The term “Mergers and Acquisitions” is generically used to refer to the breadth of transactions involving the sale and purchase of a company. Most often, the transaction is structured either as a stock purchase or an asset purchase. A “merger”, however, is a transaction with a different structure than an asset purchase or stock purchase. Although “mergers” are not used often in private company deals, they can be useful in specific circumstances. It is important to understand exactly what a merger is. A merger is a combination of two companies. The surviving company takes on all assets and all liabilities of both companies. A selling company may have valuable contracts that cannot be transferred. In this case, a stock purchase is sometimes used. Suppose, however, that not all of the seller’s stockholders agree to sell their stock. In this scenario, a reverse merger can be used to maintain the status of the contracts because in most states, a merger can be approved by less than unanimous vote of the stockholders. A merger would therefore allow you to acquire the entire company without approval of all stockholders. Mergers are typically structured with the purchase price being in the form of purchaser stock rather than cash. This can result in the seller totally deferring tax until the purchaser’s stock is sold, which may be attractive to a seller who is not seeking or does not need a total liquidation event. In contrast to an asset purchase, in a merger, the surviving entity assumes all liabilities, known and unknown, of the seller. Although this is a disadvantage, it can be tempered through appropriate indemnification provisions. The message here is that, in a unique set of circumstances, a merger, rather than a stock or asset purchase, may be appropriate.
ABOUT GLENN D. SOLOMON
Glenn D. Solomon Esq., is a principal at the law firm of Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years, with extensive experience in the purchase and sale of businesses, structuring ownership agreements, and advising companies in financial distress.
ABOUT OFFIT KURMAN
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