
The following representations have been made in connection with the proposed
transaction:
1. The fair market value of the Acquiring common stock, cash, or combination
thereof received by each shareholder of Target will be approximately equal
to the fair market value of the Target common stock surrendered in the
exchange. The formulas set forth in the Agreement for the exchange of
Acquiring shares for Target stock, and the other terms of the Agreement, are
the results of arm's-length bargaining.
2. The Merger will qualify as a statutory merger under Federal and Delaware and
Pennsylvania State law.
3. Acquiring has no plan or intention to reacquire any of its stock issued in
the Merger.
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4. Acquiring has no plan or intention to sell or otherwise dispose of any of
the assets of Target acquired in the transaction, except for dispositions
made in the ordinary course of business or transfer described in Section
368(a)(2)(C) of the Code.
5. The liabilities of Target to be assumed by Acquiring and the liabilities, if
any, to which the transferred assets of Target are subject, were incurred by
Target in the ordinary course of its business.
6. The Merger is being undertaken for valid non-tax business reasons, including
[ ].
7. Following the Merger, Acquiring will continue the historic business of
Target or use a significant portion of Target's historical business assets
in a business.
8. Acquiring, Target and the shareholders of Target will each pay their
respective expenses in connection with the Merger.
9. There is no intercorporate indebtedness existing between Acquiring and
Target that was issued, acquired, or will be settled at a discount.
10. No two parties to the transaction are investment companies within the
meaning of Section 368(a)(2)(F)(iii) and (iv) of the Code.
11. Target is not under the jurisdiction of a court in a Title 11 or similar
case within the meaning of Section 368(a)(3)(A) of the Code.
12. The fair market value of the assets of Target transferred to Acquiring in
pursuance of the Merger equals or exceeds the sum of (a) the liabilities
assumed by Acquiring, plus (b) the amount of liabilities, if any, to which
the transferred assets are subject.
13. Under the terms of the Agreement, at least 50 percent of the fair market
value of the total consideration issued to Target shareholders will consist
of Acquiring stock.
OPINIONS
On the basis of the facts and representations set forth above, it is our opinion
that:
1. The merger of Target with and into Acquiring will qualify as a tax-free
reorganization within the meaning of Section 368(a)(1)(A) of the Code; Target
and Acquiring will each be a "party to a reorganization" within the meaning
of Section 368(b) of the Code.
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[ ], 2003
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2. No gain or loss will be recognized by Target shareholders who receive solely
shares of Acquiring common stock in exchange for their shares of Target
common stock (Section 354(a)(1)).
3. To the extent Target shareholders receive cash in exchange for their shares
of Target common stock, gain, if any, will be recognized but not in excess of
the cash received (Section 356(a)(1)). If Target has current and accumulated
earnings and profits and the exchange has the effect of a distribution of a
dividend, then the amount of gain recognized that is not in excess of the
ratable share of undistributed earnings and profits of Target will be treated
as a dividend (Section 356(a)(2)).
4. To the extent Target shareholders receive solely cash in exchange for their
shares of Target common stock and as a result hold no Acquiring stock post
Merger, they be will be treated as having a complete termination of interest
in Target. The cash received by such shareholders will be treated as a
distribution in full payment in exchange for Target stock (Section
302(b)(3)). As provided in Section 1001, gain will be realized and recognized
by such shareholders to the extent of the difference between the redemption
price and the adjusted basis of the Target stock surrendered.
5. No gain or loss will be recognized by Target as a result of the Merger
(Section 361(a)).
6. No gain or loss will be recognized to Acquiring upon the Merger (Section
1032(a)).
7. The aggregate tax basis for Acquiring shares received by each Target
shareholder in the transaction will be the same as the aggregate tax basis of
the Target shares held by each such Target shareholder immediately prior to
the Merger, decreased by the amount of cash received by the shareholder and
increased by the amount of gain recognized by the shareholder on the exchange
(Section 358(a)(1)).
8. The holding period of Acquiring shares received by each Target shareholder in
the transaction will include the period during which the Target shares
surrendered in exchange therefor were held (provided such Target shares were
held as capital assets on the Effective Date) (Section 1223(1)).
9. The tax basis of the assets of Target acquired by Acquiring will be the same
as the tax basis of such assets in the hands of Target immediately prior to
the Merger (Section 362(b)).
10.The holding period of the assets of Target in the hands of Acquiring will
include the period during which those assets were held by Target (Section
1223(2)).
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[ ], 2003
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11.Acquiring will succeed to and take into account the items of Target
described in Section 381(a)(2) of the Code, including the earnings and
profits (or deficit in earnings and profits), of Target as of the date of the
transaction. Acquiring will take those items into account subject to the
conditions and limitations specified in Sections 381, 382, 383 and 384 of the
Code and applicable Treasury Regulations.
DISCUSSION
TAX-FREE REORGANIZATION
A transaction will qualify as a tax-free reorganization under Section 368(a) if
it satisfies the statutory requirements of a subsection of Section 368(a), as
well as certain non-statutory requirements. Below, we discuss each of the
requirements.
Type "A" Reorganization Statutory Requirements
Section 368(a)(1)(A) defines a tax-free "A" reorganization as a "statutory
merger or consolidation." The Regulations provide that to qualify as an "A"
reorganization, a merger must be effected pursuant to the laws of the United
States or a State or the District of Columbia. (1) In addition, as a result of
the merger, (i) all of the assets and liabilities of one "combining entity" must
become assets and liabilities of another combining entity, and (ii) and the
transferor entity must cease its separate legal existence. (2) For this purpose,
a combining entity includes a domestic corporation, so that Acquiring and Target
both constitute combining entities.
It has been represented to us that the Merger will qualify as a statutory merger
under the national banking laws and of the State of Delaware. As a result of the
Merger, Target will cease its legal existence and all of its assets and
liabilities will be transferred to Acquiring. Therefore, the merger will meet
the statutory requirements of Section 368(a)(1)(A).
Non-Statutory Requirements
In addition to the statutory requirements specified in the Code and Regulations,
several additional requirements must also be satisfied in order for a
transaction to be a tax-free reorganization under Section 368(a). (3) These
principles, including business purpose,
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(1) Treas. Reg. Section 1.368-2T(b)(1)(ii).
(2) Treas. Reg. Section 1.368-2T(b)(1)(ii). The regulations define a combining
entity as a corporation that is not a disregarded entity for federal tax
purposes. Treas. Reg. Section 1.368-2T(b)(1)(i)(B).
(3) Treas. Reg. Section 1.368-1(b).
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continuity of shareholder interest and continuity of business enterprise, have
generally been incorporated in the Regulations.
a. Business Purpose
To qualify as a tax-free reorganization, a transaction must have a valid
corporate business purpose. (4) The courts have established that a transaction
should not be given effect for tax purposes unless it serves a purpose other
than federal income tax avoidance. (5) It has been represented to us that the
Merger is intended to accomplish a bona fide business purpose. Hence, the
business purpose requirement is satisfied.
b. Continuity of Shareholder Interest
To qualify as a tax-free reorganization, a transaction must also satisfy the
continuity of shareholder interest requirement ("COI"). (6) COI generally
requires that a substantial part of the value of the proprietary interests in
the target corporation be preserved through a continued proprietary interest in
the acquiring corporation. (7)
The Service has provided for a safe harbor, for purposes of issuing letter
rulings, where the target shareholders, as a group, exchange at least 50% by
value of the total outstanding target stock immediately prior to the
reorganization for stock of the acquiring corporation. (8) The courts have not
insisted on continuity as high as 50%. (9)
Under the Agreement, the maximum aggregate number of Target shares that may be
exchanged for cash is 45%. Depending on the share price of Acquiring on the
Effective Date, the share exchange ratio pursuant to which Target shares are
exchanged for Acquiring shares varies according to the formula established in
the Agreement. It has been represented to us that the value of the stock
consideration will be above 50% of the total value of the merger
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(4) Treas. Reg. Section 1.368-2(g) states that, to qualify as a tax-free
reorganization, a transaction must be undertaken for reasons germane to the
continuance of the business of a corporation that is a party to the
reorganization.
(5) Gregory v. Helvering, 293 US 465 (1935).
(6) Treas. Reg. Section 1.368-1(e)(1)(i). See also Cortland Specialty Co. v.
Commissioner, 60 F.2d 937 (2nd Cir. 1932), cert. denied, 288 U.S. 599 (1933).
(7) Treas. Reg. Section 1.368-1(e)(1)(i). A proprietary interest will be
preserved in a reorganization if (1) such proprietary interest is exchanged for
a proprietary interest in the acquiring corporation, (2) it is exchanged by the
acquiring corporation for a direct interest in the target corporation, or (3) it
otherwise continues as a proprietary interest in the target.
(8) See Rev. Proc. 77-37, 1977-2 C.B. 568.
(9) See, for example, John A. Nelson Co. v. Helvering, 296 U.S. 374 (1935)
(founding adequate continuity when target shareholders received 38% nonvoting
preferred stock and 62% cash); see also Miller v. Commissioner, 84 F.2d 415 (6th
Cir. 1936) (25% continuity was found sufficient).
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consideration. Therefore, the IRS safe harbor will be met and the continuity of
interest requirement will be satisfied.
c. Plan of Reorganization
A fundamental aspect of the corporate reorganization concept is a "plan of
reorganization." A plan of reorganization is explicitly required by Sections 354
and 361, which grant tax-free treatment to exchanges only if they are made "in
pursuance of the plan of reorganization." A plan of reorganization must be
adopted by each of the corporations that are parties to the reorganization and
the adoption must be shown by the acts of their officers and appear on the
official records of the corporations. (10) The Agreement has been executed by
officers of Acquiring and Target, and it sets forth all of the terms of the
Merger, and thus, constitutes a valid plan of reorganization. Hence, the plan of
reorganization requirement is satisfied.
d. Continuity of Business Enterprise
A transaction constitutes a tax-free reorganization only if there is a
continuity of the business enterprise ("COBE"). (11) Continuity of the business
enterprise is preserved if the acquiring corporation, either:
(1) continues the target corporation's historic business; or
(2) uses a significant portion of the target corporation's historic
business assets in a business.
In determining whether a line of business or a portion of the target's historic
business assets is significant, all relevant facts and circumstances are
considered. (12)
It has been represented to us that Acquiring will continue the historic business
of Target. As a result, the continuity of business enterprise requirement will
be satisfied.
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(10) Treas. Reg. Section 1.368-3(a).
(11) Treas. Reg. Section 1.368-1(d).
(12) Treas. Reg. Section 1.368-1(d)(1).
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CAVEATS AND LIMITATIONS
The conclusions reached in this opinion represent and are based upon our best
judgment regarding the application of federal income tax laws arising under the
Internal Revenue Code, judicial decisions, administrative regulations, published
rulings and other tax authorities existing as of the date of this opinion. This
opinion is not binding upon the Internal Revenue Service or the courts and there
is no guarantee that the Internal Revenue Service will not successfully assert a
contrary position. Furthermore, no assurance can be given that future
legislative or administrative changes, on either a prospective or retroactive
basis, would not adversely affect the accuracy of the conclusions stated herein.
PricewaterhouseCoopers LLP undertakes no responsibility to advise any party or
shareholder of any new developments in the application or interpretation of the
federal income tax laws.
This opinion does not address any federal tax consequences of the transactions
set forth herein, or transactions related or proximate to such transactions,
except as specifically set forth herein. This opinion does not address any
state, local, foreign, or other tax consequences that may result from any of the
transactions set forth herein, or transactions related to such transactions.
This opinion may not be relied upon by any other party to this transaction or in
any other transaction without our prior written consent.
This opinion is based upon the representations, documents, facts, and
assumptions that have been included or referenced herein and the assumption that
such information is accurate, true, and authentic. This opinion does not address
any transactions other than those described herein. This opinion does not
address any transactions whatsoever if all the transactions described herein are
not consummated as described herein without waiver or breach of any material
provision thereof or if the assumptions set forth herein are not true and
accurate at all relevant times. In the event any one of the facts or assumptions
is incorrect, in whole or in part, the conclusions reached in this opinion might
be adversely affected.
Very truly yours,