Business Law

Asset Sales & Purchases in Mergers & Acquisitions

One way for one company or business to "acquire" or buy another company or business is to buy its assets. Such a transaction has multiple variables and factors that need to be considered, such as:

  • How the sale will be structured, that is, what will the buyer use to pay for the assets
  • What can and can't be sold or transferred
  • If and when the shareholders need to approve of the sale
  • Who's responsible for the debts and liabilities of the merged or acquired company
  • Typically, asset sales and purchases in mergers and acquisitions can be a complicated matter, and so often the parties to such a transaction seek the advice of an experienced business law attorney.

    Types of Assets Transactions

    A business can sell its assets to another company for cash, notes, or property, or for stock of the acquiring company or corporation. The typical sale involves cash for the purchase price or for part of the purchase price, with a note or notes for the balance.

    Other variations of the basic "assets for cash or notes" transaction include:

    • Financing the acquisition with cash earned from the public or private sale of the buyer's stock
    • Arranging for the buyer to purchase only part of the seller's assets immediately and to lease the rest with an option to buy
    • Exchanging the purchaser's stock for the assets of the selling corporation

    There are numerous possibilities here, and the form of the transaction will depend largely on the needs and capabilities of the buyer and the seller. For example, if the buyer is short on cash, a stock exchange might be best.

    Transfer Problems

    Generally, the parties negotiate on what will be sold, and the buyer usually picks and chooses the assets, or some times it buys them all. Regardless, there are some assets that can't be transferred automatically. For example:

    • Mortgages and loans often contain a clause forbidding the seller-debtor to dispose of the property or assets, and so the buyer, if it wants that property or asset, will likely have to assume the mortgage or the loan, subject of course to the lender's credit approval
    • Contracts- like property leases- and franchises and licenses might not be able to transferred without the consent of the landlord or owner of the franchise or license
    • In most states, if the buyer does not intend to assume all of the seller's debts, the buyer must notify all of the seller's creditors of the assets that the buyer is going to take and debts that it will assume

    Shareholder Approval

    When it comes to selling all or substantially all of a corporations assets, most states follow one of three general rules:

    • Shareholder approval is not needed when the sale is in the "usual and regular course" of company's business
    • Shareholder approval is needed when the sale is not in the "usual and regular course" of company's business
    • Shareholder approval is needed when sale, in essence, represents the end of the seller's existence

    Most states follow one of the rules that focus on the "usual and regular course" of business and allow the board of directors alone to authorize all asset transactions, even those involving all or substantially all of the corporation's assets, when made in the usual and regular course of business.

    For example, if a company's regular business involves selling and leasing equipment, it would need shareholder approval every time it sold or leased all or substantially all of its assets-inventory. Such a requirement would make it nearly impossible to conduct business in a timely, profitable manner.

    When shareholder approval is needed, the laws of the state where the seller is incorporated establish the process. Generally, the process requires that:

    • Shareholder approval be given at an annual or special shareholder's meeting.
    • The shareholders receive notice of the meeting within a certain time of its date, usually within 20 days of the meeting. In addition, some states require that all shareholders receive the notice, while others require that only shareholders with voting powers be notified, and most states require a statement regarding the purpose of the meeting, such as, "to approve the sale of assets to Corporation X."
    • The shareholders vote on the sale. In many states, sale can be authorized only by a majority of the shares entitled to vote on the sale, and in the case of class voting, a majority of each class and of the total number of shares entitled to vote. Other states require an affirmative vote of two-thirds of either all of the outstanding shares or all the shares entitled to vote on the sale.

    Finally, in majority of states that require shareholder approval, a shareholder has the right to dissent from the sale and have the value of his or her shares determined or "appraised" independently of the sales transaction. The idea being to get a higher price than he or she would have received if he or she had agreed to the sale.

    Questions For Your Attorney

  • I didn't receive notice of the sale my company's assets. Is there anything I can do?
  • Is there a downside to dissenting to a proposed sale of assets?
  • How can I be certain that a seller gives me a complete and accurate list of its creditors so that I can notify them of our proposed asset sale and purchase?
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