Acquisition Structures

A Brief Introduction by Corporaider@Scribd

Asset Purchase Structure

AdvantagesBuyers and Target can transfer only the assets and liabilities they wish to transfer.

For Buyer, lowers the risk of successor liability since Target remains an existing entity (subject to risk of fraudulent conveyance).

For Buyer, potentially better ability to write up basis of acquired assets.

As opposed to stock purchase (but not merger) may require only majority shareholder approval (or less if not substantially all the assets).

Disadvantages Certain assets (contracts with third parties, permits) may not be transferable without third party or regulator consent, adding condtionality and risk to closing deal.

Target shareholders of C corporations can not easily get consideration without being subject to a tax on the dividend.

Stock Purchase Structure

AdvantagesTarget remains in existence so many contracts and permits will remain in force despite the change in control.

Shareholders receive funds directly so avoids double taxation issue.

Disadvantages Buyer takes all of Target's liabilities, known and unknown.

Dependent on getting at least 90% of shareholders to sign on to agreement and buyers often will want 100% to avoid disputes with dissenting shareholders.

Direct Merger

AdvantagesConversion is via operation of law so a greater number of contracts and permits are likely to survive than an asset purchase agreement.

Shareholders receive funds directly so avoids double taxation issue.

If most of consideration is Buyer shares, can be tax free reorganization.

Does not require 90 or 100% shareholder approval.

Disadvantages Buyer takes all of Target's liabilities, known and unknown.

Target does not survive so greater chance of contracts/permits not surviving than a stock purchase or reverse triangular merger.

Post acquisition no separate Target for liability separation.

Reverse Triangular Merger

AdvantagesShareholders receive funds directly so avoids double taxation issue.

If most of consideration is Buyer shares, can be tax free reorganization.

Does not require 90 or 100% shareholder approval.

Target remains in existence so many contracts and permits will remain in force despite the change in control. Also provides another layer of liability insulation

Disadvantages Buyer takes all of Target's liabilities, known and unknown.

Some companies do not like to create new standalone subsidiaries (requires more intercompany arrangements).

Forward Triangular Merger

AdvantagesShareholders receive funds directly so avoids double taxation issue.

If most of consideration is Buyer shares, can be tax free reorganization.

Does not require 90 or 100% shareholder approval.

Conversion is via operation of law so a greater number of contracts and permits are likely to survive than an asset purchase agreement.

Disadvantages Buyer takes all of Target's liabilities, known and unknown.

Target does not survive so greater chance of contracts/permits not surviving than a stock purchase or reverse triangular merger.

Some companies do not like to create new standalone subsidiaries (requires more intercompany arrangements).

Some Final Thoughts

If the target is a pass-through entity (LLC, S corporation, limited partnership) then double-taxation is not an issue.

It is possible to get asset purchase treatment on an equity purchase via election.

If there needs to be different amounts of consideration to different stockholders within the same class, a stock purchase agreement offers greater flexibility more easily than a merger.

Depending on the structure there are regulations that may or may not come into play (bulk sales, etc.)