When it comes to mergers and acquisitions, buyers and sellers utilize a variety of transaction structures – among the most popular structures are stock acquisitions, asset acquisitions, and mergers. These transaction structures refer to the distinct ways in which a buyer can acquire the target company it wishes to acquire.
These three transaction structures are by no means the only structures, but they are among the most popular. For the purposes of this blog, let’s focus on key distinctions between two of the most popular structures — stock acquisitions and asset acquisitions. Mergers are heavily governed by state law, so we’ll save that discussion for another day.
The differences among the various transaction structures are many, and each structure and its appropriateness for your transaction requires a nuanced analysis of many factors, including (among many other considerations):
- relevant state and federal statutes and common law
- tax law
- antitrust law
- the ownership structure of the parties
- the manner and method in which the buyer will finance the acquisition
- the type of consideration (cash, debt, equity, or a mix) the seller or its owners will receive in the transaction
- the types of assets owned by the seller
- the contracts to which the buyer and seller are a party
- whether the seller’s assets are encumbered by liens
- the seller’s debt obligations.
Ultimately, the parties and their advisors should consider all of these factors and more – especially tax considerations – to determine which structure is most appropriate for the deal at hand. Buyers and sellers typically will prefer different structures for tax, liability, and post-closing economic, governance, and operational reasons.
Let’s focus on the primary structural differences between stock acquisitions and asset acquisitions.
Stock Acquisition
In a stock acquisition, the buyer purchases an equity interest in another company by purchasing some or all of the shares, membership interests, or partnership interests from existing owners of the seller’s target company. Although the concept of “stock” is customarily associated with a corporation, buyers and sellers still may utilize a similar structure with appropriate modifications in the case of target companies that are limited liability companies or partnerships whose ownership interests are characterized as something other than “stock.”
Following the closing of a transaction, the seller entity – now under the control of the buyer – often continues to operate similarly to how it operated prior to the transaction. Unless the parties otherwise agree in the purchase agreement, all of the assets, liabilities, and obligations associated with the seller entity remain with the seller entity. Before a buyer proceeds with a stock transaction, it customarily will require the seller to divest itself of certain assets or pay off certain liabilities in order to exclude those assets and liabilities from the entity at the time the buyer takes control.
Asset Acquisition
On the other hand, an asset acquisition allows the buyer to select specific assets and liabilities to purchase and leave behind other less desirable assets and liabilities. In some cases, the buyer will purchase substantially all of the assets of a seller entity and assume substantially all of the liabilities; in other cases, the buyer will select only the assets and liabilities it wants to acquire.
Regardless of what portion of the assets are acquired and liabilities are assumed by the buyer, the buyer may nonetheless be required by a court to satisfy liabilities it did not assume under one more theory of “successor liability.” Buyers should take care in their purchase agreements to provide appropriate indemnification provisions in the event a buyer must nonetheless satisfy liabilities it did not intend to assume.
General Concerns
- Taxes. The existing legal and tax structure of the target company, its historical and ongoing tax obligations, and the tax implications of any transaction to buyer and seller often dictate the structure utilized in an acquisition.
- Liabilities. The known and unknown liabilities of a target company heavily influence the type of transaction and the allocation of risk between buyer and seller in the purchase agreement.
- Contracts. Buyers are generally interested in preserving the valuable business relationships of the target company, but the transferability of those relationships often depends on the seller’s contracts with its customers, vendors, suppliers, employees, and independent contractors.
- Regulatory Considerations. Licenses and permits required to operate a business often inform the determination to utilize one transaction structure over another in order to ensure continued regulatory compliance.
- Consents and Approvals. Buyers and sellers must consider what consent or approval is required by the target company’s board, stockholders, and key customers, vendors, and suppliers. Some consents are required by law while others are required by contract.
Engaging a trusted mergers and acquisitions lawyer in Phoenix is instrumental in navigating the complexities of choosing the most appropriate structure for your transaction. You should consult an experienced mergers and acquisitions attorney before you sign any letter of intent (LOI), memorandum of understanding (MOU), or term sheet relating to the purchase or sale of a business, even if that initial agreement is intended to be non-binding, to help you pursue your business goals.
