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Nina Yablok firstname.lastname@example.org Basic types of acquisition Cash Purchase of Shares Cash Purchase of Assets Stock as consideration for Shares Stock as consideration for Assts Merger CASH PURCHASE OF SHARES: PROS a. Approval by shareholders of purchasing corporation is not required. b. Formal meeting of shareholders of corporation sought to be acquired to approve sales of shares is not required. c. Approval by board of directors of corporation sought to be acquired is not needed. d. Consideration to be paid for shares, as agreed on by purchasing corporation and selling shareholders, may consist of cash or cash and other combinations of cash, notes, debt securities, shares, etc. e. Acquiring corporation is not liable for debts or liabilities of acquired corporation. f. Name and reputation of acquired corporation may be continued as separate entity. g. Shareholders of acquiring corporation are not subject to dilution of ownership interest. h. Acquired corporation may continue to use its net operating loss carryforward in certain circumstances. i. Mechanics of transfer are simple if shareholders are few in number: (1) Uniform Commercial Code‐‐Bulk Sales Division is not applicable. (2) Purchase price is not withheld until sales tax and employment contribution clearance are received. (3) Separate instruments of conveyance are not needed for personal and real property. (4) Leases and contracts belonging to acquired corporation do not need to be assigned. 1313 N Milpitas Blvd. Suite 139 Milpitas, CA 95035 (408) 955‐9100 (408) 955‐9191 fax www.yablok.com Page 2 of 6 j. Transaction is not subject to California Sales and Use Tax. CONS a. Shareholders of acquired corporation must pay income tax on any gain realized on sale of their shares to acquiring corporation. b. Acquiring corporation does not automatically receive new income tax basis for assets of acquired corporation. c. Acquiring corporation normally cannot use net operating loss carryover income tax deduction of acquired corporation to reduce its own income. d. Unknown and contingent liabilities of acquired corporation may reduce value of its shares below purchase price paid by acquiring corporation. e. Minority shareholders of acquired corporation who refuse to sell their shares may hinder future corporate operations. f. Securing purchase of all, or substantially all, shares of corporation sought to be acquired may be unduly expensive and burdensome if shareholders are numerous and geographically scattered, or its management opposes purchase. CASH PURCHASE OF ASSETS PROS: a. Acquiring corporation gets new income tax basis for assets purchased from selling corporation. b. Acquiring corporation is not required to assume any liabilities of selling corporation, except strict liability in tort for defective products. c. Shareholder approval of purchase by shareholders of acquiring corporations is not required. d. Neither dissenting shareholders of acquiring corporation nor dissenting shareholders of selling corporation have right to require purchase of shares. e. Acquiring corporation may reject obsolete or worthless assets of selling corporation, including long overdue accounts receivable. f. Transaction is not subject to California securities laws. Cons a. Sale proceeds may be subject to tax at both corporate and shareholder level if proceeds are distributed to shareholders. Page 3 of 6 b. California state sales tax must be paid on portion of sale proceeds received for fixtures and equipment used in activity requiring sales tax permit from California State Board of Equalization. c. Acquiring corporation is not entitled to benefit of net operating loss carryover income tax deduction belonging to selling corporation. d. Sale may require compliance with requirements of Uniform Commercial Code‐‐Bulk Sales Division. e. Sales proceeds must be withheld in escrow to protect acquiring corporation from liability under successor liability statutes for amounts owed by selling corporation for sales tax or unemployment compensation insurance contributions. f. Acquiring corporation may be subject to products liability claims for injuries subsequently caused by products originally sold by the selling corporation. g. Separate documents of conveyance or transfer must be drafted, executed, and registered or recorded for personal and real property. h. Sale may require obtaining consent from third person or corporation to assign or transfer lease or other contracts. SHARES FOR SHARES PROS a. Mechanical simplicity: (1) Compliance with escrow and notice requirements of Uniform Commercial Code‐‐Bulk Sales Division is not required. (2) Separate instruments of conveyance need not be drafted, executed, and recorded for various assets of acquired corporation. b. Approval of board of directors and management of corporation sought to be acquired is not needed. c. Acquiring corporation is not liable after share exchange for debts, liabilities, and obligations of acquired corporation. Page 4 of 6 d. Separate identity and goodwill of acquired corporation are preserved after share exchange. e. Dissenting shareholders of corporation sought to be acquired have no right to require their shares to be purchased for cash at their appraised fair market value. f. Income tax advantages: (1) Share exchange can be arranged as income tax‐free reorganization. (2) By dissolving or merging acquired corporation into itself, acquiring corporation can obtain net operating loss carryover deduction belonging to acquired corporation. g. Transaction is not subject to California Sales and Use Tax. CON a. Permit must be obtained from California Commissioner of Corporations qualifying shares to be issued in exchange by acquiring corporation. b. Acquiring corporation cannot acquire new income tax basis for assets of acquired corporation, even by dissolving or merging with acquired corporation after exchange. c. Proposed share exchange must be approved by affirmative vote of majority of all outstanding shares of each class of acquiring corporation, regardless of any restrictions on their voting rights. d. Undisclosed and unknown liabilities of acquired corporation may render shares of acquired corporation worthless. e. When corporation sought to be acquired has large number of shareholders geographically scattered, cost and effort required to obtain their acceptance of share exchange offer may be prohibitive. f. Shareholders of acquiring corporation who do not approve of proposed exchange may require their shares to be purchased for cash at their appraised fair market value. g. Shareholders of acquired corporation who refuse to exchange their shares may constitute group of minority shareholders hampering effective management of acquired corporation by acquiring corporation after exchange. SHARES AS CONSIDERATION FOR ASSETS PROS a. Acquiring corporation does not automatically become liable for debts and liabilities of selling corporation, with possible exception of products liability claims. Page 5 of 6 b. There is no minority interest to harass acquiring corporation in managing business and assets acquired from selling corporation. c. Assets‐for‐shares exchange can be arranged to be income‐tax‐free. d. Acquiring corporation succeeds to any net operating loss carryover of acquired corporation. CONS a. Proposed exchange must be approved by boards of directors, and principal terms of proposed exchange must be approved by outstanding shares of each class of both acquiring and selling corporations. b. Permit qualifying shares to be issued by qualifying corporation or its parent in exchange generally must be obtained from California Commissioner of Corporations. c. Dissenting shareholders of either acquiring or selling corporation have right to require that their shares be purchased by their corporation for cash at appraised fair market value of shares on day preceding first announcement of terms of proposed assets‐for‐shares exchange. d. Acquiring corporation does not obtain new income tax basis for assets it is acquiring from selling corporation in assets‐for‐shares exchange. e. Tangible personal property transferred for stock may be subject to California sales tax. f. Transfer of assets from selling corporation to acquiring corporation may require compliance with Uniform Commercial Code‐‐Bulk Sales Division. g. To protect acquiring corporation from liability under successor liability statutes for sales taxes and unemployment compensation insurance contributions owed by selling corporation, exchange of shares for assets cannot be consummated until selling corporation obtains: (1) Sales tax clearance from California State Board of Equalization. (2) Statement from California State Department of Benefit Payments that no amounts are due from selling corporation for unemployment compensation insurance contributions. MERGER PROS a. Mechanical simplicity. (1) Filing merger agreement with Secretary of State perfects merger. (2) On perfection, surviving corporation succeeds without further transfer to all rights and properties of each disappearing corporation to merger. (3) Surviving corporation need not pay any local agency transfer fees for licenses, permits, registrations, and other privileges if merger does not result in a change of ownership. Page 6 of 6 b. Minority shareholders' only method of objecting to merger is sale of shares back to corporation. c. Effective date of merger can be controlled. d. Income tax advantages, including: (1) No taxable gain to shareholders or surviving corporation. (2) No requirement that only voting shares of surviving corporation can be exchanged for shares and assets of disappearing corporations in tax‐free merger (shares‐for‐shares exchange), (C) (assets‐for‐shares exchange). (3) Surviving corporation succeeds to any net operating loss carryover belonging to disappearing corporation. (4) Transaction is not subject to California Sales and Use Tax. CONS a. Surviving corporation automatically becomes liable for debts and liabilities of each disappearing corporation b. Outstanding shares of each class of each constituent corporation must usually approve principal terms of merger. c. Dissenting shareholders may require that corporation purchase their shares at fair market value on day preceding first announcement of terms of proposed merger. d. Offer or sale of securities to be issued or exchanged in merger must comply with securities laws. e. Disappearing corporation will lose name and identity in merger, unless surviving corporation changes its name to that of disappearing corporation. f. Surviving corporation will not obtain new income tax basis for assets of disappearing corporation.
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