In an asset purchase, the buyer purchases specified assets (and possibly assumes liabilities) of the target in exchange for cash, securities, assets or a combination thereof. Assets and liabilities not transferred to the buyer are retained by the target. This structure provides the buyer with flexibility in acquiring specific assets (and assuming specific liabilities) of the target without acquiring unwanted assets or liabilities. This structure is particularly advantageous from the buyer’s perspective if the target owns assets that the buyer does not want or if the buyer believes the target has significant unknown or contingent liabilities that the buyer does not wish to assume.
In a stock purchase, the buyer acquires all of the target’s outstanding shares of capital stock from the target’s stockholders in exchange for cash, securities, assets or a combination thereof. The target continues to operate as it existed prior to the transaction. Unlike an asset purchase, the buyer owns all of the assets, as well as the liabilities, of the target. As a result, a stock purchase tends to be simpler than an asset acquisition from a structuring and documentation standpoint because the parties generally do not need to identify and price specific assets and liabilities. In addition, because the target’s contracts and licenses are not being transferred to a new entity, fewer third-party consents or other transfer approvals related to such obligations will likely be required than when doing an asset acquisition.
Sometimes the buyer in a stock purchase will purchase less than all of the outstanding shares of capital stock of a company. If the buyer is purchasing less than 50 percent of the voting stock, it may seek to enter into a stockholders agreement with the target and/or the other target stockholders that provides the buyer with minority stockholder protections, such as veto rights over material corporate transactions and representation on the board of directors. The company and/or the other company stockholders, on the other hand, will seek to limit the list of actions that require the minority stockholder’s prior approval.
An acquisition by merger is a frequently used method of acquiring a business. Mergers can be structured as a direct merger, forward triangular merger or reverse triangular merger. In any type of merger, the target’s stockholders exchange their shares in the target for the purchase consideration, which may include cash, securities, assets or a combination thereof. In a direct merger, the buyer and target merge with each other and the merger agreement will indicate which company, the buyer or the target, is the surviving entity in the merger. In a triangular merger, the target merges with a subsidiary of the buyer and either the buyer’s subsidiary is the surviving entity (this structure is called a “forward triangular merger”) or the target is the surviving entity (this structure is called a “reverse triangular merger”).
Each merger structure provides different advantages and disadvantages for each party to the transaction. The effects of the different structures will vary depending on the specific facts and circumstances applicable to a particular transaction and to each party. For example, a forward triangular merger (which is treated as a sale of assets by the target to the buyer for tax purposes) may result in more favorable tax consequences for the buyer and less favorable tax consequences for the seller and a reverse triangular merger (which is treated as a sale of stock by the target’s stockholders to the buyer for tax purposes) may have the opposite result. In addition, because mergers are governed by state law, a review of the relevant laws of each merging entity’s state of incorporation will be necessary. Reed Law will provide you the counseling necessary to identify the Michigan laws required for each merging entity, the various merger structures and how each will affect your business.