Acquisition or Merger? Choosing the Legal Structure of the Transaction

One of the most important decisions in an M&A transaction is made before the definitive agreement is fully negotiated: how will the transaction legally be implemented?

The "M&A" acronym brings together two broad concepts: mergers and acquisitions. An acquisition can itself take different forms. Most commonly, the buyer may acquire the shares of the target company in a share deal, or acquire specific assets and liabilities of the business in an asset deal. Alternatively, depending on the jurisdiction and circumstances, the transaction may be implemented through a statutory merger or similar corporate combination.

Economically, each route may ultimately result in control over a business changing hands. Legally, however, they operate in very different ways. The choice affects liabilities, contracts, employees, licences, regulatory approvals, taxation, financing, execution mechanics and ultimately the price the buyer is prepared to pay.

The distinction between a merger and an acquisition is not always purely economic. An acquisition describes the objective of obtaining ownership or control of a business, typically through the purchase of shares or assets. A merger, by contrast, is a corporate-law mechanism through which two entities are legally combined. In practice, however, a merger may still have the economic substance of an acquisition where one party effectively obtains control of the combined business.

Deal structure is therefore not simply a drafting choice. It is one of the first points where legal analysis and transaction strategy must be considered together.

The share deal: acquiring the company itself

In a share deal, the buyer purchases some or all of the shares in the target company from its existing shareholders.

The distinction is important: the buyer does not directly acquire the target’s individual assets and liabilities. It acquires ownership of the legal entity that already owns those assets and remains subject to those liabilities.

If Buyer acquires 100% of Target, Target normally continues to exist as the same company after closing.

Its employees remain employed by it. Its premises remain owned or leased by it. Its contracts generally remain contracts of the same legal entity. Its intellectual property remains registered in its name.

From an execution perspective, this continuity can make a share acquisition considerably simpler than transferring an operating business asset by asset.

But continuity has another side.

The company does not leave its history behind at closing.

Tax exposures, litigation, contractual liabilities, employment issues, regulatory problems and other risks existing before the acquisition generally remain within the target. The buyer therefore acquires economic exposure to them through its ownership of the company.

This explains why legal due diligence, representations and warranties, disclosure and indemnification become so important in a share deal.

The buyer cannot simply select the good parts of the company and leave the historical risks with the seller.

Instead, much of the SPA negotiation is about identifying those risks and determining who should ultimately bear their economic consequences.

Continuity does not mean that consents are irrelevant

It is tempting to assume that because the underlying contracts remain with the same company, no third-party consent is required in a share acquisition.

That is not always the case.

Material agreements may contain change-of-control provisions allowing a counterparty to terminate, renegotiate or require consent if ownership of the target changes.

Financing arrangements may contain similar restrictions. Regulatory licences may require notification or approval following a change of control.

An apparently simple share transaction can therefore still depend on a detailed analysis of the target’s contractual and regulatory framework.

From an advisory perspective, these issues should be identified early.

Discovering shortly before closing that a key customer can terminate its contract because of the acquisition can materially alter both valuation and execution risk.

The asset deal: acquiring the business piece by piece

An Asset Purchase Agreement, or APA, takes a fundamentally different approach.

Instead of acquiring the company that owns the business, the buyer acquires specified assets directly from it.

These may include machinery, inventory, intellectual property, customer contracts, real estate, receivables, goodwill or an entire business division. The agreement identifies which assets are transferred and which liabilities the buyer agrees to assume.

This creates one of the principal attractions of an asset transaction:

selectivity.

A buyer interested in only one division of a diversified company may acquire that business without purchasing the rest of the corporate group.

Similarly, depending on applicable law, the buyer may seek to assume only specified liabilities rather than acquiring an entity containing its entire historical liability profile.

But this apparent flexibility comes with greater execution complexity.

Assets do not always move together automatically.

A contract may need to be assigned. A landlord may need to consent to the transfer of a lease. Intellectual property registrations may need to be updated. Licences may need to be transferred or obtained again. Employees may be subject to specific transfer rules. Real estate may require separate formalities.

The more integrated the business, the more complicated separating and transferring it can become.

Can a buyer really leave all unwanted liabilities behind?

The ability to "cherry-pick" assets and liabilities is frequently presented as one of the great advantages of an asset acquisition.

Conceptually, that is correct.

Legally, however, it should not be overstated.

Depending on the jurisdiction and the type of liability involved, certain obligations may follow the transferred business regardless of what the APA says between buyer and seller. Employment, environmental, tax and other forms of successor liability may be governed by mandatory rules.

The contractual allocation of liability between the parties therefore does not necessarily determine the rights of third parties or regulators.

This is another reason why transaction structure should be analysed before assuming that an asset deal automatically provides complete isolation from historical risk.

And what about a merger?

A merger achieves the transaction through corporate law rather than simply through a transfer of shares or individual assets.

Depending on the relevant jurisdiction, one entity may be absorbed into another, or the transaction may result in a combined entity through another statutory mechanism.

The consequences can be significant because assets, liabilities and contractual relationships may transfer by operation of law, subject to the applicable corporate, regulatory and contractual framework.

Merger transactions can also involve shareholder approvals, creditor protections, statutory procedures and, particularly in listed-company transactions, additional securities and takeover requirements.

For that reason, a merger is not simply an alternative form of SPA.

It is a different legal mechanism for achieving a business combination.

Which mechanism is available — and commercially sensible — depends heavily on the jurisdiction, ownership structure and nature of the transaction.

Structure changes the economics of the deal

Choosing between structures is not only about liability.

It can materially change the economics of the transaction.

In a share sale, the purchase price is paid to the selling shareholders.

In an asset sale, the purchaser generally pays the company selling the assets. Any subsequent distribution of those proceeds to shareholders is a separate step.

The tax consequences can therefore be very different for both buyer and seller, depending on the relevant jurisdictions.

Accounting treatment, acquisition financing and the ability to obtain security over acquired assets can also influence the preferred structure.

This means that transaction structuring should not be undertaken by legal advisers in isolation.

Tax, financial and legal advisers need to model the same transaction from different perspectives before the parties commit themselves to a particular route.

A structure that is legally elegant but economically inefficient may not survive negotiations.

Buyer and seller may naturally see structure differently

Deal structure can itself become a negotiation.

A buyer concerned about unknown historical liabilities may prefer an asset acquisition.

A seller looking for a complete exit from a business may prefer to sell the shares of the company rather than retain a corporate shell containing excluded assets and liabilities.

But these are tendencies, not rules.

A buyer may strongly prefer a share deal because transferring hundreds of contracts and licences individually would make an asset acquisition impractical.

A seller may prefer an asset sale because it wishes to retain another part of the company.

The right structure is therefore not the structure that is theoretically most favourable to buyer or seller.

It is the structure that best reconciles commercial objective, risk allocation and execution feasibility.

The advisory question: what are we actually trying to achieve?

Before selecting the documentation, advisers should first understand the commercial objective.

Is the buyer acquiring the entire business?

Only a division?

A controlling stake?

A minority investment?

Are there material historical liabilities?

Are key licences transferable?

Would important customers have termination rights?

Does management remain?

Are there regulatory approvals?

How easily can the business be separated from the seller’s wider operations?

And what are the tax consequences of each alternative?

These questions can lead two economically similar transactions toward completely different legal structures.

Consider a buyer interested in a manufacturing division embedded within a much larger group.

Buying shares in the parent company would make little sense simply to obtain one business line. An asset or business transfer may be the natural solution.

Now consider a regulated business dependent on hundreds of customer agreements, employees and licences.

Attempting to transfer every element individually may create far greater execution risk than acquiring the shares of the company that already holds them.

The structure should therefore follow the business reality — not the other way around.

Structure determines the rest of the legal architecture

The decision between a share deal, asset deal and merger is not isolated from the rest of the transaction.

It determines much of what comes next.

It changes the scope of due diligence.

It changes what must be transferred at closing.

It influences the representations and warranties required from the seller.

It determines which third-party consents matter.

It affects how liabilities are allocated.

It may alter purchase price mechanics and tax treatment.

And it determines the form of the definitive transaction agreement itself.

That is why the question should be addressed early, often already at LOI stage.

The parties should know not only how much is being offered, but what legal transaction that offer actually contemplates.

Because in M&A, buying a company and buying its business may look economically similar from a distance.

Once the lawyers, advisers and transaction teams begin examining how ownership will actually change hands, they can become very different deals.