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?"
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.