Merger and Acquisition Deal Structure – Stock Purchase, Part I

In a recent acquisition that I handled for a company in Santa Cruz, the buyer decided to purchase, with cash, the stock of the company rather than its assets. Acquisitions through stock or equity purchases are a common method of buying a company. From an administrative standpoint, equity purchase acquisitions are one of the easiest deal structures to implement.

In an equity purchase acquisition, a company is bought by purchasing all of the ownership interests of that company. If the company is a corporation, a buyer purchases all of the company’s shares of stock from the company’s stockholders. If the company is a limited liability company or partnership, a buyer purchases all the ownership interests of the company from its members, in the case of a limited liability company, or its partners, in the case of a partnership. This discussion will focus on a stock purchase, although the basic issues outlined here are the same when dealing with a limited liability company or partnership.

The administrative benefit of a stock purchase transaction is that ownership changes simply by transferring all of the company’s shares. Contrast this with an asset purchase structure, where each desk, chair and personal computer must be accounted for and sold to the buyer.

A significant advantage to a stock purchase is that there may be no need for assignments of the contracts of the business (although case law can be inconsistent on this point). Contracts should be reviewed, however, as many prohibit stock transfers, or changes in control, of the business.

Stock purchase transactions, however, can have disparate tax impacts on the buyer and seller. As a result, both the buyer and the seller will need to consult their respective tax advisor early and often to understand the consequences of a stock purchase structure and the specific terms within the transaction. Parties that agree to terms without consulting their tax advisor are often faced with the need to renegotiate their transaction under less than optimal circumstances.

One of the top issues in a stock purchase is the treatment of the company’s liabilities. Although purchasing the stock keeps the assets of the business intact, it also retains all of its liabilities. In other words, a stock purchase does not rid the business of its obligations. For this reason, a buyer is not disposed toward purchasing stock, because the buyer ends up with an entity that cannot escape its past liabilities.

In my next segment, I’ll discuss some of the available solutions commonly used in a stock purchase transaction to provide sufficient comfort to a buyer to close the deal.