Deal or No Deal? Mitigating Preclosing Tax Liabilities in Stock Purchase Transactions

In a stock purchase transaction, the outstanding stock of the target company is transferred directly by its stockholders to the purchaser, with a stock purchase agreement serving as the primary governing document. Tax professionals must thoroughly identify and resolve any open or unresolved tax issues and verify that all required tax filings have been executed on time. This step is critical because the target company typically retains its preclosing liabilities after acquisition, meaning that any unresolved tax issues or discrepancies will ultimately pass to the buyer upon closing. As a result, conducting comprehensive due diligence, scrutinizing all tax representations, warranties, and negotiating robust indemnification clauses is essential to protect the buyer from unexpected exposures.

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• Stock Purchase Agreement Basics
  Learn more about stock purchase transactions. Unlike an asset purchase transaction, the purchaser in a stock purchase generally does not exclude assets that it does not want, and the purchaser assumes all of the target's liabilities. In addition, stock purchase transactions are not subject to the same statutory requirements as mergers and, unlike mergers, do not need to account for the effect of the merger on the capital stock of the merging entities within the transaction documents. As a result, a stock purchase agreement generally is simpler to structure and draft than an asset purchase agreement or merger agreement.

• Stock Acquisition Resource Kit
  Reference this Stock Acquisition Resource Kit which identifies Practical Guidance content that relates to stock acquisitions. Click here to see recent examples of publicly filed stock purchase agreements in Market Standards - M&A, the Practical Guidance database of publicly filed M&A deals that enables users to search, compare, and analyze transactions using 150+ M&A deal points to filter search results.

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