Mergers-&-AcquisitionsMergers & Acquisitions Defined

Mergers & acquisitions (M&A business transactions) are simply the transfer of assets, liabilities and ownership from one business entity to another.  Businesses are complex on every level and as such, mergers & acquisitions can be equally intricate. Even a standard transaction– for example a private company looking to transfer an existing business to a newly created separate subsidiary– although a seemingly simple business transaction on its face, the above scenario is full of complexities.  Our business attorneys in Chicago regularly provide legal counsel to seller’s selling a business in Illinois and to buyer’s purchasing a business in Illinois.

Mergers vs. Acquisitions

Mergers & acquisitions are the legal methods by which distinct corporations become one corporation, unified through shared assets. In spite of the popular phrasing of mergers & acquisitions, there is a subtle, yet important distinction between the two legal devices.

An acquisition occurs when one company absorbs the assets, debts, rights and liabilities of another one.  An acquisition may also be thought of as a complete purchase of all the stocks and/or assets of another company. A merger, on the other hand, takes place when two distinct companies mutually agree to become a single business. The mutual agreement component of a merger is the primary distinction from an acquisition, which is predicated on a transactional behavior between two parties.  Acquisitions by merger result in the surviving entity succeeding to all of the rights and obligations of the acquired entity.

Stock Purchase vs. Asset Purchase

Most acquisitions can be consummated either as an asset purchase or a stock purchase.  Where an asset purchase transaction is favored, a variety of issues must be considered as the transaction is truly one of the sale of each of the individual assets of the business and an assumption of agreed upon liabilities.  Conversely, where the transaction is structured as a stock purchase, by its very nature the acquisition results in a transfer of the ownership of the business entity itself (as a going concern), but the entity continues to own the same assets and have the same liabilities.

When determining whether to structure a business acquisition as a stock purchase or an asset purchase there are a number of advantages and disadvantages of each that will need to be weighed by the seller selling a business or the buyer purchasing a business. Our Chicago corporate attorneys have experience handling mergers and acquisitions and representing buyers and sellers alike. Contact our law firm to learn more about the legal process of selling or buying a business in Illinois.

Advantages and Disadvantages

For example, in an asset acquisition business transaction, the liabilities of the business from which the assets are being purchased generally do not follow the assets, except where successor liability is imposed.  In a stock purchase business transaction, the buyer will inevitably take on unknown liabilities that may greatly reduce the value of stock.  In the latter transaction, incorporating certain indemnification provisions can reduce the risk the buyer will assume somewhat, but only to the extent that the seller is able and willing to honor those indemnification obligations.

On the other hand, in an asset acquisition business transaction, assets need to be assigned, and often titles, deeds, commercial leases, customer and vendor business contracts, and the like, need to be transferred to the acquiring entity, which can add additional cost and expense.  Further, more often than not, certain business licenses, registrations and certifications will not be able to be assigned and the acquiring entity will need to apply for such licenses, registrations and certifications independently, which can sometimes be a burdensome process.  In a stock acquisition, title to the assets, including the company’s business licenses, registrations, certifications, commercial leases and customer business contracts, will be maintained in the acquired entity, so generally no transfers will be needed.

Which Business Acquisition Structure is Best?

When determining whether to structure a business acquisition as a stock purchase or an asset purchase there are a number of advantages and disadvantages of each that will need to be weighed by the seller selling a business or the buyer purchasing a business.

Tax Issues

Tax issues are not always the most important factor in determining whether to structure an acquisition as a stock purchase or an asset purchase.  Other non-tax reasons generally are more determinative in deciding the appropriate acquisition structure.  That said, when taxes are an important consideration, the buyer and seller generally consider the amount of the owner’s net after-tax proceeds, the buyer’s desire to assign a high basis to the assets for depreciation purposes, and any gain recognition by the company.

Seller ‘s Liabilities

The seller’s liabilities (also termed successor liability) connected with the business is usually the most important factor when deciding whether the acquisition will be structured as stock purchase or an asset purchase.  In most transactions, the buyer has a heightened desire to avoid responsibility for the seller’s liabilities.  Every buyer’s nightmare is that, after closing, an unknown or undisclosed and costly liability arises and attaches to the acquired business.

If an entity acquires the stock of another business, the transaction results only in a change of ownership of the acquired company and all of the obligations, liabilities in existence prior to the transaction remain with the acquired entity.  While creative efforts by the buyer’s attorneys can push back on the assumption of some of the seller’s liabilities in this scenario, such as contractually excluding certain obligations, strengthening seller’s representations and indemnification provisions, or providing that a certain amount be set aside in escrow, the buyer will still be left holding the bag at the end of the day.

Buyer’s pursuing asset purchases, on the other hand, may avoid many of these seller liabilities by forming a new entity to acquire the assets to be transferred.  In general, the liabilities of the business from which the assets are being acquired do not follow the assets. There is no substitute for throughout and thoughtful due diligence to identify the potential liabilities that may be transferred in an acquisition transaction.

Existing Business Contracts

It is important that all of the business contracts to which the company is a party be carefully reviewed to make certain the proposed transaction will not violate existing duties or obligations.  Every business is party to a host of business contracts that affect its operations.  From real estate leases to client contracts to employment agreements, companies obligate themselves to continuing relationships with third parties.  In the acquisition context, these contractual relationships must be addressed to ensure the benefits of these business contracts are not lost, or that the seller is not in breach of these agreements as a result of the acquisition transaction.

When a buyer desires to take advantage of the target business’ existing business contracts (such as customer contracts, vendor contracts, commercial leases, and insurance), intellectual property rights, permits, certifications or licenses (which may be unassignable), a stock purchase can be more attractive, because it avoids the need to assign each of the business contracts (and to get permission to assign the business contracts).  On the other hand, a buyer contemplating an asset purchase will need to ensure that the business contracts are freely assignable or else it will need to obtain the consent of the third party bound to the contract.

Call Our Chicago Corporate Attorneys

Our Chicago corporate attorneys have significant experience in handling a wide range of acquisition business transactions throughout Illinois. To schedule a consultation with one of our business attorneys today, please contact us via email, online or give us a call at 312-789-5676