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Mergers and Acquisitions
Our lawyers are experienced in private company merger and acquisition transactions of all kinds. We represent clients in the structuring, negotiating, and closing of transactions in mergers, acquisitions, assets sales, and business reorganizations. Transactions of this nature are significant events in the business life-cycle and, for many owners, are once in a lifetime transactions. We provide advice from the beginning to the end of a deal so that our clients can maintain focus on what is most important: running their businesses.
When business owners initially consider an M&A transaction it often appears like a relatively straight-forward process. However, there are structuring considerations from the outset that can have a very real impact on a company’s finances and risk profile.
After the basic business terms of a transaction are agreed upon, the process of drafting and negotiating the written deal documents present a number of potential complications. In addition to the deal structure, the closing process, representations and warranties, indemnities, and termination provisions contained in the documents are just a few of the provisions that can be very high stakes for both parties. Our attorneys diligently represent and protect the interests of our clients in these deals to avoid unnecessary risks.
Business acquisition are generally structured as either entity stock sales or asset sales. There are characteristics of each structure that have a significant impact on the parties and the net results of the transaction. In an asset sale, the buyer purchases some or all of the target company’s assets while the seller maintains its ownership interest in the target company. If the target company sells all of its assets, it has little to no value after the transaction and is often dissolved. In an entity sale, the buyer purchases the seller’s ownership interest (i.e. in the case of a corporation, the seller’s stock and in the case of a limited liability company, the seller’s membership interest). Along with that ownership interest comes all of the assets and liabilities of the company.
As a very general matter, buyers will often prefer an asset sale because of advantages with both taxes and liabilities. An asset sale will typically permit buyers to take a “step up” in the tax basis of the acquired assets, and buyers generally want to allocate as much of the purchase price as possible to assets that allow for quicker depreciation after the acquisition. Additionally, in an asset sale, the liabilities that the buyer acquires are defined in the transaction documents so the buyer may be able to leave certain liabilities with the selling entity rather than acquiring all future liabilities. However, transferring certain assets may be contractually prohibited or require consents, which can complicate the process.
Similarly, as a very general matter, sellers will often prefer an entity sale for tax and liability reasons. By selling the ownership interest in the entity the seller will typically be taxed at the long-term capital gains rate, which can be significantly lower than the income tax rate that could apply to some or all of the proceeds from an asset sale. Asset sales for C corporations also present issues of double taxation for shareholders since asset sales create tax at the corporate level and then again at the individual level upon distribution of funds. In regards to liabilities, in an entity sale all company liabilities are acquired by the buyer when the ownership interest is purchased. This assures the seller that subsequent to the transaction, with certain exceptions, it will have no further exposure to liabilities related to company operations.
A third avenue utilized for certain business transactions is the statutory merger. While a statutory merger can take various forms, the general framework entails the combination of two or more legal entities that concludes with the ongoing existence of one entity while the other entity or entities cease to exist. The end result is similar to the transactions discussed above in that one company acquires the operations of another. However, the process and the considerations involved in the merger structure are significantly different. A statutory merger is defined by particular steps that are detailed in the laws of the states of domicile of the participating entities.
In all cases, whether dealing with a merger, acquisition, or reorganization of some form, there are a long list of state and federal laws that can be implicated in the transaction. These range from simple government and private party notifications to formal approval requirements. The particular applicability of each law will often depend upon the size of the companies involved and nature of the business that the company conducts. If any applicable laws or regulations are not given the proper consideration there can be serious ramifications for all parties involved in the transaction.
It is important to understand that business transactions are fact specific. The generalities of deal structure discussed in the preceding paragraphs can, and will, change considerably based upon the particulars of the transaction. Retaining experienced legal counsel to structure around those particulars is extremely important in assuring that the transaction is executed in the most efficient and advantageous manner possible