GREE Is Good: How PerBlue Sold Its DragonSoul to Japanese Firm

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listed in the ownership table, along with chief technology officer Andrew Hanson, who is the company’s other co-founder.

ShareholderStake in PerBlue, Inc.
Innovation Group Investors, LP21.9%
Andrew Hanson (PerBlue CTO)19.7%
Justin Beck (PerBlue CEO)18.9%
Golden Angels Perblue Investors, LLC14.4%

The two representatives of Innovation Group Investors named in the document are Eric Lefkofsky and Mike Mauceri, both of whom are listed as Lightbank executives on that organization’s website.

Brookfield, WI-based Golden Angels Investors has invested in PerBlue in the past. Tim Keane, who directs the group, said that “by looking at registration statements, you begin to see there are old entities and new entities. You begin to see that the entities have shifted around.”

Keane is likely referring to the creation of PerBlue Entertainment, Inc., and transfer of all non-DragonSoul assets into that entity from PerBlue, Inc. There appears to be no mention of PerBlue Entertainment, Inc., in the Japanese document, which jibes with GIE’s statement that it only acquired DragonSoul, and the rest of PerBlue remains intact. None of the four PerBlue, Inc., shareholders listed in the document returned messages asking them to confirm the size of their holdings.

Provided that figures in the document are accurate, it is not clear who owns the remaining 25.1 percent of shares. They could belong to other PerBlue investors and employees, as it’s common for startups to create stock options plans for their workers. Presumably, the four shareholders listed in the document are the company’s top shareholders.

According to the document, GIE’s acquisition of DragonSoul was structured as a reverse triangular merger, also known as a 368(a)(2)(E) reorganization.

In a reverse triangular merger, the acquiring company creates a subsidiary, which then merges into the target company. According to the Tokyo Stock Exchange document, in the DragonSoul deal the target company was PerBlue, Inc. (which consisted only of DragonSoul assets), and the merger subsidiary created by GIE was called Parrot Merger, Inc. The result of this type of reorganization is that the target company survives the merger. Following the transaction, it operates as a subsidiary of the acquirer, which owns the target company’s stock.

Tony Nitti is a partner at the accounting firm WithumSmith+Brown, and has written for Forbes on some of the various types of mergers available to companies. (He wasn’t involved with the PerBlue deal.) He said there are a few different factors that typically lead businesses to structure acquisitions as reverse triangular mergers.

First, Nitti said, the two parties may wish to structure the transaction to be tax-free. Second, the acquirer may wish to keep the target company alive if, for example, it has ongoing contracts or other non-transferable assets, he added.

Nitti said that both of these criteria could be satisfied through a 368(a)(1)(B) reorganization, which is often referred to simply as a “B” reorganization.

However, he said, “The problem with a B reorg is… you can’t even give a penny of cash to the selling shareholders, or else the entire transaction becomes taxable, not just the penny in cash that you gave them. That’s not very appealing to a lot of sellers because they usually want some measure of liquidity from their deal.”

So, when the seller has shareholders who wish to get some cash out as part of the acquisition, the two sides may opt to structure it as a reverse triangular merger, Nitti said.

Keane, the Golden Angels Investors director, said it’s no secret that when the time comes to make a deal, business executives and investors often seek out the most desirable tax terms.

“People that buy and sell companies are looking for favorable tax treatment,” he said.

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