Sale & Purchase of a Business: Asset, Stock, and Merger Deals

Asset Purchase 

In an asset purchase, the buyer is not purchasing the stock of the seller, but only certain assets, most of the time the majority or all the assets of the seller. This structure is often the most favorable solution for the buyer, as the buyer selects the assets necessary for its activities and can dodge liabilities arising from the seller’s unsecured obligations or some specific asset not purchased. Nonetheless, the buyer will have to conduct thorough due diligence to avoid an implied assumption of liabilities brought by one or more of the assets purchased (for instance, the seller’s creditors may have secured their claims by using the seller’s assets as collateral).

Stock Acquisition

The private stock acquisition is an optimal option when the target company has strong financials, a longstanding and established history with its customers and vendors, and has not been involved in lawsuits. With this said, the legal advisor of the purchaser will still have to conduct thorough due diligence, not relying merely on the information provided by the management of the target company.

Assuming that the results of the due diligence are fully satisfactory, the stock acquisition is a better structure than an asset purchase because the purchaser will not have to select assets, contracts, and employees.

Merger

Unlike the asset purchase structure, but similar to stock acquisition, in a merger deal, the buyer assumes all the rights and obligations of the target company, although there are limited workarounds to avoid specific exposures. Therefore, comprehensive due diligence on the target company is quintessential and is often very time-consuming. The results of the due diligence will be translated into the heavily negotiated representation and warranty clauses, in which the buyer seeks protection from the seller in the event future issues or liabilities resulting from previous operations arise after the closing.

Mergers can be structured in different ways:

DIRECT MERGERS

In this instance, the target company ceases to exist after merging with the acquiring company, while the shareholders of the target company receive cash or stock of the acquiring company as compensation for their consent to approve the merger. Typically, the board of directors of the acquiring company will have to secure the approval of its shareholders unless the certificate of incorporation of the buyer is not amended and no more than 20% of the outstanding voting power is offered as a price of the merger. In a direct merger, the acquiring company will assume all the liabilities of the target company.

FORWARD SUBSIDIARY MERGER 

In this instance, the target company ceases to exist after merging with a newly formed subsidiary of the acquiring parent company, while the shareholders of the target company receive cash or stock of the acquiring parent company as a compensation for their consent to approve the merger. This structure ensures two benefits that may be very attractive in certain situations: 

REVERSE TRIANGULAR MERGER

In this instance, the newly formed subsidiary of the acquiring parent company ceases to exist after merging with the target company, while the shareholders of the target company receive cash or stock of the acquiring parent company as compensation for their consent to approve the merger. Similar to a forward subsidiary merger, this structure simplifies the approval procedures on the buyer’s side, as only the approval of the acquiring parent company is necessary as the sole shareholder of the subsidiary and limits the obligations assumed by the acquiring parent company. The reverse triangular merger is preferred over a forward subsidiary merger when it is advisable for business purposes to maintain the target company’s existence.