Sales and Mergers of California Businesses

Courtesy of CEB, we are bringing you selected legal developments in areas of California business law that are covered by CEB’s publications. This month’s feature is a preview of the September 2025 update of Sales and Mergers of California Businesses. References are to the book’s section numbers. The notable developments since the last update include the suspension of the Net Operating Losses deduction by SB 167 (2024).

Capital Gains and Dividends

Following are the 2025 brackets for long‑term capital gains and dividends:

	Single	Joint	Head of Household
0% tax rate:	$0 to $48,350	$0 to $96,700	$0 to $64,750
Beginning of 15% tax rate:	$48,351	$96,701	$64,751
Beginning of 20% tax rate:	$533,400	$600,050	$566,700

See §3.3.

Individual AMT

The alternative minimum tax (AMT) (see IRC §55) is designed to ensure that higher income taxpayers pay a minimum tax. After the Tax Cuts and Jobs Act (TCJA), the AMT is still in effect for noncorporate taxpayers, but the AMT exemption amount for 2025 is $88,100 for single taxpayers and $137,000 for married couples filing jointly. The exemption amounts are reduced (but not below zero) by an amount equal to 25 percent of the amount by which alternative minimum taxable income (AMTI) exceeds the phase‑out amounts, which begin at $626,350 for single taxpayers and $1,252,700 for married taxpayers filing jointly. Both the exemption amounts and the phase‑out amounts are indexed annually for inflation. The tax is imposed on individuals at the rate of 26 percent of the first $239,100 of AMTI and 28 percent above that amount. IRC §55(b)(1)(A). See §3.3B.

Net Operating Losses (NOLs)

SB 167 (2024) (Stats 2024, ch 34) suspended the NOL deduction for taxable years 2024, 2025, and 2026. SB 175 (2024) (Stats 2024, ch 34) subjects the NOL deduction suspension for taxable years 2025 and 2026 to revocation if certain budgetary goals are met. See §3.47.

In transactions involving multiple ownership changes, the §382 limitation may “stack”, meaning each change triggers its own annual limitation on NOL and built-in loss usage, measured by multiplying the target’s fair market value immediately before the change by the long-term tax-exempt rate. See IRC §382(b); Treas Reg §1.382-9(a). Strategic loss limitation modeling—especially in distressed acquisitions—can be used to determine whether pre-change losses are realistically usable under the compounded annual limitations. A critical part of this analysis involves identifying net unrealized built-in gains (NUBIGs) or losses (NUBILs) at the time of the ownership change. If the corporation has a NUBIG, gain recognized during the 5-year recognition period may increase the §382 limitation under IRC §382(h)(1)(A). Conversely, if the corporation has a NUBIL, recognized losses may be treated as pre-change items and subject to the §382 limitation, effectively accelerating the disallowance of losses. See Treas Reg §1.382-7; Notice 2003-65, 2003-2 Cum Bull 747. Post-change planning often focuses on accelerating NUBIG recognition through asset sales, while avoiding post-change triggers for NUBILs. Loss modeling should account for the availability of the Section 338 approach (for deemed asset acquisitions) or the 1374 approach (mirroring S corporation built-in gain rules) to measure gain/loss recognition. See Treas Reg §1.382-7 and Tres Reg §1.382-8. See §3.47A.

Golden Parachutes

To mitigate the adverse tax consequences of golden parachute payments under IRC §280G, several planning strategies are commonly employed. One is the shareholder approval exception for closely held corporations, which allows a disqualified individual (typically a senior executive or 1% shareholder) to waive excess parachute payments, provided the waiver is approved by at least 75% of the corporation’s disinterested shareholders. If executed in accordance with the statute and regulations, this technique eliminates the §280G excise tax and preserves the corporation’s deduction. See IRC §280G(b)(5); Treas Reg §1.280G-1, Q&A 7–10.

Another widely used method is the modified cutback, in which parachute payments are automatically reduced to just below the excise tax threshold—i.e., below three times the individual’s “base amount”—thereby avoiding both the 20% excise tax under IRC §4999 and the corporate disallowance. See Treas Reg §1.280G-1, Q&A 30–33. This approach is especially common in transactions where obtaining shareholder approval would be burdensome or uncertain.

A third strategy, though increasingly disfavored, is a gross-up provision, where the corporation compensates the executive not only for the excise tax itself, but also for the income and employment taxes on the gross-up amount. While historically common in public company deals, gross-ups have declined significantly due to shareholder scrutiny and proxy advisory firm policies. See, e.g., Lipton, Avoiding Golden Parachute Pitfalls, 120 J Tax’n 180 (2014).  See §3.49.

Best practices when drafting or reviewing change-in-control compensation include engaging a qualified compensation consultant to determine the “base amount”, modeling alternative payout scenarios, and carefully documenting the waiver or cutback mechanics in both the acquisition and employment agreements. Compliance with Treas Reg §1.280G-1, Q&A 39 (regarding reasonable compensation allocations) is also critical in reducing parachute exposure and audit risk. See §3.49.

Crowdfunding Exemptions

The Jumpstart Our Business Startups Act (JOBS Act) (Pub L 112–106, 126 Stat 306) established a new crowdfunding exemption from registration under §4(a)(6) of the Securities Act of 1933 (15 USC §77d(a)(6)) for so‑called equity‑based crowdfunding. The rules became effective on May 16, 2016, with the exception of instruction 3 adding part 227 and instruction 14 amending Form ID, which were effective January 29, 2016. These rules were subsequently modified and 17 CFR §227.504 added by SEC Release Nos. 33-10884, 34-90300, IC-34082 (Jan. 14, 2021), effective March 15, 2021. See §4.17A.

Insider Stock Trading

Counsel should consider two principal corporate insider stock trading concerns. The first is a general rule making unlawful the use of nonpublic information for personal gains in trades of public stock. This is controlled primarily by Securities Exchange Act of 1934 §10(b) (15 USC §78j(b)), SEC Rule 10b–5 (17 CFR §240.10b–5), and Corp C §25402. Regarding insider trading involving tender offers, see Securities Exchange Act of 1934 §14(e) (15 USC §78n(e)) and SEC Rule 14e–3 (17 CFR §240.14e–3). The second concern, with exceptions, relates to “short-swing profits” which makes any profit realized by an officer, director, or beneficial owner of 10 percent or more of a class of equity securities within 6 months from any purchase and sale of a corporation’s publicly traded stock recoverable by the corporation, regardless of any actual use of insider information and regardless of intent. Securities Exchange Act §16(b) (15 USC §78p(b)); SEC Rules 16b–1—16b–8 (17 CFR §§240.16b–1—240.16b–8). See §4.34.

Mergers

A filing fee must be paid by the acquiring entity to file a premerger notification. The fee depends on the size of the transaction. The fees are as follows for 2025:

HART‑SCOTT‑RODINO FILING FEES FOR 2025
Size of Transaction	Filing Fee
Less than $179.4 million	$30,000
$179.4 million or more but less than $555.5 million	$105,000
$555.5 million or more but less than $1.111 billion	$265,000
$1.111 billion or more but less than $2.222 billion	$425,000
$2.222 billion or more but less than $5.555 billion	$850,000
$5.555 billion or more	$2,390,000

These amounts are also adjusted annually. See §5.2.

Likewise, in United States v Bertelsmann SE & Co. (D DC 2022, 646 F Supp 3d 1), the court held that Section 7 extended to mergers that would substantially lessen competition between buyers competing of for a common an input. See §5.4.

Intellectual property counsel should be thoroughly familiar with, and actively engaged in, the drafting and negotiation of those sections of the merger or acquisition agreement, as well as any additional agreements, including an intellectual property assignment agreement. See §7A.1.

AI Indemnity

Many potential customers or acquirers of generative artificial intelligence systems are rightly concerned about the possibility of liability claims by third parties based on copyright infringement or other legal issues discussed in Chapter 3A of Internet Law and Practice in California (Cal CEB). Thus, some generative AI vendors are offering protection through contractual indemnification. At the same time, many other generative AI vendors are hesitant to provide a broad level of indemnity for their AI systems and have issued terms of service that attempt to shield the vendors from liability, leaving some or all liability risks on their customers. For a review of the caveats to protections offered by large generative AI providers, see https://www.law.com/legaltechnews/2024/02/09/gen-ai-providers-offer-ip-indemnity-heres-why-its-not-fool-proof/. (The review is behind a paywall and requires a subscription to access the article.) It is therefore advisable for any potential customer or acquirer of an AI system to review carefully the terms of any indemnity offered to determine whether and to what extent it is limited and whether it is sufficient. See §8A.26A.

Miscellaneous

Nonprofit corporations may also merge into certain other business entities. See Corp C §§6010, 8010, 9640(b). See §2.13.

Redemption Fees and related expenses are required to be capitalized.  (See Treas Reg §1.263(a)–2(e), amounts paid to facilitate the sale of property must be capitalized.) See §3.27.

In Actavis Labs. FL, Inc. v United States (Fed Cir 2025) 131 F4th 1345, the court held that expenses arising from a drug manufacturer defending itself against patent infringement lawsuits were deductible as ordinary business expenses because the expenses originate from the patent infringement claims and not as part of the pursuit of FDA approval. See §§3.30, 3.46.

Although goodwill and most intangibles are amortizable over 15 years under §197, the anti-churning rules (IRC §197(f)(9)) disallow amortization for certain goodwill or going-concern value acquired after August 10, 1993, if held by related parties before that date. Practitioners should review historical ownership of target entities—especially family businesses or entities with prior reorganizations—to identify possible anti-churning risks. See §3.34.