An asset purchase can avoid the buyer’s assuming the liabilities of the acquired company (target), as well as bypassing many governmental regulations dealing with mergers. Also, an asset purchase can avoid the securities problems that may result from the purchase of stock. One the other hand, a disadvantage of the asset purchase is the potential for higher taxes to the Seller because the sales proceeds are taxed at the corporate level and again at the shareholder level when they are distributed to the shareholder. Consequently, if the purchaser insists on an asset purchase, the seller may want to increase the purchase price by the amount of additional taxes it will have to pay. An alternative is to structure the asset purchase as a tax-free exchange, when the purchasing corporation issues voting stock to pay for the assets. This can trigger state and federal securities registration requirements or the need to satisfy exemptions, all of which increase the costs of the transaction. For additional information on securities exemptions, please see the accompanying articles on Federal and Texas Securities Exemptions. An additional concern to the buyer who issues new stock is the potential for dilution of the voting interests of its existing shareholders.
Procedure.
An asset purchase agreement, like a merger, normally requires notice and approval by two-thirds of the shareholders of the seller. The minority shareholders have the same right to dissent and force the selling corporation to value and purchase their shares as in a merger. If the assets of the seller are subject to long term financing which prohibits a sale of the assets securing the debt without lender consent or are subject to contract rights that are not freely assignable, then the approval of the lender or other party to the contract must be obtained to avoid triggering a default or breach.
Liabilities of Selling Corporation.
Generally, an asset purchaser does not assume the liabilities of the seller. Nevertheless, the management of the seller may require the buyer to assume some or all of the liabilities before they agree to the deal. If a buyer agrees to assume the liabilities of the acquired corporation, it should always require:
1. A final audit of the seller’s books just before closing, and deferring payment until its receipt.
2. Personal representations, warranties and indemnities from the officers, directors, and shareholders of the seller.
3. Withholding a part of the purchase price under an escrow arrangement.
If the buyer does assume liabilities, creditors are considered third-party beneficiaries of the acquisition agreement and, as such, may sue the buyer directly if the liabilities are not paid when due.
A buying corporation may be held liable for the obligations of a selling corporation under the Texas fraudulent transfer statute. This law provides that a transfer is fraudulent as to a creditor, if the seller made the transfer with the actual intent to hinder, delay, or defraud any creditor. A transfer is also fraudulent if the seller does not receive reasonably equivalent value for the property transferred and the debtor was engaged or was about to engage in a business or transaction for which the debtor's remaining assets were unreasonably small; intended to incur or believed that it would incur debts beyond the seller’s ability to pay when due; was insolvent at the time; or became insolvent as a result of the transfer.
For additional information, please see the accompanying articles: How Do You Buy a Company, Some General Considerations in Buying or Selling a Business, Stock Purchase, Mergers, The Acquisition Agreement
THIS INFORMATIONAL MEMORANDA FROM THE LAW OFFICES OF THOMAS D. SOLOMON, P.C. is provided as a courtesy to our friends and clients to provide them with items of interest in the corporate acquisition area. It is not and is not intended to be an exhaustive treatment of its subject matter, but rather an overview of some of the elements of such subject. It is not intended to be legal advice or a legal opinion and should not be relied on in making legal or business decisions. If you have any questions, please call us.
