Insight

Sellers in an M&A Transaction Normally Like Stock Sales

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With a stock sale structure, Sellers:

  • Can generally achieve favorable capital gains treatment on the sale of stock versus ordinary income tax treatment on the sale of appreciated assets;
  • Can, at least theoretically, shed all liabilities associated with the business. (In practice, the ability to avoid liabilities is significantly limited by the operation of representations, warranties, and indemnifications made by the Seller to the Buyer.);
  • Can effectively force the sale upon minority shareholders who do not want to sell; and
  • Can, if not prohibited by contract, assign business contracts to the Buyer without procuring consent of the third party to the contract.

As you might imagine, the advantages of one form to one party tend to be disadvantages to the other, and vice versa.  Therefore, in practice, a stock transaction tends to incorporate negotiated elements that lessen the advantages to the Seller, and an asset purchase transaction tends to incorporate elements that lessen the advantages to the Buyer.

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David Traversi, Partner, Newport (david.traversi@newportllc.com)

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