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[EXHIBIT 8.1]
[BLACKMAN KALLICK LETTERHEAD]
July 19, 1996
Board of Directors Board of Directors
North Shore Community Bancorp, Inc. Crabtree Capital Corporation
1145 Wilmette Avenue Suite 1540
Wilmette, IL 60091 425 North Martingale Road
Schaumburg, IL 60173
Board of Directors
Lake Forest Bancorp, Inc. Board of Directors
727 North Bank Lane Hinsdale Bancorp, Inc.
Lake Forest, IL 60045 25 East 1st Street
Hinsdale, IL 60521
Board of Directors
Libertyville Bancorp, Inc.
507 Milwaukee Avenue
Libertyville, IL 60048
Gentlemen:
You have requested our opinion as to certain federal income tax consequences
with respect to the Agreement and Plan of Reorganization amended and restated
as of May 28, 1996, between and among the following entities:
1) North Shore Community Bancorp, Inc., which will change its
name to Wintrust Financial Corporation in connection with the
transaction, (Wintrust)
2) Lake Forest Bancorp, Inc., (LFB)
3) Hinsdale Bancorp, Inc., (HB)
4) Libertyville Bancorp, Inc., (LB)
5) Crabtree Capital Corporation, (Crabtree)
6) Lake Forest Bancorp II, (LFBII)
7) Hinsdale Bancorp II, (HBII)
8) Libertyville Bancorp II, (LBII), and
9) Crabtree Capital Corporation II, (Crabtree II)
Our opinion is limited to the proposed reorganization of Wintrust with LFB, HB,
LB and Crabtree (sometimes referred to herein collectively as the Surviving
Companies and individually
[BLACKMAN KALLICK LOGO & ADDRESS BLOCK]
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as the Surviving Company) through a merger of (1) LFBII with and into LFB, (2)
HBII with and into HB, (3) LBII with and into LB, and (4) Crabtree II with and
into Crabtree.
Set forth below is a description of the principal facts relating to the
contemplated transactions. The opinion expressed herein is based on
information provided to us by management, (and representatives of management)
of Wintrust and Surviving Companies. Management has represented to us that we
have been provided all the facts and assumptions necessary for us to form our
opinion. Any fact omission, misstatement or change may require a modification
of all or part of this opinion. We are not responsible to update this opinion
for events, transactions, or circumstances occurring after the date of issuance
of this opinion.
The opinion expressed herein is based on our interpretation of the Internal
Revenue Code of 1986, as amended (the "Code"), income tax regulations, court
decisions, and rulings and procedures issued by the Internal Revenue Service
(IRS) as of the issuance date of this opinion. In analyzing the tax issues
addressed in our opinion, we have applied the standards of "substantial
authority" as used in Section 6662 of the Code. The opinion expressed herein
is not binding on the IRS; and there can be no assurance that the IRS will not
take a position contrary to the opinion expressed herein. Furthermore, no
assurance can be given that our interpretation would be upheld if the issues
were to become the subject of judicial proceedings.
We have not considered any non-income tax, state, or local income tax
consequences. Accordingly, we do not express any opinion regarding the
treatment on any non-income tax or any state or local tax issues. We also
express no opinion on non-tax issues, such as personal property transactions or
securities law matters.
Should there be any change in the Code, the regulations, the published rulings,
and the judicial interpretations, the opinion expressed herein must be
reevaluated in light of any such changes.
FACTS
Our opinions are based upon the following facts. Any alterations of such facts
could adversely effect our opinion.
A. History of Wintrust and Surviving Companies
Wintrust, LFB, HB, and LB are bank holding companies formed in the Chicago
metropolitan area over the last four years. Each of these bank holding
companies was capitalized through private placements of common stock. Common
ownership among these bank holding companies ranges from 30 - 50 percent. The
majority of the remaining stock is held by residents of the local communities
served by that particular bank.
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Each bank has been designed to be a true community bank. Each was formed in
response to the past and current consolidation trend in banking industry which
has resulted in no true community banks left to serve local areas. Before the
opening of these banks, banking alternatives in these areas were limited to
branches of large, national or multinational financial institutions. The
operating philosophy of the banks is to provide a strong level of personal
service with quality products delivered through traditional and state of the
art systems. Management and Directors of each of the banks are local
residents. Each bank's core deposit bases are retail in nature. Approximately
one half of their potential lending capacity has been traditional lending
products.
1. North Shore Community Bancorp (Wintrust)
Wintrust is the parent company of North Shore Community Bank & Trust Co. The
bank, which opened in September of 1994, originally served the communities of
Wilmette and Kenilworth. Recently, the bank opened a full service branch in
Glencoe and construction is currently underway for a full service branch
location in Winnetka. Total assets as of December 31, 1995 amounted to about
$105 million.
As of December 31, 1995, Wintrust had outstanding 246,855 shares of no par
common shares at $1 each (with 400,000 shares authorized), and 5,000 warrants
convertible to the no par common stock. Each warrant entitles the holder to
acquire one share of common stock at a purchase price of $50.
Effective September 16, 1994 Wintrust adopted a Stock Option Plan (Plan) which
provides options to purchase a total of up to 31,500 shares of its common
stock. The Plan covers certain key employees, and permits the grant of
incentive stock options, non-qualified stock options, and restricted stock.
The incentive and non-qualified options expire at such time as determined at
the time of grant; however, in no case they will be exercisable later than ten
years after the grant. These options generally vest 10% in the first year
after the grant, 10% in the second year after to the grant, 20% in the year in
which the company attains certain profitability levels, and 20% in each year
thereafter. As of December 31, 1995, options to purchase a total of 29,100
shares of common stock were granted, with strike prices ranging from $50 - $75
per share.
In December 1995, Wintrust's Board of Directors approved the granting of 9,614
additional common stock options to employees and certain directors. The grants
are subject to the approval of the stockholders to increase the number of
authorized shares under the Plan by 20,000 to accommodate such grants.
Stockholder approval was received in the first quarter of 1996. As of December
31, 1995, none of the stock options to purchase 29,100 shares of common stock
have been exercised.
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Wintrust also has a stock rights plan for certain key employees and Directors.
Each stock right entitles the holder to purchase one share of the Bancorp's
common stock for $40.00 per share. The plan was adopted on December 1, 1993
and expires on December 1, 2003. The plan provides for the issuance of a total
of 20,000 such rights. All of the stock rights have been awarded. As of
December 31, 1995, none of the stock rights to purchase 20,000 shares of common
stock have been exercised.
2. Lake Forest Bancorp, Inc. (LFB)
LFB is the parent company of Lake Forest Bank & Trust Company, which opened on
December 27, 1991. Total assets as of December 31, 1995 amounted to about $197
million. Lake Forest currently serves the communities of Lake Forest and Lake
Bluff through four locations.
As of December 31, 1995, LFB had outstanding 160,605 shares of $1 par value
common shares (200,000 shares authorized), and 1,700 convertible preferred
stock. Each share of preferred stock is convertible into 1.5 shares of common
stock.
LFB has a 1991 Stock Option Plan and a 1993 Stock Option Plan (Plans) which
provide options to purchase a total of up to 37,865 shares of its common stock.
The Plans cover substantially all of its employees, and permit the grant of
incentive stock options, non-qualified stock options, and restricted stock.
The incentive and non-qualified options expire at such time as determined at
the time of grant; however, in no case will they be exercisable later than ten
years after the grant. The options generally vest at a rate of 10% in the
first year after the grant, 10% in the second year after the grant, and
continue to vest 20% in the year in which the bank attains certain
profitability levels, and 20% in the subsequent three years, if the Company is
profitable. As of December 31, 1995, options to purchase a total of 35,369
shares of common stock were outstanding with strike prices ranging from $61 -
$90 per share.
3. Hinsdale Bancorp, Inc. (HB)
HB is the parent company of Hinsdale Bank & Trust Co., a bank organized and
opened in October of 1993. Total assets as of December 31, 1995 amounted to
about $115 million. It serves the communities of Hinsdale, Burr Ridge,
Clarendon Hills and Western Springs through two existing locations. Plans are
currently underway to open two more facilities in 1996. As of December 31,
1995, HB had outstanding 206,037 shares of no par common shares at $1 each
(with 350,000 shares authorized), 5,000 common stock Series A warrants, and
5,000 common
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stock Series B warrants. Each Series A warrant entitles the holder to acquire
one share of common stock at a purchase price of $50. Each Series B warrant
entitles the holder to acquire one share of common stock at a price of $31.50.
The Series B warrant have a ten-year life and were issued to the holders of
convertible preferred stock that were redeemed in a 1993 recapitalization plan.
Effective October 28, 1993, HB adopted a Stock Option Plan (Plan) which
provides options to purchase a total of up to 25,000 share of its common stock.
The Plan covers certain key employees, and permits the grant incentive stock
options, non-qualified stock options, and restricted stock. The incentive and
non-qualified options expire at such time as determined at the time of grant,
however, in no case will they be exercisable later than ten years after the
grant. These options generally vest 10% in the first year after the grant, 10%
in the second year subsequent to the grant, 20% in the year in which the bank
attains certain profitability levels, and 20% in each year thereafter.
In December 1995, the Board of Directors approved the granting of 10,550
additional common stock options to employees and directors of the company. The
grants are subject to the approval of the stockholders to increase the number
of authorized shares under the Plan by 15,000 to accommodate such grants.
Stockholder approval was received in the first quarter of 1996.
As of December 31, 1995, options to purchase a total of 21,575 shares of common
stock were outstanding with a strike price ranging from $50 - $65 per share.
4. Libertyville Bancorp, Inc. (LB)
LB is the parent company of Libertyville Bank & Trust Co., a bank organized and
opened in October of 1995. As of December 31, 1995 the bank had total assets
of about $37 million. It serves the communities of Libertyville, Mundelein and
Vernon Hills, Strategically, this bank will target all of Northwest Lake
County Illinois, one of the fastest growing counties in the country.
As of December 31, 1995, LB had outstanding 201,689 shares of no par common
stock (with 350,000 shares authorized), 24,000 shares of Series B convertible
preferred stock and, 20,000 Series B Common Stock warrants, and 5000 Series A
common stock warrants.
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Both the Series B preferred stock and the Series B common stock warrants were
issued in a 1995 recapitalization.
The Series B Preferred Stock is non-voting and will pay no dividends for a
period of at least ten years from issuance and thereafter, dividends, if any,
will not be cumulative. Each share of Series B Preferred Stock is convertible
into one share of common stock. The Series B Common Stock Warrants have a ten
year life. Each warrant entitles the holder to purchase one share of the
common stock at a purchase price of $40 per share.
Each Series A common stock warrant entitles the holder to purchase one share of
common stock at $50 per share.
Effective November 21, 1995, LB adopted a Stock Option Plan (Plan) which
provides options to purchase a total of up to 32,000 shares of its common
stock. The Plan covers certain key employees, and permits the grant of
incentive stock options, non-qualified stock options, and restricted stock.
The incentive and non-qualified options expire at such time as determined at
the time of grant; however, in no case shall they be exercisable later then ten
years after the grant. The Company has granted a total of 20,700 options at
$50 per share. These options vest 10% in 1996, 10% in 1997, 20% in the year in
which the bank attains certain profitability levels, and 20% in each year
thereafter. As of December 31, 1995, no stock option was exercised.
5. Crabtree Capital Corporation (Crabtree)
Crabtree is a privately held financial services company, which was formed in
September 1979, and adopted its present name in August 1985. Its major
business is providing insurance premium financing through its wholly owned
subsidiary, First Premium Services, (First Premium). The financing receivables
generated are sold to an independent third party securitization facility
through a wholly owned subsidiary of First Premium. First Premium, has a
running portfolio in the $125 million range. The financing receivables
generated are short term in nature and bear an interest rate of Prime plus 2%
to 3% point. The effective funding cost to First Premium is in the range of
three month Libor plus 1% to 2% point.
Crabtree also has other subsidiaries, which will be merged or liquidated into
First Premium or Crabtree sometime before the merger transaction contemplated
herein. On an aggregate basis, Crabtree has about $18 to $19 million in tax
net operating losses. Crabtree's goal is to expand its premium finance
business. As of December 31, 1995, Crabtree had a total assets of about $19
million on a consolidated basis.
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As of December 31, 1995, Crabtree had outstanding 1,025,266 shares of $1 par
value common stock (with 2,000,000 shares authorized).
Effective October 1987, Crabtree adopted a Stock Option Plan (Option Plan) and
a Stock Appreciation Rights Plan (SAR). As of December 31, 1995, options to
purchase up to 275,000 common shares and 200,000 stock appreciation rights may
be granted under the plans.
The Option Plan provides for the granting of incentive stock options,
non-qualified stock options and the sale of restricted stock to key employees.
In addition, the Option Plan provides that SARs may be granted on conjunction
with any option granted pursuant to this Plan. No SARs are outstanding as of
December 31, 1995.
Options and SARs granted have a maximum duration of 10 years. As of December
31, 1995, options to purchase a total of 63,225 shares of common stock were
outstanding with a strike price ranging from $7 - $25 per share.
During 1990, two senior officers of Crabtree purchased 60,000 shares of stock
at $5 per share under a Permanent Discount Plan. This stock was purchased with
a permanent discount of $20 per share. Under this plan, gains on the stock
accrue to the holders only if the value of the stock exceeds $25 per share.
Effective July 1992, First Premium established an employee stock option plan
which provides options to purchase up to the total of 2,300 shares of common
stock. On July 20, 1992, incentive options to purchase 1,663 shares were
granted to certain employees at an exercise price of $400 per share. Options
under this grant vest over 4 years and must be exercised within 10 years of the
grant date.
THE PLAN OF REORGANIZATION
The management of Wintrust and Surviving Companies believe that the proposed
transactions will allow them to have a greater access to capital sources, to
expand operations, to allocate and share personnel and capital resources more
effectively, and to provide a wider range of financial services to their
customers. Crabtree is considered a strategic match with the banks since its
expertise in asset securitization should complement the banks' excess asset
strategies.
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In furtherance of these purposes, Wintrust formed (1) LFBII, a Delaware
corporation, (2) HBII, an Illinois corporation, (3) LBII, an Illinois
corporation, and (4) Crabtree II, a Delaware corporation (all of which
sometimes referred to herein collectively as the Merging Companies or
individually as the Merging Company). Wintrust owns all of the stock in each
Merging Company. The Merging Companies were formed solely for the purposes of
consummating the proposed transactions.
Wintrust, Surviving Companies and Merging Companies entered into the Agreements
which provide that Wintrust will acquire Investments, LFB, HB, LB and Crabtree
by a merger of (1) LFBII with and into LFB, (2) HBII with and into HB, (3) LBII
with and into LB, and (4) Crabtree II with and into Crabtree. The Agreements
and the transactions contemplated thereby are subject to approval by the
requisite vote of shareholders of each of the Merging Companies and Surviving
Companies. If the statutory merger is effected, the separate existence of each
of the Merging Companies shall cease and the existence of each of the
Surviving Companies shall continue unaffected and unimpaired by the merger with
all the rights, privileges, immunities and powers and subject to all the duties
and liabilities of a duly organized corporation. As a result of the merger,
all of the assets and rights of each Merging Company will be vested in the
respective Surviving Company; and all liabilities and obligations of the
Merging Company will be assumed by the respective Surviving Company. The
parties involved in the transactions will each bear their own respective
expenses incurred in the proposed transactions.
Pursuant to the Agreements and as of the close of business on the day when
appropriate articles of merger are filed and certificates of merger are issued
(the Effective Date), each of the shareholders of the Surviving Companies shall
exchange their shares of common stock for shares of the common stock of
Wintrust as follows:
(a) LFB Conversion. Each share of the common stock, par value
$1.00 per share, of LFB (the "LFB Common Stock") issued and
outstanding immediately prior to the Effective Date shall be
converted into the right to receive 9.67334 shares (the "LFB
Conversion Ratio") of the common stock, no par value of
Wintrust;
(b) HB Conversion. Each share of the common stock, no par value
of HB (the "HB Common Stock") issued and outstanding
immediately prior to the Effective Date shall be converted
into the right to receive 6.03398 shares (the "HB Conversion
Ratio") of the common stock, no par value of Wintrust;
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(c) LB Conversion. Each share of the common stock, no par value
per share, of LB (the "LB Common Stock") issued and
outstanding immediately prior to the Effective Date shall be
converted into the right to receive 4.02578 shares (the "LB
Conversion Ratio") of the common stock, no par value of
Wintrust;
(d) Crabtree Conversion. Each share of the common stock, par
value $1.00 per share, of Crabtree (the "Crabtree Common
Stock") issued and outstanding immediately prior to the
Effective Date shall be converted into the right to receive
1.18332 shares (the "Crabtree Conversion Ratio") of the common
stock, no par value of Wintrust.
The conversion ratios (as described herein) are the result of arm's-length
negotiations among Wintrust, the Merging Companies, and the Surviving Companies
and are intended to produce approximate equality between the fair market value
of the shares of Wintrust received by the shareholders of the Surviving
Companies and the fair market value of the shares of common stock of the
Surviving Companies converted thereinto.
To avoid the expense and inconvenience of issuing fractional shares, no
fractional shares of Wintrust will be issued pursuant to the merger. Any
holder of shares of common stock of a Surviving Company who would have been
entitled to receive a fractional share will receive, in lieu thereof, an amount
of cash equal to the value of the fraction of a share of Wintrust common stock
to which such holder of shares would otherwise be entitled.
Dissenters' rights will be available to holders of shares of common stock of
the Surviving Companies. The dissenting shareholder's shares will not be
converted into shares of Wintrust, but will receive the value of the shares in
cash.
With respect to the current, outstanding convertible preferred stock in LFB,
and LB managements of these Surviving Companies has represented that the
holders of the preferred stock will convert such stock into shares of common
stock of LFB, and LB as the case may be, prior to the Effective Date of the
mergers. The holders of the convertible preferred stock will then exchange
their shares of common stock for shares of the common stock of Wintrust
according to the conversion ratios described herein.
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The current, outstanding warrants (the "Warrants") at Wintrust, HB, LB and
First Premium, Inc., a wholly owned subsidiary of Crabtree, provide in part for
each holder the right to convert the Warrant to either Wintrust Common Stock,
HB Common Stock, LB Common Stock or First Premium Services, Inc. Common Stock
as the case may be. The Warrants will be contributed on the Effective Date
(immediately prior to the consummation of the proposed merger) by the holders
thereof to Wintrust in exchange for a combination of Wintrust Common Stock and
Warrants to acquire Wintrust Common Stock ("Wintrust Warrants"). The basis of
such exchange is reflective of the conversion and exchange ratios applicable to
the shares underlying such outstanding warrants.
The current LFB, HB, LB and Crabtree stock rights plans and/or option plans
(the "Rights/Option Plan") provide in part for the holders to convert the
rights and/or options into either LFB Common Stock, HB common Stock, LB Common
Stock or Crabtree Common Stock as the case may be. Respective managements of
the Surviving Companies have represented that the options and/or rights were
granted in connections with the performance of prior, current and future
services. As of the Effective Date of the merger, each of the Rights/Option
Plans at LFB, HB, LB and Crabtree will be amended to provide for the holders
the right to convert the rights and/or options into Wintrust's stock at a fixed
conversion ratio similar to the conversion ratio established for the LFB Common
Stock, the HB Common Stock, the LB.
Common Stock and the Crabtree Common Stock. Neither the rights or options to
purchase LFB, HB, LB or Crabtree stock nor the substitute rights or options to
purchase Wintrust shares have a readily ascertainable fair market value within
the meaning of Section 1.83-7(b) of the Regulations.
As of the Effective Date, the fair market value and the adjusted basis of the
assets of each of the Merging Companies will exceed the sum of its liabilities
and all such liabilities to which its assets are subject. There is not at the
present time and will not be at the Effective Time any intercorporate
indebtedness between and among Wintrust, a Merging Company and its respective
Surviving Company that is or will be issued, acquired, or settled at a
discount.
At the Effective Date, the Surviving Companies will not have outstanding any
warrants, options, convertible securities, or any other type of right pursuant
to which any person could acquire stock in the Surviving Companies that, if
exercised or converted, would affect Wintrust's acquisition or retention of
control of each Surviving Company, as defined in section 368(c) of the Code.
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After the proposed merger, each Surviving Company will continue its business in
a substantially unchanged manner and will use the assets of the Merging Company
in the business. There is no plan or intention to cause any of the Surviving
Companies to dispose of all or any substantial portion of its business or
assets. Wintrust has no plan or intention to redeem or otherwise reacquire
after the proposed mergers a significant number of share of its common stock to
be issued pursuant to the mergers. Wintrust has no plan or intention to
liquidate any of the Surviving Companies, to merge any Surviving Company with
or into another corporation, or to sell or otherwise dispose of the stock of
any Surviving Company. To the best of the knowledge of the respective
management of Wintrust, Merging Companies and Surviving companies, there is no
plan or intention, and we assume for purposes of this opinion that there is no
such plan or intention, on the part of shareholders of the Surviving Companies
to sell or otherwise dispose of a significant number of shares of Wintrust to
be received by them pursuant to the mergers.
Managements of Wintrust and Surviving Companies also have represented that none
of the companies are undiversified investment company under Section
368(a)(2)(F)(iii) and (iv) of the Code. An undiversified investment company is
an investment company more than 25 percent of whose assets (excluding cash,
cash equivalents, receivables and U.S. Government securities) are invested in
the stock and securities of one issuer or more than 50 percent of the value of
whose total assets are invested in the stock or securities of five or fewer
issuers. A special look-through rule is provided for 50 percent-owned
subsidiaries under which the parent company will be deemed to own its ratable
share of such subsidiary's assets directly.
An investment company is defined as a regulated investment company, a real
estate investment trust, or a corporation more than 50 percent of its assets
(excluding cash, cash equivalents, receivables and Government securities)
consist of stock securities (and, for this purpose, includes rights, warrants,
options, and commodity futures contracts), and more than 80 percent of its
assets are held for investment.
DISCUSSION
A. Section 368 (a) (2)(E) Merger
Section 368(a)(2)(E) of the Code provides, in part, that a transaction
otherwise qualifying as a statutory merger under section 368(a)(1)(A) will not
be disqualified by reason of the facts that stock of a controlling corporation
(i.e., the corporation which before the merger was in control of the merged
corporation) is used in the transaction if: 1) after the transaction, the
corporation surviving the merger (i.e., surviving corporation) holds
substantially all of its properties and of
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the properties of the merged corporation, and 2) in the transaction, former
shareholder of the surviving corporation exchanged an amount of stock in the
surviving corporation that constitutes control of the corporation solely for
voting stock of the controlling corporation. In essence, to qualify as a tax
free reorganization under Section 368(a)(2)(E), the following statutory
requirements must be met:
1) The merger must be accomplished in the strict compliance with
the corporation laws of the United States, a state or
territory of the United States, or the District of Columbia.
Treasury Regulation Section 1.368-2(b)(1).
2) The shareholders of the surviving corporation must receive
voting stock of the controlling corporation in exchange for an
amount of stock in the surviving corporation that constitutes
"control", (i.e., stock possessing 80% of the surviving
corporation's voting power and 80% of each class of nonvoting
stock). Code Section 368(c).
3) After the transaction, the surviving corporation must hold
substantially all of its properties and of the properties of
the merged corporation. For IRS ruling purposes,
substantially all means 90% of the fair market value of net
assets of each corporation and 70% of the fair market value of
the gross assets of each corporation. Revenue Ruling 77-307,
1977-2 CB 117.
4) The merged corporation must be a first-tier subsidiary of the
controlling corporation.
In addition to the expressed statutory language, the reorganization must also
meet judicially imposed requirements before it can qualify as a tax free
reorganization. These requirements are the continuity of interest doctrine,
the continuity of business enterprise doctrine, and the business purpose
doctrine.
1. Strict Compliance with Merger Laws
Under the proposed transactions, the Merging Companies will merge into the
Surviving Companies in accordance with the applicable provisions of the
Illinois Business Corporation Act and the Delaware General Corporation Law.
Legal counsel of the Merging Companies and the Surviving Companies has informed
us that the mergers will be in strict compliance with the corporation laws of
Illinois and Delaware. Accordingly, the requirement of a statutory merger
contemplated by the transactions will be met.
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2. Definition of Control
With respect to the control requirement, the controlling corporation must
obtain at least 80% of the voting power and 80% of each class of nonvoting
stock of the surviving corporation by issuing its voting stock in the merger.
This means approximately up to 20% of the consideration issued by the
controlling corporation can be non-voting stock or non-stock property, since
only an amount of stock constituting control of the surviving corporation need
be acquired for voting stock of the controlling corporation. Stock in the
surviving corporation that is owned by the controlling corporation before the
merger can adversely affect the transaction. If the controlling corporation
owns over 20% of the stock of the surviving corporation before merger, the
transaction will fail the control requirement of Section 368(a)(2)(E). The
regulations under Section 368(a)(2)(E) take a liberal view in determining how
much stock of the surviving corporation is outstanding in determining the
control requirement. Regulation Section 1.368-2(j)(3)(i) state that even if
the surviving corporation redeems some of the stock (with its own assets) as
part of the merger plan, the redeemed stock is generally not taken into account
in determining if the controlling corporation has obtained control in the
transaction.
As of December 31, 1995, the outstanding capital structures of the Surviving
Companies, on a common share equivalent basis are as follows:
LFB HB LB CRABTREE
--- -- -- --------
Common stock - shares
outstanding 160,605 206,037 201,689 1,025,266
Convertible Preferred
Stock 2,850 24,000
Warrant A 5,000 5,000
Warrant B 5,000 20,000
Options - granted 35,369 21,575 63,225
Options - approved
but not granted 10,550
------- ------- ------- ---------
Total 198,524 248,162 250,689 1,088,491
======= ======= ======= =========
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The respective managements of the Surviving Companies have represented that
other than the preferred stock, warrants and options specifically described
above, the Surviving companies do not and will not have outstanding any other
warrants, options, convertible securities, or any other type of right pursuant
to which any person could acquire stock in the Surviving Companies. The
managements also have represented that any cash paid to dissenting shareholders
with respect to the proposed transactions together with any cash paid in lieu
of fractional shares will be less than 10% of the total consideration paid to
the shareholders of each Surviving Company.
Based on the capital structures (as represented by managements of the Surviving
companies), the 80 percent control requirement should be met. With a limited
number of dissenting shareholders and the exchange of the common stock by
holders of convertible preferred stock, Wintrust will acquire more than 80
percent of the stock of each Surviving Company solely for its voting stock.
3. Substantially All of the Assets
For IRS ruling purposes, "substantially all" means at least 90 percent of the
fair market value of the net assets and at least 70 percent of the fair market
value of the gross assets of each of the Surviving and Merging Companies. Rev.
Proc. 77-37, 1977-2 C.B. 568.
In determining whether the surviving corporation continues to hold
substantially all of its properties and substantially all of the properties of
the merged corporation, the following rules apply:
1) If the surviving corporation used any of its own assets as
acquisition consideration (such as using its own cash to
redeem its shareholders), the property is taken into account
in determining if the surviving corporation continues to hold
substantially all of its properties. Regulation Section
1.368-2(j)(3)(iii).
2) Cash or properties contributed by the controlling corporation
to the merged corporation to pay off dissenters, round off
fractional shares, and pay reorganization expenses are not
taken in to account in the determining whether the
substantially all requirement has been met. Revenue Ruling
77-307, 1977-2 C.B. 117.
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3) Assets contributed by the controlling corporation that passed
from the merged corporation to the surviving corporation,
which is then distributed to the shareholders of the
surviving corporation (i.g., voting stock of the controlling
corporation) are not taken into consideration in determining
if the surviving corporation continues to hold substantially
all of the merged corporation's assets.
Respective managements of Wintrust, Surviving Companies and Merging Companies
have represented that after the merger, each Surviving Company will hold at
least 90 percent of the fair market value of the net assets and at least 70
percent of the fair market value of the gross assets held by each Surviving
Company and the respective Merging Company immediately before the merger. For
purposes of the representations, amounts to pay dissenters, if any, amounts to
pay reorganizations expenses, and redemptions and distributions (except for
regular, normal dividends) made immediately preceding the merger will be
included as assets of the Surviving Companies or Merging Companies,
respectively, immediately prior to the merger.
4. First-tier Subsidiaries
LFBII, HBII, LBII, and Crabtree II are wholly owned first-tier subsidiaries of
Wintrust. Therefore, the requirement that the merged corporation must be a
first-tier subsidiary will be met.
5. Continuity of Interest
The continuity of interest doctrine requires that the shareholders of the
surviving corporation obtained a substantial proprietary interest in the
controlling corporation. For ruling purposes, the IRS will recognize the
continuity of interest requirement as satisfied if the former shareholders of
the surviving corporation hold stock of the controlling corporation
representing at least 50% of the value of the stock of the surviving
corporation. Revenue Procedure 77- 37,1977-2C.B.568.
Due to the statutory imposed control (80%) requirement, the continuity of
interest doctrine should be met, provided there is no plan or intention on the
part of the shareholders of the surviving corporation to sell, exchange, or
otherwise dispose of shares of stock of the controlling corporation to be
received in the transaction that would reduce their ownership in the
controlling corporation to a number of shares having a value of less than 50%
of the value of all of the outstanding stock of the surviving corporation on
the date of the merger. For purpose of this 50% determination, shares of stock
in the surviving corporation exchanged for cash or other
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properties, surrendered by dissenters, or exchanged for cash in lieu of
fractional shares will be treated as outstanding stock of the surviving
corporation on the date of the merger.
The managements of Wintrust, Surviving Companies and Merging Companies know of
no plan or intention on the part of the shareholders of the Surviving Companies
to sell or otherwise dispose of a number of shares of Wintrust common stock to
be received in the proposed transaction which will reduce the holding to a
number of shares having, in the total, a value (based on the fair market value
immediately prior to the merger) of less than 50 percent of the total value of
the stock of each Surviving Company outstanding immediately prior to the
merger. The management knows of no plan or intention on the part of those
shareholders who beneficially own five percent or more of stock of any
Surviving Company to sell, exchange or otherwise dispose of any of Wintrust
stock to be received in the transaction.
Wintrust also has no plan or intention to redeem or otherwise reacquire its
common stock to be issued in the transaction.
Based on the foregoing representations, the continuity of interest requirements
will be met.
6. Continuity of Business Enterprise
The continuity of business enterprise doctrine requires that the surviving
corporation in a reorganization either continue a significant line of the
historic business of the merged corporation or use a significant portion of the
merged corporation's historic assets in a business. Treasury Regulation
Section 1.368-1(d)(2). This rule ensures that a tax-free reorganization is
limited to readjustments of the continuing interest in property under a
modified corporation form. Regulation Section 1.368-1(b). Under the
regulations, a corporation's historic business is the business it has conducted
most recently. However, a corporation's historic business is not one the
corporation enters into as part of a plan of reorganization. The continuity of
business enterprise requirement may also be satisfied if the surviving
corporation used a significant portion of the merged corporation's historic
business assets, which may include stock and securities and intangible
operating assets. The determination of whether the retained assets are
significant is based on the relevant importance of the assets to the operation
of the business.
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Regulation Section 1.368-1(d)(4). We are not aware of any case or ruling
specifically addresses the application of the continuity of business enterprise
doctrine in a merger under Section 368(a)(2)(E). In Letter Ruling 9604024
(November 1, 1995), the surviving corporation sold certain assets which
represented less than 50 percent of the total fair market value of its assets
as part of the contemplated transactions. The IRS, without elaborating the
application, held that the sale did not violate the continuity of business
enterprise requirement in a Section 368(a)(2)(E) merger. The continuity of
business enterprise requirement, however, should be effectively met due to the
substantially all requirement under the statue, provided the surviving
corporation will continue its historic business or use a significant portion of
its business assets and the assets of the merged corporation in a business.
Because it has been represented to us that after the proposed transactions each
Surviving Company will not dispose of any substantial portion of its assets and
the assets of the Merged Company; and that each Surviving Company will continue
its historic business in a substantially unchanged form, it is our opinion that
the requirement of continuity of business enterprise will be met.
7. Business Purpose
The business purpose doctrine requires that a reorganization have a bona fide
business purpose other than the avoidance of tax. A plan which has no business
or corporate purpose will not be considered a plan of reorganization. Treasury
Regulation Section 1.368-1(c). It has been represented to us that the purpose
of the proposed merger is to allow the group to a greater access to capital
sources, to facilitate its expansion, to allocate personnel and capital
resources more effectively, and to provide a wider range of financial services
to their customers.
The combination of the member banks and Crabtree is considered a strategic
match. Crabtree's premium finance receivables, coupled with the member banks'
lower cost of funds, should provide immediate increase in profit to the
combined entities. Furthermore, Crabtree's expertise in the areas of asset
securitization should fit nicely into the banks' excess asset strategies.
As part of the merger, the Surviving Company will arrange $20 million in bank
debt in the form of a line of credit. Proceeds of the debt will be used to
retire existing holding company debts and to fund interim growth until the
completion of a public offering.
Based on the forgoing purposes, it is our opinion that the requirement of a
business purpose should be met.
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B. Stock Options/Rights to Employees
Section 83 of the Code provides the rules for the taxation of nonstatutory
stock options transferred to an individual in connection with the performance
of services. Under section 83 (e)(3), the recipient of an option does not
recognize income if the option granted does not have a readily ascertainable
fair market value.
For options that are not actively traded on an established market, such as the
American Stock Exchange, Regulation Section 1.83-7 (b)(2) provides that these
options do not have a readily ascertainable fair market value unless the fair
market value can be otherwise measured with reasonable accuracy. The
regulations create an irrebuttable presumption that an untraded option does not
have a readily ascertainable fair market value unless four conditions are met:
(1) The option is transferable by the holder,
(2) The option is exercisable immediately in full by the holder,
(3) Neither the option nor the underlying stock is subject to any
restrictions that have a significant effect upon the value of
the option; and
(4) The fair market value of the "option privilege" is readily
ascertainable.
The effects of the foregoing requirements is that untraded options generally do
not have readily ascertainable fair market value when granted.
Regulations provide that because the option does not have a readily
ascertainable fair market value at the time of grant, income will be recognized
at the time the option is exercised or otherwise disposed of and not at the
time of grant. Accordingly, any substitute options which do not have readily
ascertainable fair market value will not be taxable as compensation when
granted.
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C. Exchange of Warrants for Wintrust Stock and Wintrust Warrants
1. Stock
The exchange of the Warrants for common stock of Wintrust should be tax free if
the Warrants were not issued in connection with services and if the following
requirements of Section 351 are met:
(a) The Warrants constitute property.
(b) Properties are transferred to a corporation by one or more
persons (the transferors). In return, the transferors of
property receive stock of the corporation (either stock alone
or stock plus cash or any other property), and
(c) Immediately after the exchange, the property transferors, as a
group, control the corporation (i.e., at least 80% of the
total combined voting power of all classes of stock entitled
to vote, and at least 80% of the total number of shares of all
other classes of stock, meaning in the IRS's view, each class
of non-voting stock).
Section 351, therefore, does not apply unless the Warrants constitute property
and the transferors hold at least 80% of the stock of Wintrust after the
transfer. After the transfer, the Warrant holders, standing alone, will hold
less than 80% of the common stock of Wintrust. Accordingly, standing alone,
the transfer of Warrants would not qualify for Section 351 treatment and would
generate taxable gain for the holder of the Warrants.
In IRS Letter Ruling 9143025 (July 24, 1991), a target transferor transferred a
portion (but less than substantially all) of its assets to an acquiring company
in exchange for 22.5% of the acquiring company's stock. In addition, the
acquiring corporation formed a new subsidiary and merged the new subsidiary
into a second target. In effect, the second target became a wholly-owned
subsidiary of the acquiring corporation and its shareholders received 77.5% of
the stock of the acquiring corporation's stock in a Section 368(a)(2)(E)
merger. The IRS noted that the new subsidiary is a transitory entity. If the
new subsidiary and its role in the reverse triangular
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merger is disregarded, shareholders of the second target, in substance, have
transferred property (second target's stock) for acquiring company's stock.
The IRS further stated that as Congress adopted Section 368(a)(2)(E) to address
the tax consequences of reverse triangular mergers, the tax consequences of
that merger, therefore, must flow from Section 368(a)(2)(E) rather than from
Section 351. The IRS went on to say, however, that solely for purposes of
determining whether the 80% requirement has been met so as to qualify the
target transferor for treatment under Section 351, the second target's
shareholders will be considered transferors described in Section 351, and
accordingly, the second target's shareholders' ownership of acquiring company's
common stock will be included in the control determination. The combined
ownership of the transferors, so computed, exceeds 80%.
Based on this letter ruling, the transfer of the Warrants in exchange for
common stock of Wintrust should be tax-free if the Warrants constitute property
and if the Warrants and the former shareholders of the surviving companies will
collectively own at least 80% of the total combined voting power and at least
80% of the total number of shares of all other classes of stock of Wintrust.
For purposes of Section 351, the IRS has held that Warrants should constitute
property, and therefore, the transfer of Warrants was eligible for tax-free
treatment. In Letter Ruling 8440096, shareholders of a bank contributed their
shares, and certain shareholders who also owned bank corporation options
contributed the options to a new holding company, all in exchange for the
holding company's common stock. The exchange of the bank options for the stock
of the holding company as part of the overall transaction was treated as
tax-free under Section 351.
2. Warrants
The receipt of the Wintrust Warrants in exchange for existing Warrants is
taxable to the Warrant holders in an amount equal to the value of the Wintrust
Warrants received. The receipt of the Wintrust Warrants is taxable, since they
are not equivalent to stock and hence do not qualify for tax-free treatment
under Section 351.
CONCLUSIONS
Based on the foregoing information, we are of the opinion that:
1) Provided (1) that each merger of LFBII with and into LFB, HBII
with and into HB, LBII with and into LB, and Crabtree II with
and
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into Crabtree qualifies as a statutory merger under applicable
state law, (2) that after the transaction, each Surviving
Company will hold substantially all of its assets and the
assets of the respective Merging Company, and (3) that in the
transaction, the shareholders of each Surviving Company
exchange an amount of stock constituting control of the
Surviving Company (within the meaning of section 368(c)) solely
for Wintrust's voting common stock, each proposed merger will
constitute a reorganization within the meaning of section
368(a)(1)(A) of the Code. The reorganization will not be
disqualified by reason of the fact that the voting stock of
Wintrust will be used in the merger (section 368(a)(2)(E)).
For purposes of this opinion, "substantially all" means at
least 90 percent of the fair market value of the net assets and
at least 70 percent of the fair market value of the gross
assets of each of the Surviving and Merging Companies.
Wintrust, and each of the Surviving Companies and Merging
Companies will each be a "party to a reorganization" within the
meaning of section 368(b) of the Code.
2) No gain or loss will be recognized to each Merging Company
upon the transfer of its assets to the Surviving Company in
exchange for the Surviving Company stock (section 361(a)).
3) No gain or loss will be recognized to the Surviving Company
upon the receipt of the assets of the Merging Company in
exchange for the Surviving Company stock (section 1032(a)).
4) The basis of the Merging Company's assets in the hands of the
Surviving Company will be the same as the basis of those
assets in the hands of the Merging Company immediately before
the transaction (section 362(b)).
5) The holding period of the assets of the Merging Company in the
hands of the Surviving Company will include the period during
which such assets were held by the Merging Company (section
1223(2)).
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6) No gain or loss will be recognized to Wintrust upon the
receipt of the Surviving Company common stock solely in
exchange for the Merging Company stock (section 354(a)(1)).
7) No gain or loss will be recognized to the Surviving Company
shareholders upon the receipt of stock, solely in exchange for
their shares of Surviving Company stock (section 354(a)(1)).
8) The basis of Wintrust stock to be received by the Surviving
Company shareholders, including any fractional shares to which
they may be entitled, will be the same as the basis of the
Surviving Company stock surrendered in exchange therefor
(section 358(a)(1)).
9) The holding period of Wintrust stock to be received by the
Surviving Company shareholders, including any fractional
shares to which they may be entitled, will include the holding
period of the Surviving Company stock surrendered in exchange
therefor, provided that the Surviving Company stock was held
as a capital asset on the date of the exchange (section
1223(1)).
10) Pursuant to section 381(a) of the Code and section 1.381(a)-1
of the Income Tax Regulations, the Surviving Company will
succeed to and take into account the items of Merging Company
described in section 381(c) of the Code, subject to the
provisions and limitations specified in sections 381, 382,
383, 384, and 1502 of the Code and the regulations thereunder.
11) The Surviving Company will succeed to and take into account
the earnings and profits, or deficit in earnings and profits,
of the Merging Company as of the date of the transfer. Any
deficit in earnings and profits of the Merging Company will be
used only to offset the earnings and profits accumulated after
the date of the transfer (section 381(c)(2) of the Code and
section 1.381(c)(2)-1 of the regulations).
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12) Where a shareholder of the Surviving Company dissents to the
proposed transaction and receives solely cash in exchange for
his or her Surviving Company stock, such cash will be treated
as having been received by the shareholder as a distribution
in redemption of his or her stock subject to the provisions
and limitations of section 302 of the Code. Where as a result
of such distribution, the Surviving Company shareholder
neither holds any stock of Wintrust directly, nor is deemed
to own any such stock under the constructive ownership rules
of section 318(a), the redemption will be a complete
termination of interest within the earning of section
302(b)(3) and will be treated as a distribution in full
payment in exchange for the shares redeemed as provided in
section 302(a). Accordingly, such shareholders will recognize
gain or loss under section 1001 measured by the difference
between the amount of cash received and his or her adjusted
basis in the Surviving Company stock surrendered.
13) The payment of cash in lieu of fractional shares of Wintrust
stock will be treated as if the fractional shares were
distributed as part of the exchange and then redeemed by
Wintrust. These cash payments will be treated as having been
received as distributions in full payment in exchange for
stock redeemed as provided in section 302(a) of the Code (Rev.
Rul. 66-365, 1966-2 C.B. 116; Rev. Proc. 77-41, 1977-2 C.B.
574).
14) No gain or loss will be recognized by the holders of
non-qualified options to buy shares in the Surviving Companies
upon the conversion of those options into non-qualified
options to buy Wintrust shares under the same terms and
conditions as in effect immediately prior to the proposed
transaction (sections 83(a) and (b) of the Code and section
1.83-7(a) of the regulations).
15) No gain or loss will be recognized by the Warrant holders upon
the transfer of the Warrants in exchange for stock of
Wintrust, provided that the Warrants were not issued in
connection with services and the Warrant holders and the
former shareholders of the surviving companies will
collectively have control of Wintrust. Sections 351(a) and
83.
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16) No gain or loss will be recognized by Wintrust upon the
receipt of the Warrants in exchange for its stock and
warrants. Section 1032(a).
17) Gain will be recognized by the Warrant holders on the receipt
of the Wintrust Warrants in an amount equal to the value of
the Wintrust Warrants received.
We consent to the inclusion of our opinion as an Exhibit to the Joint Proxy
Statement/Prospectus constituting a part of the Registration Statement on Form
S-4 of Wintrust Financial Corporation and to all references to our firm and
said opinion included in such Joint Proxy Statement/Prospectus.
Very truly yours,
BLACKMAN KALLICK BARTELSTEIN, LLP
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BLACKMAN KALLICK BARTELSTEIN, LLP
Jack Bremner
JB/mb
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