CALDERWOOD & HARKNESS LLP 425 Park Avenue New York, New York 10022

CALDERWOOD & HARKNESS LLP 425 Park Avenue New York, New York 10022
PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT PRIVILEGE ATTORNEY WORK PRODUCT
MEMORANDUM
May 22, 2024
TO: Beatrice Holloway, Responsible Partner, Mergers & Acquisitions
FROM: Leonard Cross, Specialist Partner, Tax
RE: Benefits and Mechanics of Proposed Joint Section 338(h)(10) Election — Sale of Meridian Press Holdings LLC
MATTER NO.: 1043-00002
ENGAGEMENT REFERENCE: SC/BH/JP/2024-0304/AGMG
CLIENT: Aurelius Global Media Group PLC
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I. Executive Summary
This memorandum analyzes the benefits, mechanics, and practical considerations of the proposed joint election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code"), in connection with the sale by Aurelius Media Holdings Inc. ("AMH") of one hundred percent (100%) of the membership interests (the "Membership Interests") in Meridian Press Holdings LLC ("MPH") to Ridgeline Publishing Acquisition Corp. ("Ridgeline" or "Buyer"), the acquisition vehicle of Pinnacle Ridge Capital Partners Fund IV, L.P. ("Pinnacle Ridge" or the "Sponsor"). This memorandum is prepared for the benefit of Aurelius Global Media Group PLC ("Aurelius" or the "Client"), the ultimate parent entity, and its counsel in connection with the proposed transaction.
The transaction contemplates the sale of one hundred percent (100%) of the Membership Interests in MPH at an enterprise value of Four Hundred Eighty Million Dollars ($480,000,000), resulting in an estimated equity purchase price of approximately Four Hundred Eighteen Million Dollars ($418,000,000), subject to customary post-closing adjustments for working capital, closing indebtedness, closing cash, and target transaction expenses. The definitive Membership Interest Purchase Agreement (the "MIPA") is targeted for execution on July 19, 2024, with an anticipated closing date on or about November 15, 2024, subject to satisfaction of customary closing conditions including regulatory approvals.
Our key conclusions are as follows:
The joint Section 338(h)(10) election will treat the Membership Interest sale as a deemed asset sale for United States federal and applicable state income tax purposes. This treatment provides Buyer with a stepped-up tax basis in the acquired assets — including tangible property, intangible assets, goodwill, and going concern value — while requiring Seller to recognize gain on the deemed asset sale at the time of closing. Importantly, as to assets directly held by MPH (a disregarded entity), the transaction is already treated as an asset sale by operation of the entity classification rules; the Section 338(h)(10) election extends this deemed asset sale treatment to the corporate subsidiaries of MPH, namely Meridian Distribution Services Inc. ("MDS") and Bellweather Academic Press Inc. ("Bellweather").
We estimate that the total taxable gain to Seller (recognized at the AMH level) will be approximately Two Hundred Twenty-Eight Million Dollars ($228,000,000), derived from the difference between the aggregate deemed sale price of $480,000,000 and the estimated aggregate adjusted tax basis in all deemed-sold assets of approximately $252,000,000. Based on a blended federal and state effective tax rate of approximately twenty-one percent (21%), the estimated United States tax liability to Seller is approximately Forty-Eight Million Dollars ($48,000,000). These figures are preliminary and remain subject to confirmation of the aggregate adjusted tax basis with the assistance of Pemberton Graves LLP and to the final determination of the purchase price following the post-closing true-up process.
The Section 338(h)(10) election was requested by Pinnacle Ridge and accepted by Aurelius following purchase price negotiations that reflected the incremental tax cost to Seller resulting from the deemed asset sale treatment as compared to a pure equity sale that would not generate immediate taxable gain at the corporate subsidiary level. The incremental cost to Seller was factored into the agreed enterprise value of $480,000,000.
The Section 338(h)(10) Election Agreement (the "Election Agreement") will be executed simultaneously with the MIPA at signing on the target signing date of July 19, 2024. This memorandum should be read in conjunction with the Preliminary Tax Structure Memorandum dated April 8, 2024, previously circulated to the deal team.
II. Background and Transaction Structure
A. Seller Structure
Aurelius Global Media Group PLC (Companies House No. 08431276) is a United Kingdom-headquartered publicly listed media conglomerate. Aurelius maintains a Premium Listing on the London Stock Exchange and is also listed on the Nasdaq Stock Market through its American Depositary Receipts program. Aurelius operates a diversified portfolio of media, publishing, digital content, and entertainment businesses across multiple geographies.
Aurelius Media Holdings Inc. ("AMH") is a Delaware corporation (Delaware Secretary of State file no. 5987324) and serves as the direct United States holding subsidiary of Aurelius. AMH was incorporated in the State of Delaware and is the vehicle through which Aurelius holds its principal US operating subsidiaries. AMH is treated as a C corporation for United States federal income tax purposes and files a consolidated federal income tax return as the common parent of an affiliated group that includes its wholly owned domestic corporate subsidiaries.
AMH directly holds one hundred percent (100%) of the membership interests in Meridian Press Holdings LLC ("MPH"), a Delaware limited liability company (Delaware Secretary of State file no. 4521889). MPH is a single-member limited liability company, with AMH as its sole member. As discussed in greater detail in Section III below, MPH is treated as a disregarded entity for United States federal income tax purposes, separate from its sole member AMH, pursuant to Treasury Regulations Section 301.7701-3(b)(1)(ii). Accordingly, for federal income tax purposes, the assets and liabilities of MPH are treated as the assets and liabilities of AMH.
MPH maintains its principal office at 1180 Avenue of the Americas, 22nd Floor, New York, New York 10036. MPH is the entity through which the Meridian Press Holdings publishing business is conducted in the United States and, through its subsidiaries, internationally.
B. Target Entity and Subsidiaries
MPH operates the legacy publishing division of Aurelius, comprising book publishing, periodical, and educational content businesses under the Meridian Press Holdings brand. The business encompasses trade book publishing across fiction and non-fiction segments, academic and educational publishing, periodical publications, and digital content licensing. MPH has operated these businesses for over twenty years and has established significant market presence in the United States and Canada.
The following key subsidiaries are included in the carve-out transaction and will be conveyed to Buyer through the sale of the Membership Interests:
Meridian Distribution Services Inc. ("MDS") — a Delaware corporation (Delaware Secretary of State file no. 4736201). MDS operates the physical distribution and fulfillment operations for the Meridian Press publishing businesses, including the owned distribution centers and warehouse facilities. MDS is treated as a C corporation for United States federal income tax purposes and is included in AMH's federal consolidated return.
Bellweather Academic Press Inc. ("Bellweather") — a Delaware corporation (Delaware Secretary of State file no. 4801133). Bellweather operates the academic and educational publishing segment, including textbook publishing, scholarly journal production, and educational content licensing to institutional customers. Bellweather is treated as a C corporation for United States federal income tax purposes and is included in AMH's federal consolidated return.
Foxglove Media LLC ("Foxglove") — a New York limited liability company. Foxglove operates the digital media and content licensing segment, including e-book distribution, audiobook production, and digital rights management. Foxglove is wholly owned by MPH. As discussed in Section III.B below, Foxglove is assumed to be a disregarded entity for United States federal income tax purposes for purposes of this analysis, as it is a single-member LLC owned by MPH.
Meridian Press Canada ULC ("Meridian Canada") — a British Columbia unlimited liability company. Meridian Canada operates the Canadian publishing and distribution operations, including editorial offices in Toronto and Vancouver and the Canadian distribution network. Meridian Canada is wholly owned by MPH. The US federal income tax treatment of Meridian Canada is discussed further in Sections III.B and IX below.
For the fiscal year ended December 31, 2023, MPH and its subsidiaries on a consolidated basis generated revenue of approximately One Billion One Hundred Forty Million Dollars ($1,140,000,000) and Adjusted EBITDA of approximately Ninety-Six Million Dollars ($96,000,000), representing an Adjusted EBITDA margin of approximately 8.4%. The business employs approximately 2,400 full-time equivalent employees across its domestic and Canadian operations.
MPH's physical footprint includes four owned distribution centers located in Edison, New Jersey; Columbus, Ohio; Dallas, Texas; and Reno, Nevada. In addition, MPH and its subsidiaries maintain eight leased locations in the United States (including editorial offices, sales offices, and supplementary warehouse space) and two leased locations in Canada (Toronto, Ontario and Vancouver, British Columbia).
C. Buyer Structure
Pinnacle Ridge Capital Partners Fund IV, L.P. (Delaware Secretary of State file no. 6234577) is a Delaware limited partnership and serves as the acquiring sponsor for the transaction. Pinnacle Ridge Fund IV is a $6.2 billion middle-market private equity fund (vintage 2022) focused on investments in media, technology, business services, and consumer-oriented businesses. Pinnacle Ridge is managed by Pinnacle Ridge Capital Partners LLC, its general partner.
Ridgeline Publishing Acquisition Corp. ("Ridgeline") is a Delaware corporation (Delaware Secretary of State file no. 6501982) to be incorporated prior to closing for the purpose of serving as the direct purchaser of the Membership Interests in MPH. Ridgeline will be a newly formed, wholly owned acquisition vehicle of Pinnacle Ridge and will have no operations, assets, or liabilities prior to the closing of the transaction other than those related to the consummation of the acquisition.
The acquisition will be financed through a combination of equity and debt as follows:
Buyer Equity Contribution: Two Hundred Forty Million Dollars ($240,000,000), funded by Pinnacle Ridge Fund IV pursuant to its equity commitment letter.
Senior Secured Debt: Two Hundred Million Dollars ($200,000,000) Term Loan B facility provided by Clearwater National Bank, N.A., as administrative agent and lead arranger, priced at SOFR plus 425 basis points, with a seven-year maturity. In addition, a Sixty Million Dollar ($60,000,000) Revolving Credit Facility is being provided by Clearwater National Bank at SOFR plus 375 basis points with a five-year maturity. The Revolving Credit Facility is expected to be undrawn at closing.
D. Purchase Price Summary
The anticipated purchase price mechanics, based on current estimates and projections as of the date of this memorandum, are summarized in the table below:
The equity purchase price is subject to a post-closing true-up to be completed within ninety (90) calendar days following the closing date. Based on an anticipated closing date of November 15, 2024, the post-closing true-up would be completed by approximately February 13, 2025. The true-up will adjust the equity purchase price based on final determinations of closing cash, closing indebtedness, net working capital, and target transaction expenses, in each case calculated in accordance with the definitions and methodologies set forth in the MIPA. Any disputes regarding the post-closing true-up are expected to be resolved through the neutral accountant process set forth in the MIPA, with Kensington Forensic Advisors LLP serving as the neutral accountant.
III. Tax Classification of Meridian Press Holdings LLC
A. Single-Member LLC — Disregarded Entity Status
MPH is a Delaware limited liability company organized under the Delaware Limited Liability Company Act (6 Del. C. § 18-101 et seq.). AMH is the sole member of MPH, and no other person or entity holds any membership interests, economic interests, or other equity interests in MPH.
Under the entity classification rules set forth in Treasury Regulations Section 301.7701-3(b)(1)(ii), a domestic eligible entity that has a single owner and that has not elected to be classified as an association (taxable as a corporation) is disregarded as an entity separate from its owner for United States federal income tax purposes. This is commonly referred to as "disregarded entity" status. A disregarded entity is not recognized as a separate taxpayer; instead, its activities, assets, liabilities, income, deductions, and credits are attributed directly to its owner.
We have confirmed that MPH has not filed IRS Form 8832 ("Entity Classification Election") electing to be treated as an association taxable as a corporation. MPH has been treated as a disregarded entity for United States federal income tax purposes continuously since its formation. Accordingly, MPH's default classification as a disregarded entity under the Treasury Regulations has been in effect at all relevant times.
The practical consequence of MPH's disregarded entity status is fundamental to the tax analysis of the proposed transaction. Because MPH is a disregarded entity, its assets and liabilities are treated as assets and liabilities of AMH for United States federal income tax purposes. The sale of the Membership Interests in MPH by AMH is therefore not treated as a sale of equity interests in a separate entity; rather, it is treated as a sale by AMH of the underlying assets of MPH. This is a critical distinction because it means that, with respect to assets directly held by MPH (other than stock of its corporate subsidiaries), the transaction is already treated as an asset sale for federal income tax purposes — without the need for any special election. The Section 338(h)(10) election extends this deemed asset sale treatment to MPH's corporate subsidiaries, as discussed in Section IV below.
B. Treatment of MPH's Corporate Subsidiaries
MPH holds ownership interests in several subsidiaries, and the federal income tax treatment of each must be analyzed separately.
Meridian Distribution Services Inc. ("MDS") is a Delaware corporation and is treated as a C corporation for United States federal income tax purposes. MDS files as part of the AMH consolidated federal income tax return. Because MDS is a corporation, the sale of the Membership Interests in MPH results in a deemed transfer of the stock of MDS (since MPH, as a disregarded entity, is treated as holding the MDS stock on behalf of AMH). Without a Section 338(h)(10) election, this deemed stock transfer would be treated as a stock sale — AMH would recognize gain or loss on the deemed sale of MDS stock, and the buyer would take a carryover basis in MDS's underlying assets. The Section 338(h)(10) election converts this deemed stock sale into a deemed asset sale, as discussed in Section IV.
Bellweather Academic Press Inc. ("Bellweather") is likewise a Delaware corporation treated as a C corporation for United States federal income tax purposes, included in the AMH consolidated return. The same analysis that applies to MDS applies equally to Bellweather. The Section 338(h)(10) election will convert the deemed stock sale of Bellweather into a deemed asset sale.
Foxglove Media LLC ("Foxglove") is a New York limited liability company. For purposes of this memorandum, we have assumed that Foxglove is a single-member LLC wholly owned by MPH. If this assumption is correct, then Foxglove is itself a disregarded entity for United States federal income tax purposes (disregarded as separate from MPH, which is itself disregarded as separate from AMH). Accordingly, Foxglove's assets and liabilities are treated as assets and liabilities of AMH, and the sale of the Membership Interests in MPH includes a deemed sale of Foxglove's assets as part of the broader deemed asset sale. No separate Section 338(h)(10) election is necessary or applicable with respect to Foxglove because it is not a corporation. We recommend confirming Foxglove's ownership structure and entity classification to ensure that this analysis is correct; if Foxglove has additional members, it would be treated as a partnership for federal income tax purposes, which would materially alter the analysis.
Meridian Press Canada ULC ("Meridian Canada") is a British Columbia unlimited liability company. Under the check-the-box regulations (Treasury Regulations Section 301.7701-3), Meridian Canada is treated as an "eligible entity" for United States federal income tax purposes. As a single-member entity owned by MPH (which is itself disregarded, with AMH as the ultimate owner), Meridian Canada's default classification under the regulations depends on whether it has unlimited liability. A foreign eligible entity with a single owner that has unlimited liability is classified as a disregarded entity by default under Treasury Regulations Section 301.7701-3(b)(2)(i)(C)(2). Alternatively, Meridian Canada may have made a check-the-box election on Form 8832 to be classified as a disregarded entity or as an association taxable as a corporation. For purposes of this memorandum, we have assumed that Meridian Canada is treated as a disregarded entity for US federal income tax purposes. We recommend confirming this classification and reviewing any prior Form 8832 elections filed with respect to Meridian Canada. The implications for Canadian operations are discussed further in Section IX below.
IV. Section 338(h)(10) Election — Legal Framework
A. Overview of Section 338 Generally
Section 338 of the Code provides a mechanism by which certain stock purchases can be treated as asset acquisitions for United States federal income tax purposes. The purpose of Section 338 is to allow the tax consequences of a transaction to reflect its economic substance — namely, that the acquisition of control of a corporation through a stock purchase is economically equivalent, in many respects, to the acquisition of the corporation's underlying assets.
Section 338 operates by creating a legal fiction: when a qualifying stock purchase occurs and an election is properly made, the target is deemed to have sold all of its assets at the close of the acquisition date in a single transaction, and is then deemed to have purchased all of those assets as a new corporation on the day following the acquisition date. This deemed sale and repurchase results in a new cost basis in the target's assets equal to the allocated fair market value of those assets as of the acquisition date.
There are two principal forms of Section 338 elections:
Section 338(g) — Unilateral Buyer Election. Under Section 338(g), the buyer may unilaterally elect to treat a qualified stock purchase as an asset acquisition. In this scenario, the target is treated as having sold its assets at their fair market value and immediately repurchased them. However, the "old" target recognizes gain on the deemed asset sale, which generates a tax liability at the target level. Because the buyer bears this tax cost (through the target it has just acquired), the Section 338(g) election is rarely made in the acquisition of domestic C corporations — the tax cost of the deemed asset sale at the target level typically outweighs the benefit of the step-up in basis. Section 338(g) elections are more commonly used in acquisitions of foreign targets, where the US tax consequences of the deemed sale may be limited.
Section 338(h)(10) — Joint Buyer-Seller Election. Section 338(h)(10) is a special provision that permits a joint election by the buyer and the seller when the target is a member of a consolidated group (or an S corporation). Under Section 338(h)(10), the old target is treated as selling all of its assets in a single transaction while still a member of the selling consolidated group, and the actual stock sale is disregarded for federal income tax purposes. The gain on the deemed asset sale is reported on the selling group's consolidated federal income tax return. Importantly, no gain or loss is recognized on the actual sale of the target's stock — the stock sale is entirely disregarded. The deemed liquidation of the "old" target following the deemed asset sale also does not result in additional gain or loss recognition. This makes Section 338(h)(10) significantly more tax-efficient than Section 338(g) in many domestic acquisition contexts.
The distinction between these two forms of the Section 338 election is critical. In a Section 338(h)(10) election, the selling consolidated group recognizes gain only on the deemed asset sale (and the stock sale is disregarded), whereas in a Section 338(g) election, the target recognizes gain on the deemed asset sale and the seller separately recognizes gain on the actual stock sale, resulting in potential double taxation. For this reason, the Section 338(h)(10) election is the strongly preferred election in transactions involving the sale of a target that is a member of a selling consolidated group, as is the case here.
B. Applicability to This Transaction
The application of Section 338(h)(10) to this transaction requires careful analysis because of the interplay between MPH's disregarded entity status and the corporate subsidiary structure.
MPH is a disregarded entity, not a corporation. Accordingly, the sale of the Membership Interests in MPH is not, in and of itself, a "qualified stock purchase" within the meaning of Section 338(d)(3), because the Membership Interests are not "stock" of a "corporation." However, the transaction must be analyzed in light of MPH's disregarded entity status, which results in the following treatment for United States federal income tax purposes:
First, because MPH is disregarded as an entity separate from AMH, the sale of the Membership Interests in MPH is treated for federal tax purposes as a sale by AMH of the underlying assets of MPH. This includes all tangible and intangible assets directly held by MPH, as well as any assets held by MPH's disregarded subsidiaries (Foxglove and, as assumed, Meridian Canada). As to these assets, the transaction is already treated as an asset sale by operation of the disregarded entity rules — no Section 338(h)(10) election is required to achieve asset sale treatment for these assets.
Second, the deemed transfer of assets by AMH includes AMH's deemed transfer of the stock of MPH's corporate subsidiaries — MDS and Bellweather. Because MPH is disregarded, AMH is treated as the direct owner of the MDS and Bellweather stock, and the sale of the Membership Interests in MPH includes a deemed sale by AMH of one hundred percent (100%) of the stock of each of MDS and Bellweather. Without a Section 338(h)(10) election, these deemed stock transfers would be treated as stock sales — AMH would recognize gain or loss on the deemed sale of the MDS and Bellweather stock, and Buyer would take a carryover basis in the underlying assets of MDS and Bellweather (with no step-up).
Third, the Section 338(h)(10) election is relevant with respect to the deemed acquisition of the stock of MDS and Bellweather. By making a joint Section 338(h)(10) election with respect to MDS and Bellweather, the parties ensure that the stock acquisitions of those entities are also treated as deemed asset sales — providing Buyer with a stepped-up basis in the assets of MDS and Bellweather (in addition to the stepped-up basis in the assets directly held by MPH, which Buyer obtains automatically by virtue of the disregarded entity treatment).
The governing regulatory framework is set forth in Treasury Regulations Section 1.338(h)(10)-1 and related provisions. The requirements for a valid Section 338(h)(10) election include: (a) a qualified stock purchase of the target within the meaning of Section 338(d)(3); (b) the target must be either a member of a selling consolidated group or an S corporation; and (c) the buyer and the seller must jointly make the election by filing IRS Form 8023 within the prescribed time period. Each of these requirements is addressed below.
C. Qualified Stock Purchase Requirement
A "qualified stock purchase" is defined under Section 338(d)(3) as the acquisition by a corporation, by purchase (within the meaning of Section 338(h)(3)), of stock of another corporation possessing at least eighty percent (80%) of the total combined voting power of all classes of stock entitled to vote, and at least eighty percent (80%) of the total value of all outstanding stock of such other corporation, within a twelve-month acquisition period.
In this transaction, Ridgeline (a corporation) will be treated as acquiring one hundred percent (100%) of the stock of both MDS and Bellweather through its acquisition of the Membership Interests in MPH. Because MPH is a disregarded entity, the sale of one hundred percent of the Membership Interests in MPH is treated as a sale by AMH of all of MPH's assets, including AMH's deemed ownership of one hundred percent of the stock of MDS and Bellweather. Ridgeline will thus be treated as acquiring one hundred percent of the voting power and value of both MDS and Bellweather in a single transaction on the closing date. This clearly satisfies the eighty percent threshold and the twelve-month acquisition period requirement, constituting a qualified stock purchase with respect to each of MDS and Bellweather.
Both MDS and Bellweather are members of AMH's selling consolidated group. Accordingly, all requirements for a valid Section 338(h)(10) election are satisfied. AMH (as the seller and common parent of the selling consolidated group) and Ridgeline (as the acquiring corporation) will jointly make the Section 338(h)(10) election with respect to each of MDS and Bellweather on IRS Form 8023, as discussed in Section X below.
V. Tax Consequences to Seller (Aurelius Media Holdings Inc.)
A. Deemed Asset Sale Treatment
Under the combined effect of MPH's disregarded entity status and the Section 338(h)(10) election with respect to MDS and Bellweather, the transaction will be treated for United States federal income tax purposes as follows:
1.  AMH is deemed to sell the assets held directly by MPH (a disregarded entity). Because MPH is a disregarded entity, the sale of the Membership Interests in MPH is treated as a sale by AMH of all of MPH's directly held assets. This includes tangible personal property (distribution center equipment, fixtures, IT hardware and infrastructure), real property (owned distribution centers in Edison, NJ; Columbus, OH; Dallas, TX; and Reno, NV), leasehold interests (eight leased US locations and two leased Canadian locations), inventory (book inventory across distribution centers), accounts receivable, intellectual property (trade names, author contracts, content licenses, ISBN prefix assignments), customer relationships, and cash on hand. This deemed asset sale treatment applies automatically by operation of the disregarded entity rules, without the need for any election. Similarly, to the extent Foxglove and Meridian Canada are disregarded entities owned by MPH (and therefore by AMH), their assets are included in this deemed asset sale.
2.  The corporate subsidiaries (MDS and Bellweather) are deemed to sell all of their respective assets in a single transaction at the close of the acquisition date, while still members of the AMH selling consolidated group. This treatment results from the Section 338(h)(10) election. The "old" MDS and "old" Bellweather are each treated as having sold all of their assets at fair market value in a single transaction. The gain recognized on these deemed asset sales is included in the AMH consolidated federal income tax return for the taxable year that includes the acquisition date.
3.  The "old" MDS and "old" Bellweather are treated as liquidating into MPH (and through MPH into AMH) following the deemed asset sale. Under the mechanics of Section 338(h)(10), after the deemed asset sale, the "old" targets are treated as distributing all of their remaining assets (i.e., the deemed sale proceeds) to their parent (MPH / AMH) in complete liquidation. No gain or loss is recognized on this deemed liquidation — the stock sale is entirely disregarded under the Section 338(h)(10) regulations.
The net effect is that AMH recognizes gain or loss on the deemed sale of all assets — both the assets directly held by MPH and the assets held by MDS and Bellweather — as if a single, integrated asset sale had occurred. The actual sale of the Membership Interests in MPH and the deemed sale of the stock of MDS and Bellweather are disregarded for federal income tax purposes.
B. Estimated Taxable Gain Calculation
The taxable gain recognized by AMH on the deemed asset sale is computed based on the Aggregate Deemed Sale Price ("ADSP") of all assets, less the aggregate adjusted tax basis of those assets.
Aggregate Deemed Sale Price (ADSP). The ADSP is computed under Treasury Regulations Section 1.338-4 and represents the grossed-up amount realized by the selling group on the deemed asset sale. In general, the ADSP equals the sum of the grossed-up basis of the recently purchased stock (which, in this case, is the purchase price paid by Ridgeline for the Membership Interests, adjusted appropriately), plus the liabilities of the target (including liabilities assumed by the buyer and liabilities to which the target's assets are subject), plus other relevant items. For purposes of this memorandum, we estimate the ADSP to be approximately equal to the enterprise value of $480,000,000, which reflects the equity purchase price plus the assumed liabilities less closing cash and transaction expense adjustments.
Aggregate Adjusted Tax Basis. The aggregate adjusted tax basis of all assets deemed sold includes the tax basis of all tangible and intangible assets directly held by MPH, plus the tax basis of all assets held by MDS and Bellweather (which, under the Section 338(h)(10) election, are treated as having been sold at the asset level rather than at the stock level). Based on preliminary information available to us, including discussions with AMH's tax department and the tax fixed asset schedules maintained by Pemberton Graves LLP, we estimate the aggregate adjusted tax basis of all deemed-sold assets to be approximately Two Hundred Fifty-Two Million Dollars ($252,000,000). This estimate includes the net book value of depreciable tangible assets (net of accumulated depreciation and amortization), the tax basis of real property, the remaining unamortized basis of intangible assets (including goodwill from prior acquisitions), the basis of inventory, and the basis of receivables and other current assets.
We note that this estimate is preliminary and must be confirmed with Pemberton Graves LLP (Robert Ainsley, engagement partner) based on a detailed review of the tax fixed asset schedules, intangibles records, and goodwill computations recorded on AMH's and MPH's tax books. We recommend that this confirmation be completed prior to the signing date.
Estimated Gain. Based on the foregoing, the estimated total taxable gain recognized by AMH on the deemed asset sale is calculated as follows:
The character of the gain (ordinary income versus capital gain) will depend on the nature of the underlying assets and the allocation of the deemed sale price among the asset classes, as discussed in Section VII below. For C corporations such as AMH, capital gains and ordinary income are currently taxed at the same federal rate of twenty-one percent (21%). However, the character of the gain may be relevant for state income tax purposes, as certain states treat capital gains and ordinary income differently.
C. Estimated Tax Liability
Federal Income Tax. The federal corporate income tax rate applicable to AMH is twenty-one percent (21%) under Section 11(b) of the Code, as amended by the Tax Cuts and Jobs Act of 2017. AMH will report the gain on the deemed asset sale on its consolidated federal income tax return for the taxable year that includes the acquisition date (expected to be the calendar year ending December 31, 2024).
State Income Tax Considerations. The deemed asset sale will generate income that is subject to apportionment among multiple states in which MPH and its subsidiaries conduct business. The state income tax analysis is complex and depends on the apportionment factors (sales, payroll, and property) of MPH and its subsidiaries in each state, as well as the applicable tax rates, credits, and exemptions in each jurisdiction. A summary of the key state considerations is provided below (and is discussed in greater detail in Section VIII):
Delaware. AMH is a Delaware corporation. However, Delaware does not impose a corporate income tax on holding companies that do not conduct business within the state. While Delaware imposes an annual franchise tax, the franchise tax is not income-based and would not be affected by the gain on the deemed asset sale. To the extent AMH does not independently conduct business in Delaware (other than being incorporated there), no Delaware income tax should apply to the gain.
New York. MPH maintains its principal office in New York City. New York's combined reporting rules may require the inclusion of MPH's activity (attributed to AMH by virtue of the disregarded entity treatment) in AMH's New York combined return. The New York State corporate tax rate and the New York City General Corporation Tax may apply to the apportioned gain.
New Jersey. MPH maintains a distribution center in Edison, New Jersey, which creates nexus. The New Jersey Corporate Business Tax, including any applicable surcharge, would apply to the apportioned gain.
Ohio. MPH maintains a distribution center in Columbus, Ohio. Ohio imposes a Commercial Activity Tax (a gross receipts-based tax) rather than a traditional corporate income tax. The income tax impact in Ohio may therefore be limited, although the CAT could apply to gross receipts attributable to the deemed asset sale.
Texas. MPH maintains a distribution center in Dallas, Texas. Texas does not impose a traditional state corporate income tax; however, the Texas Franchise Tax (commonly referred to as the "margin tax") applies to the gross margin of entities doing business in Texas and could apply to the deemed asset sale proceeds apportioned to Texas.
Nevada. MPH maintains a distribution center in Reno, Nevada. Nevada does not impose a state corporate income tax. The Nevada Commerce Tax may apply to gross receipts exceeding a specified threshold, but this would represent a limited cost.
Other States. MPH and its subsidiaries maintain employees, leased offices, and sales nexus in various additional states, each of which may assert the right to tax a portion of the gain on the deemed asset sale based on the applicable apportionment formula.
Taking into account the foregoing state-by-state analysis, we estimate the blended state effective tax rate to be approximately three to five percent (3–5%) after apportionment, credits, and exemptions. After considering the interaction between federal and state taxes (including the deductibility of state taxes for federal purposes, to the extent applicable), we estimate the overall blended federal and state effective tax rate to be approximately twenty-one percent (21%).
Estimated Total US Tax Liability. Based on estimated taxable gain of $228,000,000 and a blended federal/state effective rate of approximately 21%, the estimated total US tax liability to Seller is approximately Forty-Eight Million Dollars ($48,000,000).
We emphasize that the actual tax liability will depend on several variables that are not yet final, including: (a) the final purchase price, as adjusted through the post-closing net working capital true-up process; (b) the confirmed aggregate adjusted tax basis of the assets deemed sold, as verified by Pemberton Graves LLP; (c) the final state-by-state apportionment analysis; and (d) any available tax attributes (such as net operating loss carryforwards, tax credits, or other deductions) that may reduce the tax liability. We will update this estimate as additional information becomes available.
D. UK Tax Considerations for Aurelius Global Media Group PLC
The gain on the deemed asset sale is recognized at the AMH level — AMH being a United States corporation that files US federal and state income tax returns. No direct United Kingdom corporate tax liability arises on the deemed asset sale because the gain is recognized by a US taxpayer, not by Aurelius PLC or any other UK-resident entity.
However, because Aurelius PLC is the ultimate parent of AMH and indirectly holds the investment in MPH through AMH, we must consider whether any UK tax liability could arise at the Aurelius PLC level on the indirect disposal of its investment. The relevant UK provision is the Substantial Shareholding Exemption ("SSE") under the Taxation of Chargeable Gains Act 1992 ("TCGA 1992"), Schedule 7AC.
The SSE provides an exemption from UK capital gains tax (now corporation tax on chargeable gains) on the disposal of shares in a qualifying subsidiary, provided certain conditions are met:
Substantial Shareholding Condition. Aurelius PLC (through AMH) has held a substantial shareholding — being at least ten percent (10%) of the ordinary share capital (or, in the case of a non-corporate entity such as MPH, the equivalent economic interest) — for a continuous period of at least twelve (12) months within the six (6) years preceding the disposal. Aurelius PLC's indirect ownership of one hundred percent of the Membership Interests in MPH through AMH has existed for a period substantially exceeding twelve months. This condition is satisfied.
Trading Company / Trading Group Condition. The investing company (Aurelius PLC) must be a trading company or a member of a trading group. Aurelius PLC is a diversified media conglomerate that qualifies as a trading company (or, at minimum, as a member of a qualifying trading group) for purposes of the SSE. This condition is satisfied.
Qualifying Subsidiary Condition. The subsidiary being disposed of must itself be a trading company, or its shares must derive their value substantially from trading activities. MPH operates an active publishing and distribution business and would qualify as a trading entity for these purposes.
Based on the foregoing, we conclude that any gain that might otherwise arise for UK tax purposes at the Aurelius PLC level on the indirect disposal of its interest in MPH should be exempt under the SSE. However, we note that the transaction is structured as a sale at the AMH level of the Membership Interests in MPH — Aurelius PLC is not itself selling any shares or interests. The SSE analysis relates to any UK chargeable gain that might arise at the Aurelius PLC level on the disposal of its indirect interest in MPH (or, in a different scenario, on a deemed disposal or distribution arising from the transaction). We recommend confirming this analysis with Aurelius PLC's UK tax advisors to ensure that the SSE is available and that no other UK tax provisions (such as the anti-avoidance rules or the taxation of deemed distributions) could apply.
Dividend and Repatriation Considerations. Following the closing of the transaction, AMH will hold after-tax sale proceeds that may be repatriated to Aurelius PLC as dividends. Under the US-UK Income Tax Treaty (the "Treaty"), dividends paid by a US corporation to a UK-resident company that beneficially owns at least eighty percent (80%) of the voting stock of the US corporation are subject to a zero percent (0%) US withholding tax rate. Aurelius PLC owns one hundred percent of AMH and should qualify for the zero percent rate, provided that Treaty benefits are available and that the applicable certification (IRS Form W-8BEN-E or equivalent) is properly made. We recommend confirming with Aurelius PLC's advisors that all conditions for Treaty benefits are satisfied and that the necessary certifications are in place prior to any dividend distribution.
VI. Tax Consequences to Buyer (Ridgeline Publishing Acquisition Corp.)
A. Step-Up in Tax Basis
The primary and most significant tax benefit to Buyer from the Section 338(h)(10) election is the stepped-up tax basis that Ridgeline will obtain in all of the acquired assets. As a result of the election, Ridgeline is treated as having purchased all of the assets of MDS and Bellweather at their fair market value as of the closing date. Combined with the stepped-up basis that Ridgeline automatically receives in the assets directly held by MPH (by virtue of the disregarded entity treatment), Ridgeline will have a new cost basis in all assets of the acquired business — equal to the fair market value of such assets as allocated under the residual method described in Section VII.
Without the Section 338(h)(10) election, the benefit of the disregarded entity treatment would still apply to the assets directly held by MPH (and by Foxglove and Meridian Canada, to the extent they are also disregarded entities). However, the purchase of MDS stock and Bellweather stock would be treated as stock acquisitions, and Ridgeline would take a carryover basis in the underlying assets of those corporations — the same tax basis that MDS and Bellweather had immediately prior to the closing. There would be no step-up, and Ridgeline would receive no additional depreciation or amortization deductions with respect to the assets of MDS and Bellweather. This would significantly diminish the tax efficiency of the acquisition, particularly because MDS (which operates the distribution centers) and Bellweather (which holds significant publishing intangibles) together hold a substantial portion of the value of the overall business.
With the election in place, all assets — tangible and intangible, held at every level of the corporate and entity structure — receive a new cost basis equal to their allocated fair market value as of the closing date. This creates substantial future tax benefits for Buyer in the form of depreciation and amortization deductions, as discussed below.
B. Depreciation and Amortization Benefits
The stepped-up basis in the acquired assets will generate future tax deductions for Buyer through depreciation (for tangible property) and amortization (for intangible property and goodwill). The specific treatment depends on the nature and classification of each asset:
Tangible Personal Property. Distribution center equipment, warehouse fixtures, IT hardware, office furniture and equipment, vehicles, and other tangible personal property will be depreciable under the Modified Accelerated Cost Recovery System ("MACRS") provisions of Section 168 of the Code. Most personal property of the type used in MPH's business falls within the five-year or seven-year MACRS recovery classes. To the extent available, Buyer may also be eligible for bonus depreciation under Section 168(k) (subject to the phase-down schedule enacted under the Tax Cuts and Jobs Act) or expensing under Section 179.
Real Property. The owned distribution centers in Edison, New Jersey; Columbus, Ohio; Dallas, Texas; and Reno, Nevada constitute nonresidential real property, which is depreciable under MACRS over a thirty-nine (39) year recovery period using the straight-line method. While the recovery period for real property is substantially longer than for personal property, the step-up in basis nonetheless provides meaningful annual depreciation deductions, particularly given the likely significant fair market value of these facilities.
Goodwill and Going Concern Value. The excess of the aggregate deemed sale price over the fair market value of the identifiable tangible and intangible assets is allocated to goodwill and going concern value under the Class VII residual allocation (see Section VII). Goodwill and going concern value are amortizable over fifteen (15) years on a straight-line basis under Section 197 of the Code. Given the nature of the publishing business — which derives significant value from established brands, market position, customer relationships, and content libraries — we anticipate that a substantial portion of the aggregate deemed sale price will be allocated to goodwill. The fifteen-year amortization of this goodwill represents one of the most significant tax benefits of the transaction to Buyer.
Other Section 197 Intangibles. Section 197 intangibles include, among other things, customer-based intangibles (customer relationships, customer lists, subscription lists), supplier-based intangibles, covenants not to compete, trade names and trademarks, and certain licenses and permits. In this transaction, the key Section 197 intangibles are expected to include the "Meridian Press," "Bellweather Academic," and "Foxglove" trade names and brands; customer relationships with retailers, wholesalers, libraries, and institutional customers; author contracts and content licenses; ISBN prefix assignments; and any non-competition agreements entered into in connection with the transaction. Each of these intangibles is amortizable over fifteen (15) years on a straight-line basis under Section 197.
Acquired Content and intellectual Property. MPH's publishing business involves significant content and intellectual property, including copyrights, editorial content, book backlists, and digital content libraries. The tax treatment of these assets depends on their characterization — some may qualify as Section 197 intangibles (if acquired as part of a trade or business), while others may be depreciable or amortizable over their useful lives under other provisions of the Code (e.g., Section 167). This determination will require detailed analysis during the purchase price allocation process.
The estimated present value of the step-up benefit to Buyer is significant. The combination of accelerated depreciation on tangible personal property, fifteen-year amortization of goodwill and Section 197 intangibles, and ongoing depreciation of real property will generate substantial tax deductions that reduce Buyer's taxable income and, consequently, its cash tax payments over the recovery periods. The present value of these deductions, discounted at an appropriate rate, was a key driver of Pinnacle Ridge's request for the Section 338(h)(10) election and was a significant factor in the purchase price negotiations between the parties. The incremental purchase price premium paid by Buyer to compensate Seller for the tax cost of the election reflects the shared economic benefit of the step-up.
C. Buyer's Adjusted Grossed-Up Basis (AGUB)
The total cost basis that Buyer receives in all of the acquired assets is referred to as the Adjusted Grossed-Up Basis ("AGUB"), computed under Treasury Regulations Section 1.338-5. The AGUB represents the total amount that is allocated among the seven asset classes under the residual method.
In general, AGUB is calculated as the sum of: (a) the grossed-up basis of recently purchased stock (which, in this context, is the consideration paid by Ridgeline for the Membership Interests, adjusted to reflect the grossed-up amount as if 100% of the stock were purchased for the amount paid); plus (b) the liabilities of the target (including liabilities assumed by the buyer and liabilities to which the target's assets are subject); plus (c) other relevant items (such as the cost of the election, if any).
In this transaction, the AGUB will be approximately equal to the enterprise value of $480,000,000. This reflects the equity purchase price of approximately $418,000,000 plus assumed liabilities of $62,500,000 (consisting of the $50,000,000 intercompany promissory note payable to AMH and $12,500,000 in capital lease obligations), net of closing cash adjustments and other items. The AGUB is allocated among the seven asset classes under the residual method, as discussed in Section VII.
VII. Allocation of Purchase Price Among Asset Classes
A. Residual Method Under Section 1060 / Treasury Regulations Section 1.338-6
The deemed asset sale resulting from the Section 338(h)(10) election requires that the Aggregate Deemed Sale Price (from Seller's perspective) and the Adjusted Grossed-Up Basis (from Buyer's perspective) be allocated among seven asset classes under the residual method prescribed by Treasury Regulations Section 1.338-6 and Section 1060 of the Code. The residual method requires that the total consideration be allocated first to the lower-numbered asset classes (at fair market value), with any residual amount allocated to Class VII (goodwill and going concern value).
The seven asset classes and the anticipated allocation for this transaction are as follows:
Class I: Cash and Cash Equivalents. This class includes cash, demand deposits, and similar items. The estimated allocation to Class I is $8,200,000, representing the estimated closing cash on hand at MPH and its subsidiaries as of the closing date. The allocation to Class I is based on the face value of the cash and cash equivalents.
Class II: Actively Traded Personal Property, Certificates of Deposit, and Foreign Currency. This class includes US government securities, publicly traded stock, certificates of deposit, and foreign currency. Based on our understanding of MPH's asset base, we do not anticipate any material allocation to Class II. MPH's business does not involve holdings of actively traded securities or significant foreign currency positions.
Class III: Accounts Receivable, Mortgages, and Credit Card Receivables. This class includes debt instruments (including accounts receivable) that are not otherwise described in Class II. The allocation to Class III will be based on the fair market value of MPH's and its subsidiaries' accounts receivable and similar instruments as of the closing date. Accounts receivable represent a significant component of MPH's net working capital, and the fair market value will be determined based on the face value of the receivables less an appropriate allowance for doubtful accounts.
Class IV: Stock in Trade / Inventory. This class includes property held primarily for sale to customers in the ordinary course of business. For a publishing business such as MPH, inventory consists primarily of book inventory (finished goods, work-in-process, and raw materials such as paper stock) held across the fourteen distribution and warehouse locations. The allocation to Class IV will be based on the fair market value of inventory as of the closing date, which will be closely related to the book value of inventory reflected in the closing balance sheet (subject to any fair market value adjustments). Book inventory is a significant current asset of MPH's business.
Class V: All Assets Other Than Classes I–IV, VI, and VII. This class is a broad residual category that includes all tangible and intangible assets not otherwise classified in Classes I through IV, VI, or VII. For this transaction, Class V is expected to include:
•  Tangible personal property: distribution center equipment, warehouse racking and material handling systems, IT hardware and infrastructure, office furniture and equipment, vehicles, and other fixed assets used in the business.
•  Real property: the four owned distribution centers located in Edison, NJ; Columbus, OH; Dallas, TX; and Reno, NV, including land, buildings, and improvements.
•  Leasehold interests and leasehold improvements at the eight leased US locations and two leased Canadian locations.
•  Other tangible assets not classified elsewhere.
The allocation to Class V will require appraisals or valuations of the tangible personal property and real property. The fair market value of the owned distribution centers, in particular, will be a significant component of the Class V allocation.
Class VI: Section 197 Intangibles (Other Than Goodwill and Going Concern Value). This class includes all Section 197 intangibles other than goodwill and going concern value. For this transaction, Class VI is expected to include:
•  Trade names and trademarks: the "Meridian Press," "Bellweather Academic," and "Foxglove" brands, which have significant recognition and market value in the publishing industry.
•  Customer-based intangibles: customer lists, customer relationships with retailers (including major bookstore chains and online retailers), wholesalers, libraries, educational institutions, and other institutional customers.
•  Author and content licenses: contractual relationships with authors and content providers, including exclusive publishing agreements and content licensing arrangements.
•  ISBN prefix assignments: MPH's assigned ISBN prefixes, which have value as identifiers in the publishing industry.
•  Non-competition agreements: any non-compete covenants entered into by Seller or key employees in connection with the transaction.
•  Other identifiable intangible assets that qualify as Section 197 intangibles.
The allocation to Class VI will require a formal valuation of each identifiable intangible asset, typically performed using income-based, market-based, or cost-based valuation methodologies. Given the nature of MPH's publishing business, we anticipate that the Class VI allocation will be substantial.
Class VII: Goodwill and Going Concern Value. This is the residual class. After the total consideration (ADSP/AGUB) has been allocated to Classes I through VI at fair market value, the remaining amount is allocated to goodwill and going concern value. Given the significant premium over net tangible asset value reflected in the $480,000,000 enterprise value — which is approximately 5.0x FY2023 Adjusted EBITDA — we anticipate that a very substantial portion of the total consideration will be allocated to Class VII. This is consistent with the nature of a publishing business, where a significant portion of enterprise value is attributable to brand recognition, market position, content libraries, author relationships, and the going concern value of the established business platform.
B. Allocation Agreement Between Buyer and Seller
The MIPA and the Section 338(h)(10) Election Agreement will require Buyer and Seller to negotiate and agree upon the allocation of the deemed sale price among the seven asset classes. Both parties are bound by the agreed allocation for all United States federal, state, and local income tax purposes under Section 1060(a) of the Code and Treasury Regulations Section 1.338-6(a). Neither party may take a position on any tax return that is inconsistent with the agreed allocation unless required to do so by a determination (as defined in Section 1313(a)) by the Internal Revenue Service or a court.
The parties' respective interests in the allocation are as follows:
Seller's Interest. AMH, as a C corporation, is subject to federal income tax at a flat rate of twenty-one percent (21%) on both ordinary income and capital gains. Accordingly, the distinction between ordinary income and capital gain assets is less significant at the federal level for AMH than it would be for an individual seller or an S corporation. However, certain state income tax regimes distinguish between ordinary income and capital gains, and Seller may prefer to maximize the allocation to assets that generate capital gain (such as goodwill in Class VII and certain intangibles in Class VI) to the extent that state tax rates are lower on capital gains. In addition, Seller may prefer to minimize the allocation to certain asset categories (such as receivables in Class III or inventory in Class IV) that could generate ordinary income.
Buyer's Interest. Ridgeline will seek to maximize the allocation to assets with shorter depreciable or amortizable lives, in order to accelerate the tax benefit of the step-up. Specifically, Buyer would prefer a larger allocation to tangible personal property in Class V (five- to seven-year MACRS lives) and to identifiable Section 197 intangibles in Class VI (fifteen-year amortization), rather than to real property (thirty-nine-year recovery period) or goodwill in Class VII (fifteen-year amortization). However, the allocation to each class must reflect fair market value, and both parties are constrained by the requirement that the allocation be supportable and defensible.
We recommend engaging Pemberton Graves LLP (Robert Ainsley, engagement partner) to prepare or review the valuation support for the allocation. A formal valuation study, prepared in accordance with applicable professional standards, will provide the foundation for the agreed allocation and will serve as documentation in the event of an IRS examination. The valuation study should be completed in draft form prior to signing to facilitate negotiation of the allocation with Buyer's counsel (Hathaway, Locke & Barnett LLP, Graham Ashworth) and Buyer's accounting advisor (Whitecliff & Harding LLP, Susan Cartwright).
The Election Agreement should include a dispute resolution mechanism for any allocation disagreements that cannot be resolved through direct negotiation. The mechanism may provide for submission of unresolved allocation issues to an independent valuation firm or accounting firm, consistent with the dispute resolution framework established in the MIPA for net working capital disputes. The MIPA designates Kensington Forensic Advisors LLP as the neutral accountant for NWC disputes; a separate firm (or the same firm, if agreed by the parties) could be designated for allocation disputes under the Election Agreement.
VIII. State and Local Tax Considerations
A. State Income / Franchise Tax Impact on Seller
As noted in Section V.C above, the deemed asset sale will generate income that is subject to apportionment among multiple states in which MPH and its subsidiaries conduct business. The apportionment analysis is based on the sales, payroll, and property factors of MPH and its subsidiaries in each state, weighted according to the apportionment formula prescribed by each state's tax laws. The following is a summary of the key states with potential tax impact on Seller:
New York. MPH maintains its principal office at 1180 Avenue of the Americas, New York, New York, and conducts significant business operations in New York State and New York City. New York's combined reporting rules (N.Y. Tax Law Article 9-A) may require the inclusion of MPH's activity (attributed to AMH by virtue of MPH's disregarded entity status) in AMH's New York combined return. The New York State corporate tax rate applicable to AMH's combined group is currently set at a base rate of 7.25% for business income (with lower rates potentially applicable depending on the size and nature of the taxpayer), plus the Metropolitan Transportation Authority surcharge applicable to taxpayers doing business in the MCTD. In addition, if AMH has sufficient nexus with New York City — which is likely given MPH's principal office location — the New York City General Corporation Tax (currently 8.85%) would apply to the apportioned income. The combined New York State and City rates represent one of the most significant state tax costs in this transaction.
New Jersey. MPH operates a distribution center in Edison, New Jersey, which creates corporate income tax nexus in New Jersey. The New Jersey Corporate Business Tax applies at a current