Structuring Stock Transactions - What happens in a stock transaction?

The seller transfers its shares in the target to the buyer in exchange for an agreed-upon payment. Usually, the transfer involves all company shares, but there can be exceptions. Some acquirers of public companies wage a tender offer for only partial ownership. Also, in some private company sales, founders wish to retain shares and stay on with the company in some capacity.

When is a stock transaction appropriate?

A stock transaction is appropriate whenever the tax costs or other problems of an asset transaction make the asset transaction undesirable. Asset transfers may produce too onerous a tax cost in many major transactions.

Apart from tax considerations, a stock deal might also be necessary if the transfer of assets would require unobtainable or costly third-party consents, or where the size of the company makes an asset deal too inconvenient, time consuming, or costly.

Sellers frequently prefer a stock deal because the buyer will take the corporation’s entire business, including all of its liabilities. This may not offer as big an advantage as it appears, though, because in negotiating the acquisition agreement, the buyer will usually seek indemnification against any undisclosed liabilities.