Saturday, December 10, 2011

When Buying a Business: Asset Purchase vs Stock Purchase? Part II

In this post, I will discuss some advantages and disadvantages of a stock purchase vs asset purchase. Of course, every deal is different, and this post is meant only for general discussion purposes. This blog is just a list of questions to consider, when structuring a transaction.

Two main advantages of a stock purchase, in my opinion, are:

• A stock sale is more beneficial to target’s shareholders because the purchase price that the target corporation shareholders receive in a stock purchase will not be subject to double taxation (unlike in the case of asset sale).

• Typically, a stock purchase transaction is easier and cheaper to execute (there may be no or little need for third party consents as stock sale would typically be considered an assignment by “operation of law”).

There are several disadvantages or challenges associated with a stock purchase deal. These include:

• When buying stock, purchaser buys all the liabilities of the business as well, including contingent liabilities, disclosed and undisclosed liabilities. Buyers should be aware that not all liabilities may be revealed by due diligence.

• Another risk with stock purchase may arise if the stock of the target is owned by multiple shareholders who do not all want to sell, at least not on the same terms. The buyer may not be able to enter into the same stock purchase agreement with all of the current shareholders, thus risking that it will acquire less than 100% of outstanding shares. In this case, the buyer, assuming it becomes a majority stockholder, will owe fiduciary duties to the minority shareholders.

• From tax perspective, a buyer does not achieve as much tax benefit from a stock purchase transaction because in a stock purchase, all the tax attributes of the target company are carried over to the buyer and the buyer will not be able to have a new step up basis for the purchased assets of the business or higher depreciation and amortization deductions.

• Under Delaware law, those shareholders who did not vote in favor of the all stock sale get appraisal rights. An appraisal process can be an expensive and time-consuming process.

Do advantages of a stock purchase deal outweigh the disadvantages? The answer is “it depends…”. Each transaction is unique, and obtaining expert legal and accounting advice early on is key to structuring a successful business acquisition.

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.

2 comments:

  1. So I hate to be that tax nerd again, but another nifty thing you can do with a stock-for-stock merger is make an election under I.R.C. §338(h)(10) when the Target fulfills the enumerated criteria. That would allow you to have the "step-up" in basis that you enjoy with an asset purchase, only the Target's shareholders don't have to take the hit on the realized gain. This obviously only works if the stock purchase price exceeds the Target's basis in all of its assets.

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  2. That obviously only features if the inventory cost surpasses the Target's foundation in all of its resources.

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