Explore the intricacies of asset and stock purchases in M&A transactions to effectively manage risks and protect personal assets. Learn from a real case study and understand the importance of asset purchase agreements.
M&A Stories
March 26, 2019
When you’re considering purchasing an existing business, there are critical decisions to make, including the structure of the deal. This article simplifies the complexities for entrepreneurs, business owners, CFOs, accountants, CEOs, board members, wealth advisers, lawyers, ESOP professionals, business brokers, investment bankers, and aspiring business owners.
Introduction:
You’ve identified a business to acquire and worked out the price and payment terms. Now what? Your advisors inquire about the business structure, whether it’s a corporation or an LLC. The choice you make will significantly impact your risk management strategy.
Stock or Asset Purchase?
Buying the stock of a corporation means acquiring both assets and liabilities. Opting for an asset purchase allows you to selectively choose which assets to acquire while assuming specific liabilities, subject to exceptions.
The Deal:
In this case study, a couple sought to purchase an existing spa business structured as a corporation. They established their own corporation and acquired the spa’s assets, assuming only the specified liabilities as detailed in the asset purchase agreement. The deal closed in November 2013.
The Lawsuit:
After the transaction, a former employee of the seller corporation filed a lawsuit in a New York state court, alleging sexual assault by the seller’s owner in May 2013. The buyer sought to dismiss the claim against them through a summary judgment motion.
The buyer demonstrated that they formed and purchased the spa business five months after the alleged incident. Furthermore, the asset purchase agreement did not assign any liability to the employee. Importantly, neither the buyer nor its owners had any prior interest in the seller corporation, nor did the seller corporation have any stake in the buyer corporation.
The court dismissed the employee’s claim, emphasizing that the buyer corporation was clearly identified as the purchaser in the asset purchase agreement, and the bill of sale unmistakably transferred spa assets to them.
The Outcome:
The court not only ruled in favor of the buyer but also imposed $2,500 in sanctions against the employee’s lawyers for filing a baseless claim.
Risk Management:
The buyer’s owners wisely formed a corporation to execute the purchase, protecting their personal assets from potential liability in the employee’s lawsuit.
In summary, understanding the nuances of asset and stock purchases in M&A transactions is crucial for mitigating risks and ensuring a successful acquisition.
Case Reference:
This case is referred to Wilkow v. Araque, Docket No. 154300/2014, Motion Seq. No. 002, Supreme Court, New York County, (March 11, 2019) https://scholar.google.com/scholar_case?case=6871192005474678056&q=%22asset+purchase+agreement%22&hl=en&scisbd=2&as_sdt=2006&as_ylo=2017.
By John McCauley: I help businesses minimize risk when buying or selling a company.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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