There are essentially three ways how to structure an acquisition of a company. The primary methods include a statutory merger or share exchange; purchase of business assets; or purchase of shares from the existing shareholders. When purchasing assets, the purchaser only buys specified assets of a business (which may or may not be substantially all business assets) and specified liabilities (if any at all). When purchasing the shares, the purchaser buys ownership in the company, including all of its assets and liabilities. Which method is preferable? Below are some advantages and disadvantages of each method. Please note that it is essential to involve a tax lawyer or an accountant in the structuring of the acquisition.
Asset purchase advantages:
• Buyers can purchase only selected assets of the business and not liabilities to minimize the risk.
• Under Delaware law, sale of all or substantially all assets requires the majority vote of the target’s shareholders and there are no appraisal rights for shareholders who did not vote in favor of the transaction.
• An asset purchase allows buyers to allocate the purchase price among the assets to reflect their fair market value. This results in a step-up of tax basis, allows higher depreciation and amortization deductions, and results in future tax savings.
Asset purchase disadvantages
• It may be a challenge to define which assets the purchaser wants to acquire. Usually, businesses sell a subsidiary or a division. So, they typically sell the assets that are used exclusively or primarily in that subsidiary or division. However, there may be “shared assets” that would need to be negotiated, properly licensed to the purchaser, and accounted for in the purchase price.
• An asset sale typically requires numerous third party consents, approvals (such as agreeing to substitute a lesee on an office space lease, or consent to assign a contract, or transfer a permit). The third parties may view the transaction as an opportunity to renegotiate their contracts, which could delay the deal and add to the transaction costs.
• If there are any liabilities (disclosed or undisclosed) that the buyer is not including in the purchase, parties have to make sure that the purchase is not being made for less than the fair value of the assets and that following the sale, the company will still be sufficiently capitalized to pay its debts and liabilities. Otherwise, the transaction may violate fraudulent conveyance laws. Parties would need to obtain a solvency opinion, which can add to the transaction costs.
• An asset sale is subject to double taxation if the target is a C-corporation, so it is not advantageous from the perspective of the target’s shareholders. However, this disadvantage disappears if the target is an S-corporation or another entity with pass-through taxation (LLC, partnership).
Given the challenges associated with an asset purchase transaction, between 2002 and 2009, only 18% of all acquisitions were structured as asset purchases.
In the next post, I’ll discuss advantages and disadvantages of a stock purchase.
This article is not a legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga. Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of business, corporate, securities, and intellectual property law.