CHOOSING AN

ACQUISITION
STRUCTURE AND
STRUCTURING A DEAL
October 5, 2016

© 2016 Morgan, Lewis & Bockius LLP

Agenda

• Overview of the Acquisition Process

• Basic Forms of Acquisitions
• Basic Issues to Consider in Structuring the Deal
• Select Public Company Issues
• Considerations in Selecting Form of Acquisition
• Hypothetical Facts

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Overview of the Acquisition Process

I. Role of Lawyer:
• If representing Buyer, advice on structuring and go/no go decision
• If representing Seller, advice on sale process and deal structure, and possibly evaluating
bids from multiple Buyers
• Due diligence
• Negotiation and documentation
• Getting to closing

Practice Tip – At the beginning of every proposed deal, ask the following questions:
• Is there a confidentiality agreement in place?
• Is there a letter of intent, term sheet, or even exchanges of emails on proposed terms?
• Has a structure for the deal been selected? If so, why?
• For a Buyer, who else is competing to buy this business?
• For a Seller, what alternatives are there other than this proposed Buyer or this proposed
deal?

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Overview of the Acquisition Process (cont’d)

II. Motivations of Buyer and Seller:

• Practice Tip – at the beginning of every deal, spend a little time thinking
through why each side is pursuing the transaction, and its key motivations.
• Motivations for My Side
• What does my client hope to get out of this?
• What is my client worried about?
• When does my client want to do this?
• What is the proposed process for getting to a signed deal?
• Motivations for the Other Side
• Why is the other side selling (or buying)?
• What does the other side hope to get out of this?
• What is the other side worried about?
• When does the other side want to do this?
• What is the proposed process for getting to a signed deal?

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Overview of the Acquisition Process (cont’d)

III. Typical Acquisition Process

• Process can be different for different types of deals
• Bilateral negotiations
• Informal “auction” process with multiple bidders
• Bankruptcy sale
• Public target vs. private target
• Common elements:
• Preliminary discussions/Preliminary start of “auction” process
• Confidentiality agreement
• Letter of Intent (maybe) or Term Sheet/Indication of Interest
• Due diligence
• Negotiation of terms and documentation
• Execution of documents
• Period between signing and closing (if applicable)
• Closing
• Resolution of postclosing issues

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Basic Forms of Acquisitions

A. Acquisition of Assets

• Buyer, or subsidiary of Buyer, acquires assets of Seller for stock of Buyer, cash
or other consideration and the assumption of none, some, or all of the related
liabilities of Seller
• Completed through the asset acquisition agreement
• negotiate directly with Seller’s management
• ability to specify assumed and excluded assets
• ability to specify assumed and excluded liabilities
• only agreed-upon assets and liabilities to be
transferred to Buyer
• Seller survives acquisition holding:
• excluded assets
• excluded liabilities unless distributed to Seller’s creditors or stockholders,
cash, stock, or other items paid as consideration

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Basic Forms of Acquisitions (cont’d)

Acquisition of Assets
Buyer

Cash, Stock or
Other Consideration &
Assets
Assumption of Liabilities

Seller
Stockholders
of
Distribution of Seller
Cash, Stock
or Other
Consideration
As Part of or
After Asset
Sale

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Basic Forms of Acquisitions (cont’d)

B. Acquisition of Stock

• Buyer acquires Seller’s outstanding stock from the stockholders of Seller for
stock of Buyer, cash, or other consideration
• Completed through stock purchase agreement
• negotiate directly with Seller’s stockholders
• may acquire 100% of outstanding shares or less – most Buyers want
100% ownership
• Seller continues to hold all of its assets and liabilities both before and after
the transaction – now has different stockholder(s)

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Basic Forms of Acquisitions (cont’d)

Acquisition of Stock

Before: After:
Former
Cash, Stock, Stockholders
or
Other
of Target
Buyer (now hold the
Consideration Stockholders
Buyer purchase
of Target
Shares of Stock consideration)

Target
Target

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Basic Forms of Acquisitions (cont’d)

C. Merger
• Three basic structures, all of which involve statutory mergers in which Seller’s
outstanding stock is converted into the right to receive stock of Buyer, cash, or
other consideration:
Straight Merger: • Seller merges into Buyer, with
Buyer as surviving corporation
• Note: requires approval of
Buyer’s stockholders (as well as
Seller’s stockholders)

Reserve Triangular Merger: Subsidiary of Buyer merges into

Seller with Seller as surviving
corporation

Forward Triangular Merger: Seller merges into subsidiary of

Buyer, with subsidiary as surviving
corporation

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Basic Forms of Acquisitions (cont’d)

• Completed through merger agreement

• specific terms of merger negotiated with Target’s management or

stockholders
• merger occurs by operation of state law for the jurisdiction(s) where the
merging entities are organized
• surviving corporation – one of the constituent corporations survives the
merger and succeeds to all assets and liabilities of the constituent
corporations
• Must comply with the state law merger statutes
• Merger statute
Delaware General Corporation Law (DGCL) §§ 251-271

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Basic Forms of Acquisition (cont’d)

Straight Merger
Before: After:

Former
Stockholders of
Stockholders Premerger
Target
of Stockholders Stockholders
(If Stock
Target Cash, Stock, or of of Buyer
Other Received as
Buyer
Consideration Consideration)

Seller Stock P Stock P Stock

Target Buyer Buyer

Target

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Basic Forms of Acquisition (cont’d)

Forward Triangular Merger

Before: After:

Cash, Stock, or Former

Other Target
Stockholders Consideration
of Buyer Buyer Stockholders
Target (Hold $ If
Cash Deal)

Subsidiary
Target Subsidiary Subsidiary is surviving corporation
Merger (Combined with
Target)

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Basic Forms of Acquisition (cont’d)

Reverse Triangular Merger

Before: After:

Cash, Stock, or Former

Other Target
Stockholders Consideration
of Buyer Buyer Stockholders
Target (Hold $ If
Cash Deal)

Target
Target Subsidiary Target is surviving corporation
Merger (Combined with
Subsidiary)

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Basic Issues to Consider in Structuring the Deal

Pros and Cons to Asset Acquisition Structure

• Buyer
• Can pick and choose specific assets and liabilities
• No money wasted on unwanted assets (but may inadvertently fail to
purchase an important asset)
• Lower risk of assuming unknown or undisclosed liabilities – but see
Practice Tip below
• Often better tax treatment than stock acquisitions
• Seller
• Left with known/unknown liabilities not assumed
• Often better tax treatment when selling stock
• More complicated – assigning specific assets
• More time consuming – third-party consents
• Practice Tip – If representing Buyer in an asset acquisition, can’t assume that
Buyer has no risk with respect to unassumed liabilities. Among other things, need
to address potential types of liabilities that raise successor liability issues (for
example, product liability) and any fraudulent conveyance risks.

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Basic Issues to Consider in Structuring the Deal
(cont’d)

Pros and Cons to Stock Acquisition Structure

• Buyer
• Cannot pick and choose specific assets and liabilities – will assume all
liabilities (known and unknown)
• Often worse tax treatment than sale of assets
• Seller
• Not left with any contingent liabilities
• Often better tax treatment than sale of assets
• 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

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Basic Issues to Consider in Structuring the Deal
(cont’d)

Pros and Cons to Merger Structure

• Buyer
• Cannot pick and choose specific assets and liabilities – assume all
liabilities (known and unknown)
• Seller
• Not left with any contingent liabilities
• Typically only majority consent of Target stockholders required – very
effective way of completing acquisition of a company with a large
number of stockholders
• Numerous third-party consents may be required if Target merged out of
existence
• Appraisal rights may apply
• Practice Tip – Need to be mindful of issues raised in Cigna case.

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Basic Issues to Consider in Structuring the Deal
(cont’d)

Cigna v. Audax
• It has been a common practice for acquisitions of private companies with a large number
of stockholders to structure each transaction as a merger, with all or part of the merger
consideration being subject to an indemnity by the Target stockholders, who may or may
not be parties to the merger agreement.
• In Cigna, the Delaware Chancery Court invalidated two provisions in a merger agreement:
• Indemnification by the Target stockholders for breaches by the Target of its
representations and warranties. The court invalidated the indemnification obligation
because it violated the DGCL §251(b) requirement that the merger consideration be firm
and determinable; and
• Release required to be delivered by Target stockholders in a separate document as a
condition to receiving the merger consideration, which the court voided for lack of
consideration.

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Basic Issues to Consider in Structuring the Deal
(cont’d)

Ways to address Cigna case

• Structure the deal as a stock purchase agreement rather than a merger so that all
stockholders sign the agreement
• Hold a portion of the purchase price in escrow, which may be decreased as stockholders
sign support agreements
• Put temporal and monetary limits on the indemnification obligations to increase the
likelihood of enforceability
• Condition the closing of the merger on acceptance by key stockholders, often by
requiring stockholders to sign a separate support agreement
• If including a condition for payment or obligations in a separate contract or letter,
provide for additional consideration for the stockholders’ agreement
• Purchase (or require Target to purchase) representations and warranties insurance to
cover liabilities in excess of escrow amount

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Select Public Company Issues

One-Step Mergers vs. Tender Offers

One-Step Merger Process

• Seller and Buyer sign merger agreement

• Seller prepares proxy statement, which is reviewed by the SEC
• After the proxy statement is cleared, Seller sets date for
stockholders meeting
• If stockholders approve the merger, deal typically closes shortly
thereafter, subject to regulatory approvals
• Merger is effected and Seller stockholders receive merger
consideration in exchange for ownership interest in Seller

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Select Public Company Issues (cont’d)

One-Step Mergers vs. Tender Offers

Tender Offer Process

• Seller and Buyer sign merger agreement (typical for “friendly” deal, but
not required)
• Pursuant to merger agreement, Buyer launches tender offer directly to
stockholders
• After end of tender offer period, if sufficient shares are tendered and
other conditions are met, tender offer is closed and Buyer acquires
tendered shares
• Buyer may thereafter complete a “back end” merger and squeeze out
remaining stockholders, subject to compliance with state merger statute

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Select Public Company Issues (cont’d)
Benefits of a Tender Offer vs. a One-Step Merger
• No SEC Preclearance. SEC preclearance of cash tender offer materials is not required
before mailing to Seller shareholders. SEC review of cash tender offer materials after
distribution is often limited.
• Speed. A cash tender offer can be completed relatively quickly – 20 business days
following commencement in the case of a friendly deal not involving any regulatory or
other timing impediments (DGCL Section 251(h) eliminates prior delays in completing
back-end merger).
• Direct. A tender offer is made directly to shareholders and does not require a shareholder
meeting or board approval (could be used for hostile offer, although Section 251(h) may
not be used).

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Select Public Company Issues (cont’d)
Tender Offers and Section 251(h) of the DGCL
• Tender offers are frequently used as the first step in the acquisition of all of a Seller’s
common equity and must be followed by a “back-end” merger, where the bidder
squeezes out the remaining shareholders for the same consideration offered to
shareholders in the tender offer
• Under Delaware law, a back-end merger following a tender offer has long required
shareholder approval unless the acquirer owned following the completion of the tender
offer at least 90% of each class of target stock otherwise entitled to vote on the merger
• Effective August 1, 2013, Delaware eliminated the possible need for shareholder
approval for second-step squeeze-out mergers in qualifying two-step acquisitions
• Under Section 251(h) of the DGCL (as amended), shareholder approval is not required
for the back-end merger if, following the tender offer, the acquirer owns at least the
percentage of stock that would otherwise be required for stockholder adoption of the
merger agreement (typically >50%) subject to eligibility and other requirements

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Considerations in Selecting Form of
Acquisition
Generally, the structure of the transaction involves a balancing of competing and sometimes
adverse business, tax, corporate law, contract, securities law, and accounting considerations.
Basic Questions About Seller • Public company/private company
• Private company – number and identities of equityholders
• State of incorporation
• What is Buyer buying?
• Is Seller business in a standalone entity or operated as
a division of a larger entity?
• Are there assets/businesses Buyer does not want to
acquire?

Tax Treatment • Tax treatment for Seller

• Tax treatment for Seller stockholders
• Availability and allocation of tax benefits
• Tax treatment for Buyer if it later sells all or part of the business
• Compliance with specific tax requirements (for example,
REIT rules)

Corporate Law • Seller shareholder approval

• Buyer shareholder approval
• Appraisal rights

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Considerations in Selecting Form of
Acquisition (cont’d)
Timing/Other • Relative leverage of the parties

• Liability profile of the target business

• Ability to obtain indemnity from credit-worthy party

• Financing structures

• Buyout fund structures

• Third-party/other consents, regulatory requirements

(including Hart-Scott-Rodino antitrust filing)

• State statutes

• Availability of adequate indemnity from Seller to cover

liability issues that can’t be addressed with chosen
structure for deal

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Considerations in Selecting Form of
Acquisition (cont’d)
• Tax Considerations
• Taxable or “Tax Free” Transaction – The tax impact on Seller or its
stockholders resulting from an acquisition – whether the transaction is
taxable or “tax free” (really tax deferred) to Seller – will generally be
determined by:
• the structure of the transaction,
• the nature and amount of the consideration to be received in the transaction,
and
• the nature of the entity that is the Seller (i.e. whether the entity is itself a
taxpayer or a pass-through entity for tax purposes)

• General Rule in Taxable Transaction – Seller is taxed on the gain

recognized on the sale of the assets sold. Generally, the gain recognized
equals:
• Cash, plus
• Fair market value of property received, plus
• Liabilities assumed (in an asset sale), less
• Tax basis in assets sold

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Considerations in Selecting Form of
Acquisition (cont’d)
Tax Considerations (continued)
• Try to Avoid “Double Taxation” in Taxable Asset Sale – taxes paid by the
entity selling the assets, and then stockholders pay taxes on the net
proceeds distributed from sale.
• “Tax-Free” Transactions – Seller may seek to structure a transaction so
that it is, in whole or in part, “tax free” to its stockholders.
• Buyer Tax Preference – A Buyer will generally prefer to acquire assets to
maximize its tax benefits but generally must be cognizant of Seller’s tax
position in structuring a deal and must also be aware of the
disadvantages of an asset acquisition (complexity, consents, expense,
etc.)
• Practice Tip – Because the tax treatment for a transaction can be one
of the biggest drivers of economics based on different transaction
structures, deal teams should involve tax counsel early in the process.

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Considerations in Selecting Form of
Acquisition (cont’d)
• Corporate Law Considerations
• Mergers – statutory; driven by state law; statutes will dictate approvals,
filings, effectiveness of merger, and appraisal rights
• Corporate Approval Matters – (Affects Timing)
• Board of Directors Approvals
• Stockholder Approvals
• Third-Party Approvals
• Third-Party Consents
• Sometimes deal structure will dictate whether third-party consents are
required for the deal. An example would be a key lease or IP license
that prohibits assignment but has no restrictions on a change of
ownership.

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Considerations in Selecting Form of
Acquisition (cont’d)
• Securities Law Considerations
Whenever stock is being transferred in a transaction, securities law
issues need to be considered.
• Acquisitions of private companies – Buyer must find exemption from
federal securities law requirements to register its stock in an acquisition
• State securities laws – Consider state securities law matters; may have
filings or approvals at the state level depending on structure and the
nature of the parties receiving stock in the acquisition; may have pre- or
post-transaction filings; consult local counsel if Seller or Seller’s
stockholders reside in different states

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Hypothetical Facts

Scenario One Possible Outcome

• Private company with 100+ stockholders • Too many stockholders to pursue negotiated
stock acquisition; asset acquisition or merger
may be preferable
• Same as above, but also has key IP licenses • May not be able to do asset sale; as a result
that require consent to assign may have to structure as a merger
Scenario Two

• Business operated in a subsidiary of a larger • Could buy as stock sale, asset sale, or merger
corporate group
• Same as above, but other businesses not • This rules out stock sale or merger, unless
desired by Buyer are also in the same unwanted businesses are transferred out prior
subsidiary to closing and Seller provides adequate
indemnity with respect to retained businesses

• Same as above, but subsidiary also has • This may drive to an asset acquisition unless
significant contingent liabilities Seller can provide creditworthy indemnity on
acceptable terms to cover the contingent
liability

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Biography
John Utzschneider focuses primarily on mergers and
acquisitions, securities offerings and corporate
governance and finance, including debt restructurings.
He represents both private and public companies, equity
and debt financing sources and underwriters in mergers
and acquisitions, leveraged buyouts, joint ventures,
private and public offerings, and restructurings.

John R. Utzschneider Chambers USA 2014 describes him as extremely bright

Boston and responsive and able to deliver “top-notch and
+1.617.951.8852 efficient legal services.” John has been listed for many
[Link]@[Link]
years to various peer-reviewed best lawyer lists in
various categories, including Chambers USA, Best
Lawyers in America, and Legal 500.

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Biography
Gitte J. Blanchet’s practice focuses on representing
financial and strategic acquirers and targets in mergers
and acquisitions and advising clients on joint ventures,
private placements, corporate securities including debt
restructurings, capital markets, and general corporate
matters. She represents both public and privately held
companies in merger and acquisition transactions and a
variety of debt and equity financing transactions across
Gitte J. Blanchet numerous industries.
Boston
+1.617.951.8211
[Link]@[Link]

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© 2016 Morgan, Lewis & Bockius LLP

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