There are three primary transaction structures:
- Asset Purchase
- Stock Purchase
- Merger
Each structure also has substructures, based on tax considerations.
Asset Purchase
This structure occurs where the buyer purchases the targets assets. Assets include goodwill, equipment, inventory, intellectual property, contracts. In this situation, the target still exists with the remaining liabilities (minus any liabilities taken with purchases). For consideration, the target receives cash or stock as consideration. The target then pays of their liabilities with the cash, go through dissolution proceedings, then distribute the remaining consideration to shareholders.
For buyers, this structure is advantageous because there is flexability in saying which assets are to be purchased and the liabilities remain with the target. The challenge here is to keep track of all the essential assets to keep the business running (and make sure those assets transfers to the buyer).
For targets, the structure is disadvanteous because the liabilities remain with the target, even through dissolution (to an extent). This is also a more time consuming, and thus expensive, type of transaction. Taxes are also worse for targets. For example, the target will have to pay income tax from teh proceeds and then pay shareholders will have to pay taxes for dividends received from those proceeds.
Stock Purchase
In this structure, the buyer purchases the stock of the shareholders. The target then becomes a subsidiary of the buyer.
For a buyer, a stock purchase is advantageous because the process of conducting a stock purchase is simplier. There is no need to obtain consents for contract purchases and there is no need to inventory assets. There are risks to buyers in a stock purchase. There is a potential the company can’t purchase 100% of the stock, holding up the deal from closing.
A target perfers a stock purchase because: (1) less taxes because the purchase of stock goes directly to the shareholders (there is no ordinary income), (2) fewer liabilities because those are obsorbed by the buyer.
Mergers
Mergers are the least common structure. There are three types of Mergers:
- The buyer obsorbs the target. This is known as the “Direct Statutory Merger.” The target is now part of the buyer. Typically, in this situation, the the shareholders of the target will end up getting shares of the buyer’s stock. Another option is the stock of the shareholders will be bought by the buyers as consideration.
- The buyer has a subsidiary entity that obsorbs the target. This is known as the “Foward Triangular Merger.” The purpose of this method is to protect the buyer from liability.
- The buyer has a subsidiary entity that is obsorbed by the target. This is known as the “Reverse Triangular Merger.” The purpose of this method is to remove the cost of maintaining the name and consumers while removing any potential confusion. Because of the fewer steps to maintain business methods, this method of merger is the most common of the three options.
The advanteges and disadvantages of a merger are very similar to a stock purchase. The main difference is that the approval of shareholders only requires a majority for the transaction to occur.
