University of Management & Technology | School of Law & Policy
LL.M. in Commercial Law | Mergers & Acquisitions
Lecture Note 6 | Session 6
OVERVIEW OF THE METHODS
MERGER & ACQUISITIONS
(Structuring the Deal)
v THE THREE METHODS
Ø Stock/Share Purchase,
Ø Asset Purchase
Ø Merger Of Companies
v STOCK PURCHASE (Acquisition of Shares)
§ In a stock purchase, the Purchaser buys the stock of the Target Company directly from
individual shareholders for consideration.
§ The consideration (stock of Buyer, cash, or some combination) of the transaction is paid
directly to the shareholders of the Target Company.
§ Purchaser/Acquirer could acquire a controlling majority or upto the entire Target’s voting
shares from its existing shareholder(s).
§ The legal and corporate status of the Target Company remains the same after the
transaction except that the voting shares of the Target Company are now owned by the
Purchaser/Acquirer.
§ Given the Corporate Personality of Target, the Acquirer or buyer as the majority or
complete shareholder/Owner of the Target, essentially becomes the owner of all the
Target’s/Seller’s assets and liabilities.
§ That is, the Target continues to hold all of its assets and liabilities both before and after
the transaction – now has different stockholders i.e. the acquirer.
v ADVANTAGES & DISADVANTAGES OF STOCK PURCHASE TO THE PURCHASER
♣ Speed and simplicity
♣ No transfers of title to assets required.
♣ Few third party consents required (but still need to review contracts of the Target any
change in control provisions).
♣ Less disruption with clients and employees.
♣ Purchaser owns all contracts, intellectual property and assets, making it easy to begin
deriving value from the acquisition.
♣ All-stock deal negotiations tend to be less contentious.
♠ Purchaser assumes all liabilities of the Target, including contingent and
unknown future liabilities (can transfer specific liabilities to Seller by
express agreement, but ultimate end point for liabilities is the Purchaser).
♠ Purchaser cannot pick and choose the assets to be acquired.
♠ Purchaser may get lulled into “ease” of the transaction and fail to perform
adequate due diligence; due diligence into potential liabilities is
particularly important.
University of Management & Technology | School of Law & Policy
LL.M. in Commercial Law | Mergers & Acquisitions
Lecture Note 6 | Session 6
♠ As Purchaser acquires all of the Seller’s outstanding liabilities, the buyer
may inherit legal and financial problems that ultimately reduce the value
of the purchase.
♠ And if the Target has dissenting shareholders, a stock purchase won’t
make them go away.
♠ Dissenting shareholders of the Target
v ADVANTAGES & DISADVANTAGES OF STOCK PURCHASE TO THE SELLER
♣ Speed and simplicity: the Sellers(Shareholders of the Target) simply sell their stock
certificates to the Purchaser.
♣ Board and Shareholder approval not required.
♣ Tax Treatment
♣ Seller is not liable for the liabilities of the Target (contingent, unknown or otherwise),
except if expressly assumed in the agreement.
♣ No third party consents required.
.
♠ Seller has no continuing operation in Target, except as expressly
provided in contract.
♠ As the transaction is a sale of securities, legal regime compliance is
necessary
♠ Not practical if the Target has large number of stockholders – all must
agree to sell – negotiations can be time-consuming • Few (or none)
statutory requirements for negotiated stock sales
v ASSET PURCHASE
§ In an asset purchase, the Purchaser buys only operating assets and goodwill of the
Target Company (i.e. Acquirer wants only the assets of the Target).
§ The Target Company remains in existence and continues to be owned by the Target’s
shareholders.
§ The Purchaser/Acquirer pays the purchase price/consideration for the said Assets to the
Target Company, who then distributes it as income to the Target/Seller’s shareholders.
§ Consideration may be cash or offering of the Purchaser/Acquirer’s own shares — and the
Acquirer assumes all liabilities associated with those assets.
v ADVANTAGES & DISADVANTAGES OF ASSET PURCHASE TO PURCHASER
♣ The Purchaser can pick and choose the assets it buys.
♣ And by avoiding the rights of appraisal issues that typically surface in a merger, buyers
can sidestep complaints made by dissenting shareholders.
♣ What’s more, an asset sale can trigger a costly tax event, hindering the transaction or
requiring both buyer and seller to agree on a price that takes tax implications into
consideration.
♣ No money wasted on unwanted assets
University of Management & Technology | School of Law & Policy
LL.M. in Commercial Law | Mergers & Acquisitions
Lecture Note 6 | Session 6
♣ Lower risk of assuming unknown or undisclosed liabilities - The Purchaser generally
avoids contingent and unknown liabilities of the Target Company.
♣ The Purchaser is generally not liable for any of the Target Company’s liabilities except for
those that are expressly assumed.
♠ complex, time consuming, expensive and cumbersome,
♠ title to each of the assets being sold must be transferred.
♠ Sales tax involved
♠ Consents and assignments from third parties are required for each third party
contract,.
♠ Assignment of registered intellectual property, patents and trademarks, need
to filed and approved by the relevant governmental authority.
♠ Unpaid creditors of the Target can sometimes assert claims directly against
the Purchaser
♠ Corporate formalities must be followed (approval of BOD of Purchaser and
approval of BOD and Shareholders of Target).
v ADVANTAGES & DISADVANTAGES OF ASSET PURCHASE TO THE SELLER
♣ Seller may retain cash in the Target, certain accounts, and A/Rs as part of the deal.
♣ Makes funds quickly available
♣ Generally the consideration paid is in cash or cash equivalents.
♣ Seller can continue operation of Target and maintain tax attributes of Target.
♣ Often better tax treatment when selling stock
♠ complex and time consuming because every asset needs to be separately
transferred.
♠ Consents and assignments from third parties are required.
♠ Seller remains responsible for liabilities that are not expressly transferred,
including contingent and unknown liabilities.
♠ Seller may incurs a “double tax” on the transaction—one at the corporate
level and then again when the consideration is distributed to the Seller
(shareholders).
v MERGERS
Ø Direct Merger
Ø Forward Triangular Merger
Ø Reverse Triangular Merger
♦ DIRECT MERGER
§ Target merges directly with Acquirer
§ In a direct merger, the target company merges directly into the acquiring company, with
the acquiring company surviving the merger.
§ The stockholders of the target company will receive the consideration offered by the
University of Management & Technology | School of Law & Policy
LL.M. in Commercial Law | Mergers & Acquisitions
Lecture Note 6 | Session 6
acquiring company (generally stock of the acquiring company) as payment for “selling”
their equity in the target company.
§ All assets and liabilities of the Target become those of the Acquirer
♦ FORWARD TRIANGULAR MERGER
• A forward triangular merger involves the acquiring company forming a subsidiary
company.
• The target company merges with and into the merger subsidiary, and the
merger subsidiary is the surviving entity.
• The stockholders of the target company will receive consideration from the Acquirer
for the “sale” of their shares in the target. Consideration can be cash, stock of
Acquirer or combination.
• Under this structure, the subsidiary of the Acquirer obtains all of the target
company’s assets and liabilities by operation of law.
• Any contracts of the Target and rights thereto become vested in the Subsidiary, and
not assigned, by operation of law.
• But contract-by-contract due diligence is must to ensure.
♦ REVERSE TRIANGULAR MERGER OR REVERSE SUBSIDIARY MERGER
§ A merger subsidiary is created by the Acquirer which the merges with and into the Target
Company, with the Target Company surviving the merger.
§ Thus, this structure produces the same result as if the Acquirer had purchased all shares
of stock of the Target (or acquired company).
√ It has the advantage of isolating the liabilities of the acquired company/Target via
a separate subsidiary (unlike the direct merger), \
√ has the advantage of preserving the acquired company/Target as a corporate
entity (unlike the forward triangular merger).
√ The assets of the target do not need to be transferred to another entity because
they remain with the target. This is important because Third Party contracts of
the Target are protected (anti-assignability clauses).
v The specific form of the transaction should be determined considering the
relevant tax, accounting and business objectives of the overall transaction.
§ There is no difference between a reverse triangular merger and a reverse subsidiary
merger. BUT reverse merger is different
