Posted By
Kevin Tsai

If you are thinking about selling your company (see also Getting Ready for an M&A exit and Negotiating a Term Sheet), you should carefully consider how to best structure the sale.  Below is a quick primer on some of the advantages and disadvantages of the most common acquisition structures:  mergers, stock sales and asset sales.

Merger

Summary

A merger consolidates two companies that are distinct legal entities into a single legal entity that holds the combined assets and liabilities of the original companies.  In the most common type of merger, a “reverse triangular merger”, a buyer creates a wholly-owned subsidiary company (a “merger sub”).  At the closing, your company’s equityholders’ interests are cancelled in exchange for “merger consideration”, most commonly cash or stock issued by the buyer.  The merger sub merges into your company and ceases to exist as a separate entity and your company “survives” – now as a wholly-owned subsidiary of the buyer.

Advantages

  • Mergers can be simpler than asset sales since the merged entities collapse into each other by operation of law. In an asset sale, assets to be sold need to be specified and duly transferred.
  • Merger consideration is typically paid directly to stockholders, whereas in an asset sale you have to take the additional step of distributing the sale proceeds to the stockholders. Your company will also still exist after an asset sale, and administratively you will still need to take steps to dissolve the company and deal with any remaining liabilities and assets.
  • Unlike a stock sale, 100% of the interests of a company can usually be transferred without the consent of all of the stockholders. The actual stockholder approval requirement, whether a majority in interest of outstanding stock or some higher threshold, will depend on state laws, your charter and the contracts you have signed.

Disadvantages

  • A merger can require additional steps to be completed compared to a stock sale with a limited number of sellers. For example, the buyer may need to form a merger sub and a merger certificate will need to be filed with state authorities.
  • Some types of mergers may result in your company’s ceasing to exist as a distinct legal entity. This can breach anti-assignment provisions in contracts your company may have entered into, so you will need to evaluate contracts and determine if any third party consents need to be secured before closing.

Stock Sale

Summary

In a stock sale, the buyer simply purchases the outstanding stock of your company directly from each stockholder. The legal status of your company remains the same and the name of your company, operations, contracts, etc., all remain in place unless otherwise contemplated by the acquisition agreement.

Advantages

  • No need to take certain steps that may otherwise be required in a merger, such as forming a merger sub.
  • Since the company still exists in its original form post-closing, anti-assignment provisions are usually not breached (though change of control provisions may still be problematic).
  • Stockholders are paid directly for their shares.

Disadvantages

  • Your company may have a large number of stockholders, some of whom might be difficult or impossible to contact, such that it may be hard to coordinate action by all holders. Buyers typically want to own 100% of a target’s outstanding equity and a single absent holder or small holder opposing the transaction may frustrate that buyer from being able to achieve that goal.   Therefore, unless your company is closely held and you are confident that all of the stockholders can be convinced to agree to the terms of the sale, a stock purchase may not be feasible.

Asset Sale

Summary

In an asset sale, a buyer can buy some or all assets of your company.  Assets can be in all kinds of forms, including intellectual property rights or contracts.  Similarly, the buyer may assume none, some, or all of the liabilities of your company, and any liabilities not assumed by the buyer will remain with your company post-closing.  Your company will continue to exist, and potentially continue to operate, following the sale.

Advantages

  • Buyers like asset sales since asset sales allow a buyer to only acquire desired assets and leave unwanted assets (and liabilities, both known and unknown) behind with the seller.
  • A buyer can often obtain significant tax benefits in an asset purchase, since the buyer will get a “step up in basis” with respect to assets it purchases.
  • Limited asset sales might not require the approval of the stockholders of the selling company (though a sale of substantially all assets will still require stockholder approval).

Disadvantages

  • If only a portion of the company’s assets are being sold, it can be time consuming, expensive and impractical, to separate assets (and contracts relating to such assets) to be acquired from the rest of your company. 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.  While these challenges can sometimes be addressed through “transition services agreements” that allow assets to be shared between the buyer and your company for a period of time, such agreements may themselves be complicated and difficult to negotiate.
  • If your goal is to sell the entire company, an asset sale will not automatically wind down the company. After the asset sale, you will still need to figure out how to deal with the company’s remaining assets and liabilities.
  • Transferring contracts in an asset sale often will require third party consent since the party to the contract will change. Other desired asset transfers might be difficult or prohibited.  For example, government filings or approvals may be needed to complete certain transfers of intellectual property or contracts and government permits may be non-transferable.

Further Considerations

The appropriate transaction structure for your deal will vary significantly based on your specific circumstances.  Each structure offers distinct advantages and disadvantages, including those not addressed in this brief article.  For example, while mentioned only in passing here, tax considerations can play a significant – or even chief role – in determining what structure will most maximize value in a deal.  Considering these structures thoughtfully can help you facilitate a smooth sale transaction and increase the value your stockholders get out of the deal (including, in some cases, by giving your buyer the benefit of a structure it prefers in exchange for more consideration to be paid to your stockholders).