Whether you’re considering pursuing a merger or acquisition for your North Carolina business, in researching whether one of these options is best for you, you’re bound to have encountered the concepts of “stock purchase” and “asset purchase.” If you’re wondering how these differ, continue reading, where we’ll describe some of the differences between them. 

What a Stock Purchase Is

In a stock purchase, the buyer purchases shares of stock or other equity interests in the target company directly from the owners. The buyer becomes the new owner of the target business. 

Advantages and Disadvantages Associated With Stock Purchases

Whether a particular factor associated with a stock sale is positive or negative will vary depending on one’s role in the transaction. However, some commonly cited advantages associated with stock purchases from a selling business owner’s perspective include:

• The transfer of stocks involves less complexity than transferring assets. 
• The tax consequences to sellers are generally more advantageous than in an asset purchase.
• The name, the organizational structure, contracts, etc. remain the same once the stock purchase occurs unless otherwise stated in the acquisition agreement.
• It is less likely to violate anti-assignment clauses in contracts, given that the company continues to exist in the same form after the sale is closed.

At the same time, there are some factors that, depending on one’s perspective, may be seen as disadvantageous to those considering a stock purchase, such as:

• Stock purchases are disfavored by risk-averse buyers as they will assume additional risk in acquiring pre-existing liabilities and contingencies, whether known or unknown.
• Getting in touch with a large number of stockholders and coordinating a sale among them can be challenging, if not a deal-breaker, to a buyer looking to acquire 100% equity.
• There isn’t a step-up for tax purposes when acquiring assets, with limited exceptions (such as if an S-corp has 336(e) or 338(h)(10) elections).
• A buyer may find their tax obligation is higher in the future because there is lower depreciation expense. 

What an Asset Purchase Is

In an asset purchase, a buyer purchased all or substantially all of a target company’s assets, or those of a business division. Asset purchases generally involve buyers taking on only specified pre-existing liabilities of the target company. 

Benefits and Downsides to Asset Purchase Sales

Pros and cons of asset purchases vary depending on one’s point of view as a buyer or seller. Some benefits associated with asset purchases include: 

• Buyers can purchase assets they want, leaving known and potential liabilities and any undesired assets in the seller’s possession.
• The assets acquired by the buyer are received on a step-up basis, which offers significant tax benefits for them (and generally less favorable tax consequences to sellers).
• The buyer deals with the company’s management more so than shareholders.

Conversely, some commonly cited downsides of asset purchases include:

• Separate negotiations may need to occur regarding the purchase of certain assets.
• Separating assets can be costly and time-consuming measures, such as the negotiation of a transition services agreement between buyer and seller, may be required. 
• The transfer of assets from seller to buyer can be complicated.
• It may be necessary to procure third-party consents to move forward with the sale of assets. 
• Sellers may incur more tax as noted above.
• Deciding what to do with a selling company’s remaining assets or liabilities is necessary if all are not purchased/assumed by the buyer.

Getting Legal Guidance in Planning for a Merger or Acquisition

Above is only a brief introduction to what stock and asset sales are and some of the pros and cons associated with each option. Reach out to our law office, Wilson Ratledge, and we will put you in contact with an experienced attorney who has guided other companies here in Raleigh and elsewhere in NC in growing their business’ reach through strategic acquisitions.

CORPORATE TRANSPARENCY ACT IN ACTION | TALES FROM THE TRENCHES – PART 1

And so begins the inevitable experiential anecdotes in this, the first year of implementation of the Corporate Transparency Act (“CTA”).  I wrote a general overview of this law on January 15, 2024.  I fully expected to encounter noteworthy experiences and information as this year progresses, and so far, I have not been disappointed.  I hope to continue to share our experiences, and invite you to do the same.

TALE #1: ARE WE A LARGE OPERATING COMPANY?

Before I posted my article, I got an email from a client asking me to confirm that his company would be exempt from the CTA based on the following:

For example, to take advantage of the “large operating company” exemption, an entity must (1) employ 20 full-time employees in the United States; (2) have an operating presence at a physical office in the United States and filed a federal income tax or information return in the United States demonstrating more than $5,000,000 in gross receipts or sales.

At first glance, based on what I knew about the company, I thought this was an easy yes.  As any lawyer must do, I went to the actual law to confirm.  Not surprisingly, I needed to ask some more questions.  For purposes of the exemption, the CTA has its own guidance regarding whether an employee is a “full-time employee,” and even what is considered the “United States!”  Generally, a full-time employee averages 30 hours per week, or 130 hours per month.   The United States means “[t]he States of the United States, the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the United States.”  In addition, “gross receipts” means “net of returns and allowances” and net of any such gross receipts or sales “from sources outside of the United States.”  Once I clarified these points with the client, I was able to confirm his company should be exempt from the CTA.

TALE #2:  THE PROCESS OF FILING THE BENEFICIAL OWNER INFORMATION (“BOI”) REPORT

I already have personal knowledge of an individual attempting to file the BOI report on his own.  While it was mostly correct, he omitted an individual with “substantial control” that was not an owner.  His experience was that one is not offered guidance in the process of completing the report; therefore, it is important that the client either receive competent advice or thoroughly review the informational materials provided by FinCEN and others prior to filing the report.

TALE #3:  OBTAINING AND USING FinCEN IDENTIFIERS

As discussed in the original article, the CTA allows individuals who are either a beneficial owner or otherwise exercise substantial control over a reporting company, to obtain a FinCEN identifier, and provide that to reporting companies in lieu of their personally identifiable information (“PII”) required by the CTA.  This allows the individual to submit their PII directly to FinCEN rather than the reporting company.  I am not sure how much comfort that provides the individuals, but it is an opportunity to simplify the obligations of the applicable reporting company(ies), discussed further below.

Your humble author is the proud owner of her own FinCEN identifier.  It was fairly easy to get one.  You can get yours here:  https://fincenid.fincen.gov/landing.  An interesting and query-inducing side note:  You will be required to log in using login.gov, which is a system maintained by the Federal government for use by the public and interaction with participating government agencies.  I tried to create a new account, and was told I already have one, though I have no recollection of ever setting up such an account.  I do, however, have an Id.me account that I set up some years ago.  Id.me is a third-party service used by some government agencies for interaction with the public (including IRS which, like FinCEN, is also part of the U.S. Treasury).  Perhaps there was some crossover there?  Who knows?  

Once I was able to log in, I was able to get the FinCEN identifier pretty easily, as I stated above.  I took a picture of my driver’s license and submitted that.  Now, if I move, I will have to file an updated report with FinCEN.  However, any companies for which I am a beneficial owner or otherwise have “substantial control” will not have to file an updated BOI report when my information changes.

Please consider a hypothetical based on a real example in our office.  Below is a chart (which has been abbreviated!) of companies in which our clients, two brothers, are involved as beneficial owners:  

These clients are incredibly fortunate to have (and to have had for a long time) a brilliant and capable assistant that helps them and us keep all of this straight.  Not all of our clients have that.

Imagine one person in charge of all of this, having to gather PII for all beneficial owners and others with substantial control as defined by the CTA.  Then imagine what happens when one brother moves.  In this hypothetical, one brother’s move would trigger TEN new BOI reports!  As you may have figured out, as did their brilliant assistant, the brothers are obtaining their own FinCEN identifiers.  We are also exploring the use of FinCEN identifiers for entities “upstream” of the reporting company.

I recommend, however, that this be taken a step further and that, in our hypothetical, all JV partners also obtain their own FinCEN identifiers.  This should ease the burden of the reporting companies regarding providing FinCEN with any updates to the personal situations of its beneficial owners and other with substantial control.

I further contend that this strategy is appropriate for any entity with more than one beneficial owner or other individual with “substantial control.”  One day I might contend it makes sense even for entities with only one applicable person.  I do not think it would be detrimental in any material way to take that approach.  

Again, stay tuned, I am sure there is more to come.

When it comes to why companies pursue joint ventures, they do so for a wide variety of reasons, some of which include developing new products or expanding into new markets, or perhaps for a temporary business project. In these instances, the pooling of two or more parties’ resources can provide a unique opportunity for growth. While joining with another party to accomplish a certain task or make aspirations a reality might sound like a win-win, there are important legal essentials to consider and pitfalls to avoid with the goal of maximizing success in joint ventures. 

Understanding Your Legal Obligations When Forming a Joint Venture

Put simply, a joint venture (JV) involves two or more persons or companies combining their resources, including assets, such as property and cash, and human capital to collaborate in a specific and defined project. It’s important that individuals and entities that are parties to the joint venture invest the time and resources necessary on the front end to memorialize their collective goals, rights, and obligations to minimize unforeseen legal and financial liabilities. Joint ventures should always involve defining the newfound arrangement in a contract; and the often involve founding a new joint company to carry out the joint venture.  In joint ventures implemented through a new company, the choice of entity is often a limited liability company, and the “contract” governing the joint venture is the new company’s operating agreement.

Whether the joint venture is implemented through a new company or not, having a joint venture agreement in place is essential. 

Matters Your Joint Venture Agreement Should Address

The fact that you even considered forming a joint venture suggests that you and the party you’re planning to work with have shared goals and objectives for this business arrangement; however, it’s important to properly and formally document that information in aJV agreement, as well as other details, such as:

• How much each party is contributing to getting the joint venture off the ground (in terms of assets and capital)
• Details about how long the JV is intended to last
• What will become of intellectual property rights secured and whether entering into a confidentiality agreement is necessary to protect them
• Descriptions of each party’s rights and responsibilities
• Details about how the JV will be managed
• Each party’s rights and obligations with respect to profits, losses, and taxes
• Procedures to follow if disputes arise or there’s a desire to terminate the agreement

This is not an exhaustive list of the details you’ll want to cover in the JV agreement, which is why you’ll want to have an experienced business law attorney help you draft this contract to ensure it upholds your best interests.

Ways To Avoid Problems When Setting Up or Operating Joint Ventures

One of the biggest impediments to the success of joint ventures is that parties in these arrangements rush into the joint venture without first making sure that they’re on the same page in terms of goals and expectations and consequently find themselves needing to make decisions as a collective despite having different management styles or perspectives on the business’ direction, i.e., who to hire on for key roles. So, having extensive conversations about this is critical, and if you decide to move forward with the venture, then documenting how you’re going to blend your approaches is key. 

Another issue that often arises with joint ventures is something that commonly plagues partnerships, which is ensuring equitable allocation of obligations between entities. For example, in strategic relationships, an equitable sharing of the workload may not always be feasible, which is why one party may contribute more financial resources, and another entity, more labor. Properly documenting these matters in the JV agreement, is key to minimizing potential conflicts.

It is also crucial to agree in advance regarding unwinding the joint venture should it not prove successful. Such an agreement mapping a potential dissolution of the joint venture minimizes legal battles that could be costly, time-consuming, and could affect reputations with vendors and customers. Conversely, if the joint venture is a success, the agreement should outline options for continuing the project once the initial term of the contractual agreement has come and gone.

Learning More About Joint Ventures and If They Are Appropriate for You

Wilson Ratledge, PLLC has long assisted entrepreneurs and businesses in creating a solid foundation for their companies to operate by negotiating and drafting agreements that accurately reflect their understanding and represent their best interests. A solid, well-written contract is key to minimizing potential disputes and costly and time-consuming litigation. 

We want to be of counsel to you as you assess whether entering a joint venture is in your best interest or whether some other business arrangement is. So, call or email our law office to meet with a business law attorney who will ask you some questions about the goals for your business enterprise and advise you whether setting up a joint venture or some other type of arrangement is best, and if so, craft an agreement incorporating each parties’ desired terms and conditions. 

And, if you’ve already entered into a joint venture and are facing a business dispute, you can also contact us to review your JV agreement and advise you of your options.