Stock Purchase, Asset Purchase or Merger?

There are a variety of ways to structure the sale or acquisition of a business or enterprise. The most common methods are stock purchases, asset purchases and mergers. Determining which structure to use is often a matter of negotiation and is impacted by the various considerations of the parties to the transaction.

Stock purchases. In a typical stock purchase transaction, a buyer pays to acquire the stock of the business target. Through such purchase, the buyer assumes the assets and liabilities of the business and can step into the shoes of the former owners with regard to existing agreements as well as title to assets and ownership of liabilities with limited documentation required. In the case of a business with a large number of stockholders, like many publicly traded companies, the buyer will often take precautionary measures to ensure that all stockholders, or at least the vast majority, will agree to sell their stock. Buyers will also seek to negotiate protective provisions in the sale agreement like indemnity provisions and representations and warranties from the owners to protect against unforeseen liabilities or undisclosed issues with the business.

Asset purchases. In an asset purchase scenario, a buyer pays for specific assets and specific liabilities of the target company. In this scenario, the parties must work together to identify the appropriate assets and liabilities for transfer and take all necessary steps, including obtaining third party consents, executing transfers of deeds, bills of sale, assignment and assumption agreements and other documents to transfer title or ownership of the each purchased asset and liability from the seller to the buyer. This can be a time-intensive process, but is often preferable when a buyer is not interested in acquiring the entire business or where the buyer wants to be certain about the assets and liabilities it will acquire. Parties to an asset purchase transaction must also negotiate the allocation of the purchase price to the purchased assets for federal taxation purposes.

Mergers. In a merger transaction, two business entities are combined into a single entity, typically when a subsidiary of the buyer entity purchases the stock of the target business. Like a stock purchase scenario, the buyer entity assumes the assets and liabilities of the target business with limited documentation. Mergers are often preferable to a traditional stock purchase transaction in cases where there are a large number of stockholders, some of whom may not be willing to sell their shares. In that case, a merger can typically occur as long as a majority of the stockholders agree to sell their shares.

A merger or acquisition of a company can take many different forms. Ultimately, the parties to the transaction must consider their goals from a financial and future operating perspective to determine which transaction structure is appropriate. If you need assistance in determining the transaction structure that is appropriate for you, feel free to contact us for assistance.