Asset Purchase v Stock Purchase

When the time comes to buy or sell a business there’s one question that must be addressed: Asset Purchase or Stock Purchase – which is best for me and my situation? Generally, an Asset Purchase favors the buyer and the Stock Purchase favors the seller. Given that there are positives and negatives with each option, it will depend on the specifics of your situation and what the other party will agree to.

What’s the difference?

In an Asset Purchase, generally, the buyer gets to select the assets and liabilities it will purchase. The owner’s corporation may continue to exist since the buyer is only buying pieces of it.

In a Stock Purchase the buyer agrees to acquire all the outstanding shares of a company’s stock. The will usually include the target’s assets, rights and liabilities.

Of course, in both Asset Purchase as well as Stock Purchase, the parties can agree on certain provisions limiting liabilities, increasing assets, and other rights and responsibilities to be negotiated between them.

Asset Purchase Advantages

  • Generally Asset Purchases are more flexible as the buyer can be more selective in what is included -and excluded – from the purchase.
  • Generally, the buyer records both assets and liabilities at the fair market value at the time of the transaction which may have significant tax benefits.
  • The entire purchase may be depreciated, as permitted by tax law, including the value of the good will.
  • May avoid problems with stockholders who are unwilling to sell.
  • It may requires less due diligence because liabilities that are part of the purchase must be disclosed in purchase agreement with the caveat that certain liabilities may continue to overshadow the transaction in question under the successor liability doctrine.

Stock Purchase Advantage

  • A stock purchase generally involves the purchase of the entire entity.
  • Usually, the buyer takes the place of the seller and the business may proceed without interruption. Contracts and licenses may remain in force without interruption, unless the contract includes the right to object or there are other restrictions present.
  • Taxes are generally straightforward as seller pays standard capital gains tax, at the time of the transaction, for any gains realized.

Asset Purchase Disadvantage

  • Asset Purchase agreements tend to be more complicated because the individual assets, liabilities and contracts must in general be titled in the buyer’s name, which may require filings with governmental and regulatory agencies.
  • They typically require third party consents if contracts contain anti-assignment clauses, and thus, this process can slow the completion of the transaction

Stock Purchase Disadvantage

  • In a Stock Purchase transaction, the buyer is generally presumed to have purchased all or the majority of liabilities, including liens, potential environmental claims, etc.
  • An individual shareholder can refuse to sell her shares; the shares are not controlled by Seller Corporation. A renegade shareholder could make things difficult down the road.

The doctrine of Successor Liability

It should be noted that an Asset Purchase may not help the buyer avoid all liabilities. There is a doctrine in the law called “successor liability” under which the buyer is presumed to have assumed certain liabilities. They include but are not limited to:

  • Environmental liability
  • Certain taxes
  • Some employee benefits and other labor matters
  • Other liabilities depending on the particular business.

The purpose of the doctrine is to protect creditors. This is a concern because of two potential situations:

  • If the buyer continues the business without changing the name, without significant management personnel, remains at the same address, etc., no one outside the transaction may be aware that there was a sale. Such approach to continue conducting business may not sit well with the creditors since they may no longer know who they are dealing with.
  • It may be possible for the buyer to purchase essentially all the assets of the target company for a very small amount. The remaining company would be left with insufficient assets on which creditors could otherwise foreclose.

Bulk Sales Law Implications

California’s Bulk Sales laws are in full force, although some states have done away with them.  Bulk sales laws apply to any transaction involving more than half of the target’s inventory and equipment, when the sale is outside the company’s normal course of business.  These laws also exist for the protection of creditors. Failure of the buyer to comply with the terms of these statutes will cause the buyer to remain liable to the seller’s creditors, even when the purchase agreement includes an indemnification clause.

Broadly speaking, Asset Purchases will tend to favor the buyer and Stock Purchases will tend to favor the seller.  Each transaction is different, and the specifics of your transaction are what’s most important in determining which structure is best for you.  If you really want to close the deal you may need to agree to a structure that was not your first choice. Understanding the issues in both structures will help you make that decision.

 

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