Orange County Business Journal Guest Article: Special Issues in Using Stock as Consideration in Acquisitions


The issues surrounding any acquisition transaction can be complicated enough. If, however, a buyer should decide to offer up some of its stock as acquisition “currency,” the number and complexity of issues can increase exponentially. In this article, we provide a brief overview of some of the more important considerations affecting deal, structure and deal terms when a buyer offers up some of its stock to a seller.

Tax-Deferred Treatment

The use of stock as acquisition consideration provides the seller with an opportunity for tax-deferred treatment under the Internal Revenue Code (the “IRC”). For that reason, the parties should involve tax counsel as early as possible to maximize the potential tax advantage. For example, there are certain minimum percentages of stock consideration that must be satisfied in order to qualify the transaction for tax deferred treatment, and that minimum will be different based on the type of deal structure. In addition, certain tax-deferred reorganizations for which a corporate seller may be eligible, may not be available to a seller who is a limited liability company, partnership or sole proprietorship. Similarly, the parties need to be careful to avoid covenants that could give rise to a post closing adjustment to the stock component of the purchase price, as that could destroy the eligibility of the transaction for tax-deferred treatment. For example, if the minimum percentage of stock consideration is 80%, and should that percentage fall below 80% as a result, for example, of the buyerʼs “recapture” of escrowed shares, then the tax-deferred nature of the transaction could be forfeited.

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PDF - Orange County Business Journal - Special Issues in Using Stock as Consideration in Acquisitions

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