CHAPTER 13 PURCHASE AND SALE AGREEMENTS FOR COALBED METHANE PROPERTIES
| Jurisdiction | United States |
(Apr 1992)
PURCHASE AND SALE AGREEMENTS FOR COALBED METHANE PROPERTIES
Hall, Estill, Hardwick, Gable, Golden & Nelson
Tulsa, Oklahoma
I. STRUCTURING ISSUES
A. Types Of Transactions. There are three basic forms that a negotiated acquisition can take: (a) Purchase Of Assets, (b) Purchase Of Stock, (c) Merger.
1. Purchase Of Assets. Simply put, an acquisition of assets involves the purchase by a buyer of certain specified assets to a seller for cash, property, notes, securities, or a combination thereof. The transaction may also include the assumption of certain liabilities of the seller.
(a) Advantages. Some advantages to a buyer of purchasing assets are as follows:
(1) Avoidance Of Liabilities. The primary advantage to a buyer is the ability to negotiate the extent to which the buyer will assume the liabilities of the seller. This is particularly important when the seller has substantial contingent liabilities or the potential for such liabilities. The buyer is able to leave these liabilities with the seller and generally acquire the assets free from such liabilities and the past business sins, known or unknown, of the seller. A cautionary note is in order. Some jurisdictions will use the doctrine of "successor liability" to impose liability on a new owner of a business for unassumed liabilities of the previous owner. Historically, the successor liability doctrine has been used most often in product liability cases. Successor liability has also been applied in other areas, such as collective bargaining agreements, pension plans, tax collections and hazardous waste cleanups. Generally speaking, the doctrine of successor liability is not very far advanced in most states, but the trend is in that direction.
Acknowledgement is given to attorneys Robert A. Curry, Del L. Gustafson, Robert J. Melgaard and Larry W. Sandel and to landman Jerry Kucera for the source material for this paper.
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(2) Acquisition Of Certain Business Units. An asset acquisition may be the only viable way of acquiring certain business units, such as an operating division of a corporation.
(3) Step-up In Basis. A major advantage is the buyer's ability to step-up its basis in the acquired assets, for tax purposes, to the purchase price.
(b) Disadvantages. Some disadvantages of an asset acquisition are as follows:
(1) Time-consuming. Asset acquisitions can be rather slow moving, time-consuming process. Documenting the transaction is cumbersome due to the need for preparation of multiple instruments of transfer, especially where the number of assets being acquired is significant.
(2) New Permits And Licenses. The purchaser may have to secure new business or operations permits or licenses or obtain consents to assign in an asset purchase, whereas such permits and licenses will customarily be included in a stock purchase. A buyer should be aware that many kinds of permits may not be transferable (e.g., environmental discharge permits).
(3) Contracts. In asset acquisitions, some contracts the buyer wants may not be assignable without the consent of the other contracting party. This rarely happens in a stock sale (i.e., there is rarely a change of control provision).
(4) Seller Resistance To Asset Sale. Sellers often prefer to sell the entire company through a stock sale, rather than retaining a portion of the liabilities and assets.
2. Purchase Of Stock. Generally, a buyer will acquire all or a controlling portion of a corporation's issued and outstanding shares of capital stock from one or more of the corporation's shareholders. In such a transaction, the acquired corporation is not a party to the acquisition, and therefore the purchase of stock
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does not require the consent of the management of the acquired corporation (except where the corporation had a right of first refusal with respect to the sale of its stock). The buyer may use cash, property, notes, securities or a combination to acquire such stock.
(a) Advantages. Some of the advantages to the buyer in purchasing stock are as follows:
(1) Preservation Of Certain Valuable Assets. A buyer may be able to preserve the ownership of certain valuable assets which a buyer could not easily acquire otherwise, such as a non-transferable patent, trademark or other licenses, franchises or dealerships, purchase or supply agreements, governmental permits and licenses, and goodwill.
(2) Ongoing Entity. The buyer acquires an ongoing business with an infrastructure (such as employees, customers, suppliers, contractual relationships, goodwill, assets, etc.) already in place. Significant agreements, licenses, permits, etc. still need to be reviewed to ensure that the change of control of the corporation does not trigger termination or other rights on the part of some other party.
(3) Documentation Simpler. Documentation is generally simpler and therefore the transaction can usually be done more quickly than an asset purchase transaction.
(4) Additional Remedies. The federal and state securities laws give a buyer of stock certain remedies which are not available in an asset transaction.
(b) Disadvantages. Some of the disadvantages of a stock transaction are as follows:
(1) Liabilities. The primary disadvantage to a buyer in a stock transaction is that all of the assets and all of the liabilities (whether fixed, contingent, disclosed or undisclosed) of the acquired corporation will be
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acquired along with the corporation. Thus, the past business sins of the acquired corporation will come along with the acquired corporation (e.g., failure to pay taxes, environmental liability and product liability). The buyer will generally attempt to shift these risks at least partially to the selling shareholders in the stock purchase agreement through the use of representations, warranties and indemnification provisions. Even if a buyer is successful in legally shifting some of these risks in the stock purchase agreement, it is important to remember that, from a practical standpoint, these risks are shifted only to the extent of the selling shareholders' ability to pay. As long as the buyer allows the acquired corporation to continue to operate in the corporate form, any liabilities can be isolated within that corporation and should not taint the buyer's other assets.
(2) Assets. If there are unwanted assets in the corporation to be acquired, they will need to be stripped out (e.g., by dividend or other distribution) prior to the acquisition.
(3) Multiple Selling Shareholders. If the corporation to be acquired has several shareholders, a stock purchase may be cumbersome or impractical. A merger or asset purchase may be more desirable.
3. Merger Or Consolidation. In a merger, one or more corporations merge into and become part of another corporation which continues its existence (the so-called surviving corporation). Technically speaking, a consolidation is not a merger. In a consolidation, two or more corporations combine to form a new corporation (the resulting corporation) which is created as a result of the combination. Since consolidations are rare, they will not be discussed further. The following is a brief discussion of the most common methods of accomplishing an acquisition by merger:
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(a) Straight Two-Party Merger. In the straight two party merger, the acquiring corporation ("A") acquires the target corporation ("T") by merging "T" into "A" which becomes the surviving corporation. "A" retains its corporate attributes and succeeds to all of the assets and liabilities of "T". "T" disappears. The shares of stock of "T" are converted into securities of "A," cash or a combination of securities and cash. Both "A" and "T" are parties to a merger agreement. Generally, the shareholders of both "A" and "T" must approve the proposed merger, and they may also be entitled to appraisal rights. Appraisal rights enable a shareholder to commence a court action to receive, in cash, an amount which the court determines to be the "fair value" of such shares.
(b) Triangular Merger. In a triangular merger "A" forms a new subsidiary ("S") into which "T" is merged. "S" is the survivor. The shares of stock of "T" outstanding immediately prior to the merger are converted into securities of "A," cash or a combination of securities and cash. Both "A" and "S" retain their corporate attributes; "S" succeeds to all of the assets and liabilities of "T". "T" disappears. The triangular merger isolates the liabilities of "T" in "S" and thus keeps them from tainting "A's" other assets. The shareholders of "A" do not have an opportunity to vote on the merger. "A," as the sole shareholder of "S," votes all of the stock of "S" in favor of the merger. The shareholders of "T" must approve the merger and, generally, will be entitled to appraisal rights.
...(c) Reverse Triangular Merger. A reverse triangular merger proceeds in the same manner as a triangular merger except that "S" is merged into "T," with "T" being the survivor. The
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