Why parties to an acquisition choose one type of structure over another

Why parties to an acquisition choose one type of structure over another



Asset purchases generally work best when the buyers are interested in just select assets of the target company, such as certain intellectual property (e.g., patents). If the buyer is not worried about the company continuing as a going concern, an asset purchase is probably the best approach. The seller in an asset purchase transaction must take care to ensure it receives adequate consideration to pay for any future liabilities. What’s more, the taxable income the company receives may be subject to double-taxation in a C-Corporation, both at the company level and then at the shareholder level, when the proceeds from the sale have been distributed.

Generally, when pieces of a company are sold, the price will be lower than when the whole business is sold as a going concern. However, buyers sometimes choose an asset purchase arrangement even if wanting to keep the company as a going concern, but are especially concerned about acquiring unknown or contingent liabilities. Also, an asset purchase could be more difficult where there are a high number of contracts with third parties whose approval would be required to transfer those contracts to the buyer.


A stock purchase generally works best when the purchaser wishes to get the target entity as a going concern, and there are few shareholders. Negotiations are more simple when there are fewer parties involved, and holdouts are less likely. Buyers will prefer to obtain all of the outstanding stock of the target company if possible. Whenever there are minority shareholders who do not agree to sell, the buyer can approve a merger following the purchase, although as mentioned above, this can trigger appraisal rights. Sellers will normally favor the tax treatment of a stock purchase, while buyers will prefer the transaction be taxed as an asset purchase. As mentioned above, it might be possible to classify a stock purchase as an asset purchase for tax purposes by filing a special tax election, thereby affording the seller and the buyer the best of both worlds.


A merger generally works well when there are multiple shareholders in a target company that a buyer wants to acquire as a going concern. Instead of having to negotiate with multiple shareholders, once a vast majority of the shareholders agree to the transaction, the purchaser can be sure of having control of their business going forward. In a reverse triangular merger, buyers may maintain limited liability, by separating the target company in a wholly-owned subsidiary, obtain all the assets by operation of law, and generally avoid having to acquire third-party consents.

What sorts of laws give rise to the differences between the three acquisition types?

M&A is largely a creature of the laws of this state where the provider is incorporated/formed; however, tax laws affect the analysis significantly as well. By way of example, the Delaware general corporation law (“DGCL”) governs asset sales, stock sales and mergers for all acquisitions of Delaware corporations. The business and legal terms of an acquisition will be negotiated and agreed between the parties, but the underlying state law provides a framework for, and the basic requirements of, how each of these transactions must be conducted. The essential features of each deal type are a function of state law also. By way of instance, the DGCL has separate sections of its code handling asset sales, stock sales and mergers. Federal tax laws also weigh on the determination of whether the parties decide to enter into an asset sale, stock sale or merger, as mentioned above.


The reasons a company decides to market itself for a sale are as diverse as the reasons for starting a business. Family-owned companies are often sold because nobody in the younger generations wants to keep in the business. Some disruptive technology firms were founded with the intention of being obtained by rivals or partners. In VC- or angel-backed companies, the shareholders may see a chance to realize a return on their investment and encourage the directors to advertise the company. Founders may desire to pursue new business ventures, and thus want to divest and begin a new project. In some instances, a company might not be actively considering selling when it is approached by an investment banker or even by a possible purchaser directly. Because of their duty to act in the best interest of the company and its shareholders, boards of directors must carefully consider even unsolicited offers.

A buyer’s reason for targeting a business for acquisition could be equally varied. The goal may have developed a market into which the buyer wishes to expand, whether or not a geographic expansion, price point, customer base, or a new product. The target may have disruptive technology which the purchaser believes would be valuable to its business operations. Often bigger businesses can maximize the efficiency of a smaller concern or make other synergies by in-housing administrative or other functions that otherwise eat away at profits of smaller businesses. A buyer may also try to literally buy market share by purchasing a competitor.

No matter the motivations from the purchaser or the seller’s side, the greatest driver for an acquisition is cost. A seller wants to realize a return on investment (as that term is used in the broadest sense), and a buyer wishes to realize value in the long run through the target’s business or assets.

Ultimately, we would assert that M&A is the culmination of capitalism, as analysts (founders, investors, workers, etc.) attempt to realize a return on their investment and reinvest those funds back into the economy at large.

The difference between a Merger and an Acquisition

The difference between a Merger and an Acquisition



In an asset purchase, the purchaser buys particular resources of the target that are recorded within the trade documents. Buyers may choose an asset purchase since they can avoid buying unnecessary or unwanted assets and liabilities. Typically, no obligations are assumed unless expressly transferred under the transaction documents. Since the obligations remain inside the selling company, buyers may remove or reduce the chance of assuming unknown liabilities. Further, buyers typically get better tax treatment when buying assets instead of stock. If buyers have the ability to bring a stepped-up price basis in the assets that are acquired, they may lower their taxable profit, or increase their loss, when they later sell or dispose of their assets.

The principal risk to buyers in an asset purchase transaction is that a purchaser may fail to buy all the resources it needs to effectively operate the organization. Additionally, there are various elements of an asset sale which could be time consuming and push transaction costs: such as list particular assets and determining their worth; for some resources, third-party approval may be required before the assets can be transferred into the purchaser; and the way title of an asset is passed to the purchaser will change depending on each sort of asset, and name to each bought asset must be transferred separately. Finally, there’s a risk that the seller could retain sufficient assets to continue as a rival going concern. This risk is usually mitigated by requiring the vendor to covenant not to compete with the purchaser.

Sellers generally disfavor asset trades because the seller is left with possible obligations without significant resources it could otherwise use to meet those obligations. Additionally, the tax treatment of an asset purchase is generally less favorable to sellers than a stock exchange. The company and its shareholders can each potentially incur taxable income, which could lead to double-taxation of the sale proceeds. Entities who have pass-through taxation (partnerships, LLCs and S-Corporations) can prevent the issue of double-taxation, and consequently may be more inclined to take an asset purchase arrangement.

Generally, only acceptance of the vast majority of the members or shareholders is needed for an asset purchase transaction. Nevertheless, in Washington state and other states (not including Delaware), shareholders who vote against the asset purchase may have the right (called dissenter’s rights) to request a court to get the fair market value of the shares in connection with the asset purchase.


In a stock purchase, the purchaser buys the stock of the target company straight from the target’s shareholders. The business remains an existing going concern following the purchase, and its business, assets and liabilities continue unaffected by the trade. A purchaser may prefer a stock buy once the buyer wants to continue the performance of the target company after the purchase. Further, absent unusual circumstances, approval from third parties wouldn’t be required to approve the trade.

However, by purchasing the whole business, assets and liabilities, the purchaser could be exposed to unknown risks. Buyers can reduce its risk by holding back some of their cost in escrow to meet any obligations that arise after closure. Additionally, obtaining approval for a stock purchase could be problematic if the target has a great number of shareholders. Unless there are agreements in place ahead, buyers can’t force shareholders to market, and so that a holdout Visitor could refuse to sell to the purchaser. This result can be quite undesirable for buyers and may wind up causing the price to fall apart.

Buyers may have less-preferential tax treatment in a stock purchase. Usually, buyers might prefer to get a stepped-up price basis in the target firm’s assets than a stepped-up price basis in the target firm’s stock. However, in certain conditions, buyers are able to make an election to treat the stock purchase as an asset purchase, thus preserving the favored tax treatment of an asset purchase.


In a merger, two different legal entities become one living thing. All the assets and obligations of each are possessed by the new surviving legal entity by operation of law. There are lots of structures that mergers may take. The easiest is a forward merger, whereby the selling firm merges to the buying company, and the buying company survives the merger. Often, buyers will want to maintain the target company as a separate legal entity for liability reasons, so the buyer will rather merge the target to a wholly-owned subsidiary business of the purchaser, known as a forward triangular merger. When complete, the subsidiary survives the merger, holding all the obligations and assets of the target business.

Both a forward and a forward triangular merger normally need third-party consents, since the target company ceases to exist following the merger and all its assets are owned by the surviving entity. A reverse triangular merger is like a forward triangular merger, except that the target company is the surviving entity, rather than the wholly-owned subsidiary of the purchaser. Under Delaware law, a reverse triangular merger doesn’t constitute an assignment, as the targeted business continues as the living entity, and so no third party consents are required.

In terms of corporate approvals, mergers generally require approval only of the seller’s board of supervisors and the majority of its shareholders (absent additional requirements in its charter documents). This lower threshold is especially appealing when a target firm has multiple shareholders. However, shareholders who vote against the merger will normally have appraisal rights under state law. Appraisal rights (or dissenters’ rights) enable dissenting shareholders to request a court to get the fair market value of the stocks. This can complicate transactions and increase the purchaser’s costs.

The way the merger is taxed depends upon its structure. Generally, forward and forward triangle mergers are taxed as asset purchases, while reverse triangular mergers are taxed as inventory purchases.