How can a corporation be sold?

When the owners of a corporation, the stockholders, want to sell the business they usually want to sell the stock. While the sale of the stock will accomplish the sale of the business, the business can be also be sold by having the corporation sell its assets or by having it merge with another company. Choosing the method that will be best for a specific business sale depends on, among other things:

• whether the buyer and the sellers want a simple transaction.
• taxes.
• whether the entire business will be sold, or whether only part will be sold.
• how many stockholders there are and how many are required to approve the sale.

A sale of a corporation’s stock is straightforward. The corporation’s stockholders trade their stock certificates for money or for property. The corporation keeps all of its assets and liabilities. The only things that change are the names and identity of the stockholders. For a corporation whose stock is not publicly traded, the transaction is generally simple and usually involves only paperwork, including a stock purchase agreement, a bill of sale, the surrender of the existing stock certificates, the transfer of the stock on the corporation’s records, and the issuance of new stock certificates.

Under Colorado law, a merger is generally treated like a sale of stock. In the merger the buyer, called an “acquirer,” assumes all of the corporation’s assets and liabilities by operation of law and without the need for any other agreement or transaction.

When someone buys a corporation’s assets, the corporation sells its property, like its contracts, furniture, fixtures, and equipment, for money or in exchange for other property. The corporation gets the money and the buyer gets the assets. The buyer generally does not take or assume any of the corporation’s liabilities. Sales of assets are usually trickier than sales of stock. The sale of assets that involve third parties, like customer and vendor contracts or leases of property, involve the “assignment” of the asset to the buyer. Contracts with third parties usually require the corporation to obtain the third party’s consent before the corporation can assign the contract to the buyer.

If the corporation’s employees are going to work for the buyer after an asset sale, the corporation technically must fire the employees so that the buyer can hire them. The firing and hiring process can raise employee benefit issues, such as whether the employee is entitled to receive accrued vacation pay and whether their health and retirement benefits are changed.

Some sales of a corporation’s assets give rise to government agency filing or permit requirements. A sale of real estate requires that a formal deed be filed to transfer the property. Finally, if the corporation has used its assets to secure the payment of a line of credit or another debt, the corporation will be required to fully pay the line of credit or debt before the bank will release the liens on the assets that the corporation wants to sell. Buyers often prefer asset purchases to stock purchases for tax reasons. In most cases, the depreciated book value of the corporation’s assets is lower than their fair market value. In this situation, a buyer will want an asset deal so that the buyer’s tax basis in the assets will equal the purchase price and will allow for the greatest depreciation expense. The seller, on the other hand, usually wants to sell the corporation’s stock in order to avoid tax on the difference between the sales price of the assets and their depreciated book value. If the corporation is a C corporation, the seller also wants to avoid paying tax on the distribution of the sales proceeds from the corporation to the shareholder.

Under the tax laws, a merger may be treated as either an asset sale or stock sale, depending on the entity’s structure. Always consult a tax specialist for assistance when dealing with a merger.

Portion of Business Being Acquired

An asset sale is appropriate when the buyer is purchasing less than the corporation’s entire business. After the buyer takes the specified assets, the remaining assets may be used to continue as a going concern or may be disposed of by sale, liquidation, or distribution in kind.

Corporate Approval Requirements

Under Colorado law, mergers generally require the approval of only a majority of the shareholders of the parties to the merger. An asset sale ordinarily requires the approval of a majority of the selling corporation’s shareholders. A sale of stock, however, requires the approval of all of the corporation’s shareholders if the buyer wants to own 100 percent of the business. Unless there is a contractual agreement to the contrary between the stockholders, any individual shareholder can refuse to sell his or her stock.

In some cases, a buyer can use a merger to buy a corporation with a reluctant stockholder. The typical transaction is called a “reverse triangular merger.” To start, the buyer forms a new, wholly-owned subsidiary. The new subsidiary then merges into the corporation with the reluctant stockholder, since this requires only a majority vote. After the merger, the buyer owns 100 percent of the corporation’s stock, and the reluctant stockholder owns stock in the parent of the new and merged corporation. The reluctant shareholder can choose to exercise “dissenter’s rights,” but if the transaction is generally fair to the selling shareholders the cost and relative benefit of exercising these rights often dissuades shareholders from troubling themselves.