The Three Primary Deal Structures
Generally, facilities change hands through (1) an asset acquisition, (2) a merger, or (3) a stock sale. Each one has different implications for whether it is a CHOW, so in deal negotiation, structure is key. This blog takes the reader through an overview of each of the three structures in basic form. In follow-up blogs, we’ll go through specific issues for each of the three structures, and the factors that influence whether each may be a CHOW or not under specific circumstances.
Asset Acquisition. For background purposes, an asset acquisition is a sale where the buyer purchases the assets of the seller, and generally leaves behind all the liabilities. The seller company continues to exist and after the closing, either continues to operate its non-sold assets or closes down and distributes the sale proceeds to its stakeholders (creditors and equity). The buyer generally wants an asset acquisition because of its ability to avoid unknown liabilities and to cherry-pick specific assets. Asset acquisitions usually result in a CHOW.
Merger. A merger is the combining of two or more companies into one entity, generally by offering the owners of one company securities in the acquiring company in exchange for their ownership interests. From the buyer’s perspective, the downside to a merger is that the buyer is essentially taking on all of the liabilities of the seller. Whether a merger results in a CHOW ordinarily depends on whether the provider entity is merged into the buyer (a forward merger), or whether the buyer is merged into the provider entity (a reverse merger). Generally, a forward merger constitutes a CHOW, but a reverse merger does not.
Stock Sale. A stock sale is a transaction between the current shareholders of the company and the buyer, with the current shareholders transferring all of their shares to the buyer. Similar to a merger, the downside to a stock sale for the buyer is that the buyer takes on all the liabilities of the seller. A stock sale generally does not constitute a CHOW.