Many laypeople talk about “mergers and acquisitions” or “M & A” work as if the two were similar or go hand in hand. In fact, we find that many of the people who throw these terms around actually know very little about mergers and acquisitions and the different strategies and techniques companies use when acquiring other businesses. If you are considering purchasing a company or are being courted for a takeover, you will need expert legal counsel to explain and lead you through the process. The attorneys at SAC Attorneys LLP are positioned to provide you with that counsel, call us for your free consultation today at (408) 436-0789.
Legally, there are three primary methods for acquiring a business, an asset purchase, a stock purchase, or a merger. The following post details each of these methods’ strengths and weaknesses.
An asset purchase is when a purchasing company acquires the assets of another company, with the goal of running the purchased company, or a part of the purchased company, post-sale. When a company purchases another company’s assets, the liabilities attached to those assets stay with the original owner.
In essence, this is a “gutting” of the purchased company, taking the valuable assets required to run the business and leaving behind any liability associated with those assets. One risk to the purchasing company is that the purchased part may not be sufficient to keep the business running under new ownership. As a result, asset purchases are most often used when the purchasing company really wants specific assets such as patents or other intellectual property from the purchased company and does not care if the company remains viable. Another risk stemming from acquiring too few assets is that the selling company may have retained enough assets to become a competitor. As you can imagine, asset purchases are not favored by companies being purchased, as they are often left with insufficient assets to continue their business as a going concern, yet retain all of the liabilities of their pre-sale business. In short, an asset purchase is attractive when the purchasing company only wants specifically, easily divisible parts of another company such as intellectual property and there are significant or unknown liabilities attached to those assets.
In a stock purchase, the company purchasing the business buys it directly from the shareholders through the purchase of their stock. The acquired company continues as a going concern, with all of its assets and liabilities, but with a new owner owning the majority of the stock.
As opposed to an asset purchase, a stock purchase usually results in a new owner taking on a business and all of its liabilities—both known and unknown. This is the danger of a stock purchase, as the purchasing company buys stock without necessarily knowing the liabilities lurking in the purchased company’s books.
A stock purchase is premised on shareholders being willing to sell their stock. This will only work the purchasing company can offer an attractive price, as there is no other way to make them sell their shares. A stock purchase usually works best when there are a small number of shareholders to convince to sell.
A merger occurs when two distinct, legal entities become one. Each entities’ assets and liabilities become mutually owned by the surviving entity. Mergers require the approval of each entities’ board of directors and a majority of shareholders. Usually one company purchases and subsumes the purchased company, which continues as a going concern within the purchasing company. A merger is attractive if a company wishes to continue to run another company and understands and is willing to take on the purchased company’s liabilities.
If you are involved in or are considering an asset purchase, stock purchase, or merger, you require expert business law advice. For a free initial consultation, contact SAC Attorneys LLP today at (408) 436-0789. Based in San Jose, California, our firm is prepared to represent clients in San Jose, Mountain View, Los Gatos, Cupertino, Fremont, Palo Alto, Santa Clara County, and Silicon Valley.