In a recent article, a Denver business attorney from The McGuire Law Firm discussed a cash for asset acquisition. The article below will discuss a related type of transaction that is similar, but also quite different called a stock for assets acquisition. A stock for assets acquisition may also be called “C Reorganization” and can be a tax free stock acquisition under the Internal Revenue Code.
In a stock for assets acquisition, Corporation 1 would provide common stock (as opposed to cash consideration) for the assets of Corporation 2. Furthermore, Corporation 1 would assume all of Corporation 2’s liabilities. Thus, the post transaction view of a stock for asset acquisition is similar to that of a stock swap merger. After the transaction, Corporation 1 will not hold all Corporation 2 shares and Corporation 2 liabilities.
Depending upon the states that the corporations incorporated in, there may be general powers in the state corporate code that allows Corporation 1 to buy assets and for Corporation 2 to sell assets. Additionally, other general powers may authorize Corporation 1’s assumption of Corporation 2’s liabilities. However, the sale of all or substantially all of Corporation 2’s assets require specific authorization or steps and may require that the shareholders of Corporation 2 ratify the sale to Corporation 1. What constitutes “substantially all” of a corporation’s assets may need to be determined based upon case law. A Delaware case once determined the sale of substantially all corporate assets to be the sale of assets that is quantitatively vital to the operations of the corporation and would be out of the ordinary and substantially effects the existence and purpose of the corporation. See Gimbel v. Signal Companies, Inc. (Del. Ch. 1974). In terms of a Delaware law, another case once held that the sale of stock in a subsidiary was 68% of parent’s assets and primary income generating asset required a stockholder vote. See Thorpe v. Serbco, Inc. (Del.1996). Certain codes or acts may replace the “all or substantially all of the corporate assets” with “a disposition that would leave the corporation without a significant continuing business purpose. See MCBA Section 12.02. This section also states a safe harbor where a significant continuing business purpose exists if the continuing business activity represents at least 25% of the total assets and 25% of either income (pre-tax) or revenue from pre transaction operations.
If your business is considering a transaction or acquisition, you can discuss your questions with a Denver business attorney and tax attorney from The McGuire Law Firm. The McGuire Law Firm provides a free consultation to all potential clients to discuss your current business, tax and other legal matters.