Acquisition Agreements

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Acquisition Agreements

I. Introduction

In this paper, I will review key legal and practical issues that arise when negotiating and drafting acquisition agreements. The paper will focus on privately negotiated acquisition agreements involving assets or shares and will not address the securities law issues raised by the negotiation of agreements related to the acquisition of the shares of publicly traded corporations. However, many of the legal and business issues that arise in negotiated acquisitions of the shares of privately held corporations, wholly-owned subsidiaries of publicly held corporations or of assets are of equal relevance to the negotiation and drafting of acquisition agreements for the shares of publicly traded corporations.

II. Form of the Transaction: Assets vs. Shares; Amalgamations

A business can be acquired through the acquisition of the assets used in the conduct of the business or, indirectly, through the acquisition of shares or other ownership interests of the legal entity that conducts the business. The latter type of acquisition can be effected through a direct acquisition of such shares or ownership interests or through a reorganization, such as an amalgamation of the acquiror or an affiliate of the acquiror, with the corporation that conducts the acquired business.

Generally speaking, the choice of the form of the acquisition - as between shares/ownership interests or assets - will be driven primarily by income tax considerations as the pure business objective of acquiring control of the business itself can be attained using either form of acquisition.

Share/Ownership Interest Acquisition

As a general matter, sellers prefer to sell shares because gains realized on the sale of shares are treated as capital gains and taxed at the reduced rates applicable to capital gains. On the other hand, for reasons that will be discussed in greater detail below, the sale of assets may trigger to the seller income inclusion taxed at ordinary rates. However, if the acquired business has accumulated losses which may still be carried forward against the income of the business in future years, a purchaser (if otherwise taxable) may prefer to acquire the shares and apply the losses against future years' income. In these circumstances, careful attention must be paid to the ability of the acquired business to use losses after a change of control of the acquired company under applicable income tax rules.

Asset Acquisition

Purchaser Preference

Purchasers may often prefer to buy the assets of acquired businesses because this provides an opportunity - depending on the relationship between the purchase price for specific classes of assets and their then current book value - to "bump" the costs of such assets to their fair market value at the effective date of the transaction. This "bump" in turn gives rise to greater capital cost allowances and future depreciation available to the purcha...

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