Stock Purchase or Asset Purchase?
Stock Purchase or Asset Purchase?
A quick guide to structuring an M&A deal from the legal perspective
1. Stock sale
In a stock sale, the seller takes their equity interest and sells it to the buyer. Generally speaking, sellers prefer the stock sale method because the seller may get favorable capital gains treatment.
A stock sale may, in certain circumstances be less favorable to buyers from a tax perspective because the assets that are inherited along with the business from the acquisition, may have been depreciated and thus there may be little depreciation value left.
From a liability perspective, in a stock sale, the buyer is stepping into the shoes of the seller in owning the company, thus, the company’s liabilities are inherited. This can be addressed by liability carve outs or seller could indemnify the buyer.
Getting a deal done as a stock sale is typically a little easier, however. This is because in a stock sale, from a legal perspective, nothing is changing other than the owner of the business. We will discuss the fundamental application of this in greater detail below.
2. Asset sale
In an asset sale, the assets of the business are itemized and transferred to the buyer. Generally speaking, buyers prefer asset sales when acquiring companies. One reason asset purchases may be more favorable to buyers is because the buyer gets to mark the value of the assets acquired up to fair market value and depreciate them again thus making asset purchases sometimes a more favorable structure from a tax perspective.
It’s widely believed that asset purchases are a way to avoid liability as compared to stock purchases. While this is true to an extent, however, it’s important to note that there are cases, instances, and exceptions where a buyer who purchases assets still could be held responsible for liabilities.
Some of those exceptions to avoiding inheritance of liability from an asset purchase may be: (1) the buyer expressly or impliedly assumes the liabilities, (2) a “de facto merger” takes place, (3) the buyer is a continuation of the seller, (4) the transfer was fraudulent or meant to defraud creditors, (5) the seller’s same [defective] product line is continued by the buyer, and/or (6) public policy demands it.
To ensure that liability inheritance based on exception doesn’t occur, it’s important that the purchase agreement expressly disclaim liabilities or require that the seller obtains insurance for certain liabilities.
Asset purchases tend to be more tedious because every asset must be accounted for – as in, every contract must be considered with respect to – are the contracts assignable? Can every contract be transferred to the buyer? Most contracts have anti-assignment clauses which require approval from the counterparty. Hence, every single contract may need to be renegotiated or assigned in accordance with the terms of that contract as part of the acquisition.
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