Sally Beauty Supply 2011 Annual Report Download - page 43

Risks Relating to Our Separation from Alberto-Culver and Relating To Our Largest Stockholder
If the share distribution of Alberto-Culver common stock in the transactions separating us from Alberto-Culver did
not constitute a tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as amended, or the
Code, or if we became liable for additional taxes owed by Alberto-Culver, then we may be responsible for payment of
significant U.S. federal income taxes.
The following discussion describes the risk that the share distribution of Alberto-Culver common stock in
the Separation Transactions may have triggered significant tax liabilities for us, which could result in a
material adverse effect on us. In connection with the share distribution of Alberto-Culver common stock in
the separation, we received: (i) a private letter ruling from the Internal Revenue Service, or IRS, and
(ii) an opinion of Sidley Austin LLP, counsel to Alberto-Culver, in each case, to the effect that the
transactions qualify as a reorganization under Section 368(a)(1)(D) of the Code and a distribution eligible
for non-recognition under Sections 355(a) and 361(c) of the Code. The private letter ruling and the
opinion of counsel were based, in part, on assumptions and representations as to factual matters made by,
among others, Alberto-Culver, us and representatives of Mrs. Carol L. Bernick, Mr. Leonard H. Lavin and
certain of our other stockholders whom we refer to as the Lavin family stockholders, as requested by the
IRS or counsel, which, if incorrect, could jeopardize the conclusions reached by the IRS and counsel. The
private letter ruling also did not address certain material legal issues that could affect its conclusions, and
reserved the right of the IRS to raise such issues upon a subsequent audit. Opinions of counsel neither
bind the IRS or any court, nor preclude the IRS from adopting a contrary position.
If the Alberto-Culver share distribution were not to qualify as a tax-free distribution under Section 355 of
the Code, we would recognize taxable gain equal to the excess of the fair market value of the Alberto-
Culver common stock distributed to our stockholders over our tax basis in such Alberto-Culver common
stock.
Even if the Alberto-Culver share distribution otherwise qualified as a tax-free distribution under
Section 355 of the Code, it would result in significant U.S. federal income tax liabilities to us if there was
an acquisition of our stock or the stock of Alberto-Culver as part of a plan or series of related transactions
that includes the Alberto-Culver share distribution and that results in an acquisition of 50% or more of
Alberto-Culver’s or our outstanding common stock.
In the event that we recognize a taxable gain in connection with the Alberto-Culver share distribution
(either: (i) because the Alberto-Culver share distribution did not qualify as a tax-free distribution under
Section 355 of the Code, or (ii) because of an acquisition by CDR Investors of 50% or more of Alberto-
Culver or our outstanding common stock as part of a plan or series of related transactions that includes the
Alberto-Culver share distribution), the taxable gain recognized by us would result in significant U.S.
federal income tax liabilities to us. Under the Code, we would be jointly and severally liable for these taxes
for which Alberto-Culver may be required to indemnify us under the tax allocation agreement, and there
can be no assurance that Alberto-Culver would be able to fulfill its obligations under the tax allocation
agreement if Alberto-Culver was determined to be responsible for the taxes thereunder.
The process for determining whether a prohibited change in control has occurred under the rules is
complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case.
If Alberto-Culver did not carefully monitor its, or we did not carefully monitor our, compliance with these
rules, this might inadvertently cause or permit a prohibited change in the ownership of us or of Alberto-
Culver to occur, thereby triggering Alberto-Culver’s or our respective obligations to indemnify the other
pursuant to the tax allocation agreement, which would have a material adverse effect on us.
If any of the above events occur, we will be jointly and severally liable for these taxes, and there can be no
assurance that Alberto-Culver would be able to fulfill its indemnification obligations to us under the tax
allocation agreement if Alberto-Culver was determined to be responsible for these taxes thereunder. In
addition, these mutual indemnity obligations could discourage or prevent a third party from making a
proposal to acquire us.
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