In acquisitions, buyers typically use a variation or combination of one or more of the following five basic methods of buying a corporation (the target):

Usually the answers to two questions determine the method used: (1) will the purchase be taxable or tax-free; and (2) should the seller sell its assets or should its owners sell their ownership interest. Buyers and sellers can combine a number of these methods to achieve their desired result. Each form of acquisition has its own set of benefits and potential disadvantages.

Certain corporate transactions are tax-free, in that gain or loss is not recognized. The Internal Revenue Code provisions for stock purchases are found in Section 354(a) and in Section 361(a) for asset acquisitions. To qualify for tax-free treatment, the transaction must constitute a reorganization. Section 368(a)(1) of the Internal Revenue Code defines a reorganization to include seven specific forms of corporate combinations. Statutory mergers and consolidations may qualify as “Type A” reorganizations under I.R.C. § 368(a)(1)(A). Stock for stock deals may be qualify as a “Type B” reorganization under I.R.C. § 368(a)(1)(B). A stock for asset trade may be arranged as a “Type C” reorganization under I.R.C. § 368(a)(1)(C).

For additional information, please see the accompanying articles: Some General Considerations in Buying or Selling a Business, Asset Purchase, Stock Purchase, Mergers, The Acquisition Agreement

This informational memorandum 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 pertinent 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.