Mergers and acquisitions (M&A) are very common today: one business – usually a corporation – takes over or buys out another business and takes its place in the market. Although the terms are often used interchangeably, a merger is not the same thing as an acquisition.

A merger is when two or more companies combine into a single, new business, called the “survivor” corporation or business. The survivor typically issues new shares of stock in exchange for the shares held in the old company – the merged company – by its shareholders. An acquisition is when one business, usually called the “successor,” buys either another company’s stock or assets.

The differences between mergers and acquisitions are perhaps most important when it comes to understanding the companies’ respective rights and liabilities after the merger or acquisition – which business is responsible for the debts and obligations of the company that was “bought out?”

Asset Purchases

Generally, in an asset purchase, the buyer-company is not liable for the seller-company’s debts and liabilities. There are exceptions, however, such as:

  • When the buyer agrees to assume the debts or liabilities; that is, as the buyer, you could assume some or all of the seller’s debts in exchange for a lower sales price
  • Where the sale is in reality a merger of the two businesses, known as a “de facto” merger, which is when two companies in fact combine but don’t follow the state laws on mergers, such as getting shareholder approval
  • When the sale is fraudulent, which often arises when the seller is left with insufficient funds or other assets to pay its debts, and so the seller’s creditors can’t be paid off
  • When the buyer is merely a “continuation” of the seller, such as where there the officers, directors, and shareholders for the buyer and seller are the same, or substantially the same, before and after the sale
  • When the buyer does not comply with the state’s “bulk sales law,” which requires the buyer to notify the seller’s creditors within a specified period before it takes possession of the assets or pays for them

The asset acquisition does not require the approval of the buyer’s stockholders, but the seller’s stockholders do have to approve the sale of all or most of the assets. Stockholders who oppose the sale usually have the right to the “appraisal value” of their stock, which is determined by an independent third party.

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Stock Purchases

If you acquire a business through a stock purchase, that is, buying all or substantially all of the company’s stock from its shareholders, your company “steps into the shoes” of the other company, and business continues as usual. The buyer takes on all of the seller’s debts and obligations, including lawsuits, whether they’re known or unknown at the time of the sale.

A known liability might be a bank loan that is recorded in the company’s books and records. An unknown liability might be money owed to employees or contractors that has not been properly recorded and has been overlooked by both the seller and the buyer. But, the most dangerous unknown liability often arises from the seller’s pre-sale activities.

For example, if the seller had been making and selling paint for 15 years before the buyer acquired it through a stock purchase, the buyer can be liable for the injuries sustained by a painter who claims that the seller’s paint contained toxic chemicals, even if the painter’s injuries did not show up until 10 years after the stock purchase.

In a stock transaction, the formal approval of the seller’s shareholders is not needed because they signify their approval on an individual basis by consenting to sell their shares. There are some exceptions, though, such as:

  • In some states, when the buyer’s stock is exchanged for the stock held by the seller’s shareholders
  • In states with anti-takeover statutes, which provide that approval is needed when the amount of stock purchased exceeds a certain amount

Typically, the buyer’s shareholders do not have to give their consent, except when, for example:

  • The transaction requires funding by the issuance of more shares than are authorized by the buyer’s corporate charter
  • The transaction will result in a significant shift of voting power or control from one corporation to another

Mergers

In a merger, the surviving corporation assumes all of the merged company’s liabilities and obligations, including tort liability, like the paint example above, and even criminal penalties imposed for conduct that occurred before the effective date of the merger.

Although a merged corporation ceases to exist, legal proceedings that were pending against it at the time of the merger may proceed without formal substitution of the surviving corporation as a named party in the suit. Similarly, if a merging corporation has filed suit against another party before the merger occurs, the suit may be continued after the merger in the name of either the merged corporation or the survivor.

As with a stock purchase, mergers require stockholder approval, and stockholders have the right to oppose the merger and have the value of their stock appraised by an independent party, such as a court.

Questions for Your Attorney

  • I want to buy all of my competitor’s stock, but I want to guard against being liable for things done by my competitor before the sale. What can I do?
  • How long will it take to complete an asset sale?
  • How can I be certain that the business whose stock I’m buying has listed all of its debts and liabilities?