Guide to Purchasing an American Corporation
When it comes to acquiring a US company, there are three main methods: stock purchase, asset purchase, and statutory merger. Each approach has its unique characteristics, particularly in terms of what is acquired, the liabilities assumed, and their tax consequences.
Stock Purchase
In a stock purchase, the buyer acquires the target company's shares from its shareholders. This results in the buyer taking control of the entire legal entity, including all assets, liabilities, contracts, and obligations. The company continues to exist, but under new ownership. The buyer inherits all contingent liabilities and past obligations, making thorough due diligence and warranty protections crucial.
Tax-wise, the seller generally pays capital gains tax on the sale of shares. The purchase price is not deductible for the buyer, and the buyer does not get a step-up in the tax basis of the company’s assets unless a special 338(h)(10) election is made. This means that buyers have less flexibility in selecting assets or liabilities and assume more risk.
Asset Purchase
An asset purchase, on the other hand, involves the buyer selectively acquiring specific tangible and intangible assets but typically does not assume the seller’s liabilities unless explicitly agreed. The selling company remains as a legal entity holding any liabilities not sold.
The buyer obtains a stepped-up tax basis in the purchased assets, allowing depreciation/amortization deductions that reduce future taxable income. However, the seller may face double taxation if a C corporation: once at the corporate level on the gain from asset sale, and again at the shareholder level when proceeds are distributed.
Statutory Merger
A statutory merger occurs when one company absorbs another, which ceases to exist; the acquirer inherits all assets, liabilities, contracts, debts, and securities of the absorbed company. Legally, the target company is merged into the acquirer, which continues as the surviving entity.
Depending on the structure and elections made, a statutory merger can qualify as a tax-free reorganization, allowing deferral of taxes for both parties. However, the specifics depend heavily on IRS rules on reorganizations and transaction structuring. The entire business transfers, including liabilities, like in a stock purchase, but as part of a corporate combination.
| Feature | Stock Purchase | Asset Purchase | Statutory Merger | |-----------------------|-----------------------------------------------|-----------------------------|-----------------------------| | What is acquired | Shares of the target company | Selected assets only | Entire company (all assets & liabilities) | | Company existence | Target company continues unchanged | Target company remains, minus sold assets | Target company ceases; merged into acquirer| | Liability assumption | Buyer assumes all liabilities | Buyer assumes only selected liabilities | Buyer assumes all liabilities | | Tax basis step-up | No (unless special election made) | Yes, for acquired assets | Depends on structure, often tax-neutral | | Seller tax impact | Capital gains on shares | Potential double taxation for C corporations | Potentially tax-deferred under reorganization rules | | Buyer risk | Higher due to full liability assumption | Lower due to selective asset purchase | High as all liabilities transfer |
In summary, stock purchases involve buying the entire entity with all assets and liabilities, posing higher risk but simpler transaction from a continuity perspective. Asset purchases allow the buyer to pick assets and avoid unwanted liabilities but may trigger double taxation for the seller and lack of basis step-up benefits for the seller. Statutory mergers combine companies completely, potentially structured for tax-efficient reorganization, with full liability assumption.
These differences have major legal and tax implications that must be carefully analyzed in structuring an acquisition. Consulting tax and legal experts is vital to optimize outcomes for both buyer and seller.
It's worth noting that in the case of limited liability companies or partnerships, a transaction may also result in the recapture of losses previously recognized for tax purposes by the target's stockholders. M&A transactions can have significant tax considerations, including capital gains tax and corporate income tax. As a mergers and acquisitions lawyer, understanding tax considerations is crucial in M&A transactions.
Tax-free reorganizations typically allow capital gains treatment of tax on the gain when the equity is ultimately sold. Section 368 does not apply to entities taxed as partnerships, such as most LLCs and limited partnerships. Examples of entities that may be involved in M&A transactions include Facebook, Twitter, Pinterest, LinkedIn, and several other platforms. The tax impact will in large part depend on the tax basis of the target's stockholders. If equity holders receive cash or the transaction fails to meet specific requirements, tax on any gain to the date of closing may be due.
- The buying process in a stock purchase involves acquiring the target company's shares from its shareholders, resulting in the buyer inheriting all contingent liabilities and past obligations, making thorough due diligence and warranty protections essential.
- On the other hand, an asset purchase, unlike stock purchase, only allows the buyer to selectively acquire specific assets, with the selling company remaining as a legal entity holding any liabilities not sold, preventing the buyer from assuming many unwanted liabilities.
