396 11 Takeovers: Introduction
Successor liability. Limitations on successor liability belong to reasons why ac-
quirers can prefer asset deals.
- In an asset sale, the contractual obligations of the seller to third parties will not
normally be transferred to the acquirer unless the acquirer and the seller have
agreed otherwise. The transfer may require the consent of each third party to
whom the obligations are owed. - In a share sale, however, the target company will continue to be responsible for
its own obligations, and the acquirer will bear a commercial risk in the capacity
of its shareholder. - In a merger, the surviving company succeeds to all liabilities of each constitu-
tuent corporation.
Vendor liability. Most mergers and acquisitions are commercial failures. Whereas
limitations on the liability of the vendor can make sellers prefer mergers or asset
deals, the absence of such limitations can make acquirers prefer share deals.
- In a merger, shareholders of the company that will not survive the merger are
not party to the contract between the participating companies and cannot be
made liable for misstatements made on behalf of the company. - In an asset deal, shareholders of the vendor company are protected by limited
liability for the obligations of the company. - In a share deal, shareholders of the target company are party to the acquisition
agreement and potentially liable for misstatements made on their behalf.
Tax considerations and accounting issues. Tax considerations play a role when the
parties compare structural alternatives. For example, many acquisitions are struc-
tured as tax-free share exchanges as a result of an acquirer’s need to save cash and
the desire of shareholders not to increase their taxable income. Questions of tax
fall outside the scope of this book.
Even accounting issues fall outside the scope of this book. Typical accounting
questions relate to the possible establishment of a new basis of accounting as a re-
sult of a change of control, and the accounting treatment of goodwill.^9 Typically,
acquisition accounting is done either by the purchase or pooling of interests meth-
ods.
The purchase method is also called the acquisition method. According to IFRS 3, a business
combination must be accounted for by applying the acquisition method, unless it is a com-
bination involving entities or businesses under common control. Because of differences be-
tween the US GAAP and IFRS 3, the FASB and the IASB issued similar revised standards
in 2008. Although the revised standards are largely based on IFRS 3, some differences re-
main.
(^9) Cole J Jr, Kirman I, Takeover Law and Practice. In: PLI, Doing Deals 2008: Under-
standing the Nuts & Bolts of Transactional Practice.New York City (2008) pp 126–129.