M&A 101 Series - Deal Structure Basics

This will be common knowledge for many of you, but buyers and sellers going through the process for the first time may find it useful. One of the first decisions is whether to structure the transaction as a share purchase or an asset purchase. In a share purchase, the buyer acquires the target's shares directly from the selling shareholders and, in doing so, indirectly acquires all assets, rights, and liabilities of the business. The target company continues to exist and typically becomes a subsidiary of the buyer (or merges with acquisition company created for the sole purpose of buying it, but that is a post for another time). In an asset purchase, by contrast, the buyer only acquires the specific assets it identifies and only assumes the liabilities it chooses, subject to liabilities imposed by law. This “pick and choose” approach gives buyers significant flexibility, since they do not waste money on unwanted assets, and there is less risk of inheriting unknown or undisclosed liabilities. There is a trade-off, however. Asset purchases are considerably more complex. They require separate transfers for each asset and liability: bills of sale for tangible assets, assignment and assumption agreements for contracts, transfers of title for real property, assignments of intellectual property and related filings with the CIPO and/or USPTO updating ownership. While third-party consents are needed on both types of transactions, (consent to assignment for asset and consent to change of control for share deals), typically more contracts will have a clause restricting assignment, but not necessarily restricting change of control. All of these factors can delay closing / cause asset deals to drag on longer than share deals. According to a recent survey of 60 Canadian private M&A agreements, by Thomson Reuters, 73% were share purchases and 23% were asset purchases, continuing a multi-year trend favouring share deals. For deals valued over $100 million, 24% were asset purchases, showing that even at the larger end of the market, both structures remain in play. If you are a buyer seeking maximum control over what you are acquiring, an asset purchase may suit you. If speed and simplicity matter more, a share purchase can often be closed on a quicker timeline. Either way, understanding the structural choice is foundational to protecting your interests and understanding the interests of the other side. In Canada, sellers will generally always favour a share deal, especially given the lifetime capital gains exemption (another post for another time).