Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
business builder mergers: part one
by Todd Taylor and Kerry Trapp
You met each other over drinks at a party some time ago. After lots more dates, you both think you are ready for that next big step: a merger.
Business mergers are very similar to marriages due to the necessity of blending lifestyles, cultures, methods of handling money, customers and employees. Unlike a marriage however, business owners can select a number of different options for combining their businesses.
Each offers advantages and disadvantages depending on the goals of each business owner. Generally, if both owners wish be involved with the ongoing business, a merger makes the most sense because it legally combines the two companies. If one business is struggling or its owner wants to bow out, an asset or stock purchase or an exchange might be best.
In an asset purchase the buyer picks and chooses which assets to purchase and which liabilities to assume. This is a good option if the seller has more liabilities than assets and the buyer wishes to avoid, to the extent possible, taking on those liabilities. In a stock purchase the buyer assumes all stock, assets and liabilities of the seller. While this lets the buyer take total control of the seller’s company, the seller’s company remains separate from the buyer.
In a merger, the companies become a single corporation, which is the surviving corporation. The surviving corporation succeeds to all the assets and rights of the merged corporations. The surviving corporation is also on the hook for all the liabilities and obligations of the merged corporations.
An exchange is essentially a stock purchase with the overlay of statutory requirements similar to a merger. In an exchange, the shares of the seller are exchanged for shares of the buyer (or of any other corporation or for money or other property). An exchange is often done when a company wishes to change its type of entity, for example, a corporation wishes to become a limited liability company or vice versa. Because there is no simple “check-the-box” method of changing type of entity like there is for electing to be taxed as a C versus an S corporation, an exchange or similar event must take place.
Stronger operator
The next consideration is which entity will be the surviving entity or whether there will be a new entity created. Two existing businesses can merge into a newly created entity or they can merge into the most favorable existing company.
Some privately owned companies with strong operations seek to merge with a “public shell” in what many refer to as a back-door IPO to gain a public market for their stock. This is complicated and not as easy or effective as it was in the past. If a new entity is to be created, there are a number of choices, the most common being a corporation, a limited liability company, or an S corporation.
Tax issues associated with the choice of entity and the form of acquisition often determine the method of merger or acquisition more so than the legal issues. Each of the methods of merger, asset and stock purchases and exchanges has its own tax considerations and the wrong choice could cost you, your company and its shareholders a great deal of money in taxes.
Another important consideration is the liabilities of the seller. Known liabilities can be dealt with in the negotiations and adjusted for in the purchase price. It is the unknown, contingent or undisclosed liabilities that can be troubling.
Acquisitions can generally be structured using subsidiaries in order to limit some of the exposure of the buyer’s assets. However, the form of the transaction is important. For example, in an asset purchase as opposed to a stock purchase or merger, a buyer can specify the liabilities that it is willing to assume and leave the others behind. Each party needs to conduct appropriate due diligence on the other. No one needs to wake up a month after buying a company and find that its building needs major repairs. (See Mergers, Part Two, which follows this article.)
Securities law issues may also drive the form of the transaction. Every stock purchase and merger involves federal and state securities law issues and larger mergers or stock purchases may require registration with the SEC and/or state securities authorities. When a public company is involved the securities issues become more complex.
Can seller really sell?
Don’t forget to consider the seller’s contracts, permits and licenses. Often the seller will be a party to contracts or licenses or hold permits that the buyer desires to obtain but that are not freely assignable. In such cases, either a stock purchase or merger may be better so that it is less likely consents will be required. Many contracts contain anti-assignment or change in control consent provisions that would be triggered by a merger or sale of stock of the seller.
Complexity of the transaction is also important to consider. Where there are a small number of shareholders, a stock purchase may be less complicated than an asset purchase where all assets, contracts and liabilities are dealt with individually.
Keep in mind that not everyone may be on board with the acquisition plan. Minority shareholders can become a concern, since in a stock purchase there is no way of compelling an unwilling minority stockholder to agree to the sale. By contrast, an asset purchase or merger does not require approval by all of the seller’s shareholders. Although unanimous shareholder approval may not be required, dissenting shareholders may be entitled to have their shares purchased by the buyer and this could be costly.
The corporate approvals that must be obtained must also be considered in comparing the forms of transactions. Generally, approval by the board of directors of each of the companies will be required. The form of transaction can affect whether shareholder approval, particularly for the buyer, is necessary. In addition to corporate approvals there are a number of statutory notice and filing requirements to be followed to ensure that any acquisition is valid.
If all this seems more complex than planning your wedding, it is, because it involves joining all the shareholders, employees, customers, clients and vendors of the two companies together. It is best to consult qualified wedding planners — er, lawyers and accountants, when thinking of walking down this aisle.
[contact] Todd Taylor and Kerry Trapp are attorneys with Leonard, O’Brien, Spencer, Gale & Sayre in Minneapolis: 612.332.1030; tt*****@***gs.com; kt****@***gs.com; www.losgs.com
