Tacking can be a complicated analysis and must be reviewed in light of all of the facts and circumstances. Generally, the “tacking” concept of Rule 144 permits a holder of restricted securities to aggregate the separate holding periods of prior owners of the restricted securities in order to satisfy the holder’s applicable holding period requirement. A selling security holder may tack, or include as part of its own holding period, the holding period of a prior holder under certain circumstances.
In addition, tacking based on prior holdings of different securities is allowed when the new securities simply continue the holder’s existing investment in another form. For example, in calculating the holding period of restricted shares of common stock, a security holder may tack (or include prior holding periods) for:
- stock dividends, stock splits, and recapitalizations;
- conversions or exchanges;
- change of domicile by the issuer;
- contingent issuances;
- acquisitions pursuant to anti-dilution rights; and
- cashless exercises of options and warrants.
Tacking also is allowed in holding company formations when:
- the newly formed holding company’s securities were issued solely in exchange for the securities of the predecessor company as part of the reorganization of the predecessor company into the holding company structure;
- the security holders received securities of the same class evidencing the same proportional interest in the holding company as they held in the predecessor, and the same rights and interests as the securities exchanged; and
- the holding company was newly formed, and immediately following the transaction has no significant assets except the predecessor securities, and substantially the same assets and liabilities on a consolidated basis as the predecessor company had before the transaction.
A change in legal form of an enterprise normally will restart the holding period for restricted securities of that issuer. However, under SEC guidance, a holder of restricted securities may tack the holding period for the two entities if the following conditions are satisfied:
- the controlling agreement entered into at the time of the formation of the predecessor entity specifically contemplated the change in legal form;
- the partners or members seeking to tack had no veto or voting right over the reorganization;
- the reorganization does not result in a change in the business or operations of the surviving entity;
- the proportionate equity interests in the successor are the same as the interests in the predecessor; and
- the equity holders provide no additional consideration for the securities they receive in exchange for their equity interests in the predecessor entity.
When is tacking not permitted?
Tacking is not permitted for, among other things, exercises by an estate of a decedent’s stock options, or purchases of restricted securities in private transactions from an affiliate.
Hat Tip: MoFo.com