Asset Purchase Agreements vs Stock Purchase Agreements

We were contemplating acquiring a small legal content provider in our space with an unusual set of circumstances surrounding its capital structure.  As we were working through fit and valuation issues, it became apparent that the structure of the deal would be even more important than usual.

There are many ways to structure the acquisition of a corporation, but in any event they can be boiled down to two simple forms:  asset purchase agreements or stock purchase agreements. 

Asset purchase agreements (more links to real transactions from top law firms and public companies provided) are used to acquire the existing assets of a company, rather than the entire ownership interest in the company.  As such, they are generally preferred by the buyer for several reasons:

1. Most importantly, they limit exposure to buyers from any known or unknown liabilities relating to the target company
2. The buyer can choose to acquire only certain assets
3. The buyer can avoid unfavorable obligations such as pension liabilities, collective bargaining agreements, etc.
4. Asset purchase agreements can also result in potentially favorable tax treatment

Of course, from the seller’s perspective, many of these issues are the inverse of what the seller may want, such as the complete sale of the company including any liabilities.  That’s why sellers tend to prefer stock purchase agreements when they enter into a company sale.

In our case, we are in the process of winding down our discussions and it seems unlikely there will be  a deal here.  I’ll update this post if anything changes.