When deciding to sell your company, and taking some of the initial steps towards that goal (including Getting Ready for an M&A exit and Negotiating a Term Sheet), an important step will be determining the structure of the transaction. You may have heard the terms “merger”, “stock purchase” and “asset sale”. Below is a quick primer and summary of some of the advantages and disadvantages of each of these transaction types. Note, however, that this article does not address tax issues, which are complex and vary by transaction (and in some cases, may be the primary driver of a transaction’s structure), so you should consult with your lawyer on those issues.
Summary: A merger means that two companies are literally combined into a single company. In the most common type of merger (a “reverse triangular merger”), the buyer will create a new wholly-owned subsidiary company (often called a “merger sub”) that will merge directly into your company, with the merger sub disappearing as a distinct legal entity following the completion of the merger. The result will be that the buyer owns 100% of the merged company (the “surviving entity,” which from a legal entity standpoint is your original company) and the selling stockholders receive a deal payment.
Advantages: To complete a merger, you typically need less than all of the stockholders to provide consent (the actual requirements will depend on state laws and the contracts you have signed). If your company has many diverse, small or scattered stockholders, it might make sense to pursue a merger so as to make the sale of your company easier and more streamlined.
Disadvantages: When compared to a stock purchase (described below), a merger can be more complicated, as it often requires the creation of a merger sub and the filing of a merger certificate with state authorities. Assuming that the number of stockholders is small and those stockholders are readily available, a stock purchase may be an easier and more efficient process than a merger. Additionally, some types of mergers result in your company’s disappearance as a distinct legal entity, which can trigger certain provisions (such as anti-assignment provisions) in contracts your company may have entered into.
Summary: A stock purchase is conceptually very straightforward; the buyer simply purchases the outstanding stock of your company directly from the stockholders. The name of your company, operations, contracts, etc. all remain in place, just with new owners.
Advantages: As noted above, this is a very simple and straightforward transaction structure. There is no need to form a merger sub and in many cases this will not impact anti-assignment provisions. If there are a small number of stockholders that are operating in unison, this may be a preferred form of transaction.
Disadvantages: Often, a company has a large number of stockholders, some of whom might own small amounts of stock or might be difficult or impossible to contact. In those situations, it doesn’t make sense to bring such stockholders into the sale negotiations as it might make such negotiations difficult. Additionally, with a large and diverse stockholder base, it’s not assured that all of stockholders will actually agree to sell their shares, and few buyers are looking to acquire less than 100% of your company. Therefore, unless your company is closely held and you are confident that you can get all of the stockholders to agree to the sale, a stock purchase may not be feasible.
Summary: In an asset purchase, a buyer only buys selected assets from your company, and your company will continue to exist, and potentially continue to operate, following the sale. Relatedly, the buyer may not assume all of the liabilities of your company, which will remain with your company post-closing if not explicitly assumed.
Advantages: From the buyer’s perspective, this may be a favorable structure because it allows the buyer to pick and choose only the assets it actually wants to acquire or thinks are valuable, while leaving unwanted assets (and liabilities, both known and unknown) behind, all without having to deal directly with your company’s stockholders. There may also be significant tax benefits to the buyer associated with an asset purchase (the buyer will get a “step up in basis” with respect to assets it purchases).
Disadvantages: If a buyer is only looking to buy a single line of business, it can often become time consuming and expensive, as well as impractical, to separate the acquired assets and associated contracts relating to such assets from the rest of your company (as often times, assets and contracts are not confined to a single line of business and many assets, including intellectual property assets, may be shared between business lines). Additionally, as with other structures, an asset purchase might trigger certain provisions in contracts, or might not be permitted at all (for example, government permits are often non-transferable, while certain other transfers such as intellectual property might require government filings). Finally, the concepts of “successor liability” and “fraudulent conveyance” somewhat limits the ability of a buyer to leave behind or otherwise insulate itself from unwanted liabilities in your company.
Choosing your transaction structure as you sell your company is an important decision, and understanding the pros and cons of your alternatives is important. The above article very briefly sketches some of the advantages and disadvantages of the most common structures, but is by no means exhaustive.