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.

You can schedule a free consultation with a Denver business attorney by contacting The McGuire Law Firm- offices in Denver and Golden Colorado.

The first step of a cash for assets acquisition, Corporation 1 would pay Corporation 2 cash consideration of the assets of Corporation 2.  Corporation 1 could decide to accept the liabilities of Corporation 2, and such acceptance would lower the purchase price.  Please note, Corporation 1 does not have to accept the liabilities of Corporation 2 in this type of asset acquisition though. No change would be necessary in the corporation documents of Corporation 1 or Corporation 2 and no change would need to occur in the outstanding shares of either corporation as well.  After the purchase, and as may be commonly seen, Corporation 2 could dissolve after the sale of the corporate assets.  If Corporation 2 did dissolve, the corporate charter would be cancelled and the shares extinguished.  After Corporation 2 satisfied all remaining liabilities, the remaining cash would be distributed to the shareholders of Corporation 2 in a liquidating distribution.  The dissolution and liquidation of Corporation 2 would not impact the shareholders of Corporation 1.

If Corporation 2 did not dissolve and distribute the cash to the corporate shareholders, Corporation 2 would reinvest the cash in operating assets or for corporate operations.  If Corporation 2 reinvested this cash in passive assets such as stocks or bonds, it is important to know that the Internal Revenue Code could deem Corporation 2 a Personal Holding Company and such designation may not have the most favorable tax treatment.  Thus, from a practical point of view, a corporation in Corporation 2’s shoes, is likely to reinvest in business assets to produce income, or dissolve and distribute the monies to the shareholders.

The cash for assets acquisition differs from a stock swap merger in a couple of ways.  First, the shareholders of Corporation 1 shareholders do not vote in the asset acquisition.  Second, the post transaction of the Corporation 2 shareholders is different as in the cash acquisition the shareholders will be cashed out as opposed to holding shares in the survivor corporation.  Third, Corporation 2’s pre-transaction liabilities may remain with Corporation 2 depending upon the terms of the transaction.  Additionally, a stock swap merger, also known as an A Reorganization is typically a tax free transaction, whereas the cash for assets acquisition is likely to be a taxable transaction.

You can speak with a Denver business attorney at The McGuire Law Firm if you have questions regarding a business transaction and/or the tax implications of a business transaction.