Stock Sale or Purchase

Buying or selling stock of a company has many details that should never be overlooked. The attorneys at Fisher Stone can facilitate a smooth stock transfer.

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Stock Sale or Purchase

In a stock purchase, buyers obtain ownership of the target company by acquiring its stock. The acquisition will make the buyer responsible for the company’s old debts and liabilities. A stock purchase is simpler than an asset purchase because buyers and sellers do not need to negotiate details of transfer of assets. Once the stock purchase is executed, assets of the target company will automatically belong to the buyer as the buyer is now owner of the company.

Due Diligence

Due diligence refers to the investigations buyers perform to determine if a target company is a good investment. Due diligence is important to figure out important information. To take an example, a person buying a restaurant would need to know the terms of the existing lease, including land use restrictions and rules for change of ownership. Where landlord consent is required for ownership to change hands, parties should condition closing on obtaining the required consent to avoid future disputes.

Stock Purchase & Tax

To the buyer – Buyers are not taxed for purchasing stock of a company. In contrast with an asset sale, they do not receive a “stepped-up” basis in the company’s assets.

To the seller – Sellers are taxed on the difference between the purchase price and their basis in the stock, generally at individual capital gains rate (for investment over one year), which is lower than the corporate capital gain rate used by the company in an asset purchase.

For the Buyer

•    Ease of transaction
•    Clients and employees are part of the transaction. Meaning any previous clients and employees that were associated with the company will still remain a part of the company.

•   The buyer is responsible for the seller’s liabilities.
•   No tax benefits
•   Employees and clients are not obligated to transfer to the buyer.


For the Seller

•   Seller is not responsible for the liabilities of the company.
•  Avoids a hassle and expense of transfer contracts.

•   Not able to retain certain assets unless transferred before sale of the shares.
•   May be required to pay capital gains taxes in stocks sold.

Contracts Commonly Used

  • Bill of sale: Bills of sale are a type of document that effects the transfer of most tangible assets (furniture, equipment, inventory), but not real estate (land and buildings) or vehicles. A stock transaction will not require use of a bill of sale.
  • Assignment and assumption agreements: Assignment and assumption agreements are used to transfer contracts, permits and similar assets in an asset purchase transaction. Where intellectual properties are involved, the seller would need an assignment and assumption agreement to transfer the rights that come with those properties. The word “assumption” refers to the buyer’s assumption of liabilities associated with the assigned assets.
  • Letters of intent: Letters of intent are documents used to memorialize early discussions in a purchase/sale of a business. They do not carry the full force of a contract but are an important tool to facilitate a negotiation process.

Non-compete agreements: Non-compete agreements are a type of contract that restricts a party’s ability to engage in a certain type of business in a prescribed time and location. To be enforceable, the restriction terms must be reasonable and not make it intolerably difficult for the restricted party to apply its job skills.


 

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