M&A – Main differences between Share Deals and Asset Deals in the USA

The United States are, as of today, the largest wine-consuming country in the world.

However, contrary to any prediction, the consumption of wine by Millennials has decreased due to (1) their preference for craft beers and craft spirits; (2) their damaged financial capacity; (3) the cannabis legalization; (4) negative health messaging, absent the offset promotion of health benefits of moderate wine consumption. On the other hand, there is a shift towards wine once the consumer gets older with an increasing preference for premium wines.

• All assets and liabilities of target remain at target after transfer of target equity to buyer. Target employees also remain employed by target, on an at-will basis absent any employment agreement altering the at-will arrangement.
• Transfer of target equity subject to required board and internal approvals at seller and buyer, as well as possibly governmental consents and approvals (e.g., anti-trust, CFIUS, state tax clearances). Consents from contractual counterparties (including target creditors) may be required under relevant target contracts (i.e., change of control clauses).
• The stock purchase agreement (SPA) typically includes tailored representations, warranties and indemnities to allocate risk between the parties as to the target’s business and liabilities, which are often heavily negotiated by the parties).
• The SPA must be in writing, not violate public policy and provide for adequate consideration; otherwise, there are few legal requirements as to the content of the SPA. Courts typically defer to the parties’ negotiated SPA provisions.
  

• Typically structured as transfer of all assets (real property, personal property, intellectual property etc.), but only specified liabilities, relating to a defined “business” of the selling entity. Buyer normally does not automatically assume target employees, who remain at target. Contracts and certain types of assets must be specifically assigned or transferred.
• Asset purchase subject to required board and internal approvals at seller and buyer, as well as possibly governmental consents and approvals (e.g., anti-trust, CFIUS, state tax clearances, local permits, etc.). Consents from contractual counterparties typically not required other than creditors (if the assets serve as collateral) and landlords/owners (if the assets are leased/licensed), or if the relevant target contracts otherwise contain provisions prohibiting sale/transfer of those assets.
• The Asset Purchase Agreement (APA) typically includes tailored representations, warranties and indemnities to allocate risk between the parties on target’s business and the liabilities being assumed, which are often heavily negotiated by the parties, subject to certain conventions and legal requirements based on the types of assets being transferred and their location). Note that certain liabilities (e.g., for employment, environmental and tax matters) may be deemed assumed by the buyer as a matter of state or federal law or common law “successor liability doctrine,” and provisions of the APA may address these issues through further risk allocation clauses.
• The APA must be in writing, not violate public policy and provide for adequate consideration; otherwise, there are few legal requirements on the content of the APA. Courts typically defer to the parties’ negotiated APA provisions.
  

The main formalities depend on the form of the companies:

Corporation:

• specific requirements for share transfer, if any, typically set out in target’s organizational documents (e.g., certificate of incorporation, charter or by-laws) or shareholders’ agreement.
• share transfer typically accomplished through Seller’s delivery to Buyer of relevant stock certificate stock power signed Seller.
• transfer to be recorded in target’s stock ledger.

Limited liability company (LLC) and Partnerships:

• specific requirements for transfer of LLC membership (or partnership) interests typically set out in LLC’s operating agreement (or partnership agreement).
• if membership interests are “certificated,” the transfer procedure is similar to transfer of shares in a corporation.
• if membership interests are not certificated, the transfer is accomplished through an assignment of the membership interests, typically accompanied by an amendment of the LLC’s operating agreement to reflect the preferences of Buyer (as the new owner of the LLC).
  

• The APA will require various specific transfer documents at the closing depending on the types of assets being transferred, such as a deed (for real property), a bill of sale (for other tangible assets), an assignment of contracts (for certain assumed contracts), and filings with the patent office (USPTO) to reflect assignment of intellectual property. There may be additional formalities involved in transfer of employees.
  

• Seller will be responsible for income tax on gain, at capital gains rates (if Seller held the stock for more than a year) or at ordinary income rates (if Seller held the stock for less than a year).
• State-level stock and/or business transfer taxes may also apply.
• On the sale of a controlling interest in an entity that holds real property, real estate transfer taxes may apply (even though it is a share transfer). Such transfer taxes are typically the responsibility of Seller, but it depends on the State. If Seller is foreign, Buyer may also be subject to withholding tax obligations under FIRPTA.
  

• Seller (or, if the Seller is an entity disregarded for tax purposes, then the taxpaying parent) will typically owe income tax on the gain over the cost basis.
• Buyer typically receives assets on a cost basis, often resulting in a “step-up” in basis to fair market value.
• State-level sales and use taxes and/or business transfer taxes may also apply.
• Real estate transfer taxes are charged by some states, cities, counties and municipalities. If seller is foreign, buyer may also be subject to withholding tax obligations under FIRPTA.