Tax Considerations and Securities Laws Alternate transaction structures may produce very different tax results. For example, if the selling entity is a corporation, the tax cost of an asset sale to its shareholders may be far more than that of a stock sale or merger. On the other hand, if all or a substantial part of the purchase price is paid in the buyer's stock, an acquisition can be structured so that no tax is paid on the stock received. More basically, the tax effects of a sale on an entity, its owners and the buyer often depend on their unique circumstances. As a result, tax analysis is critical in negotiating price and structure.
Securities laws can also affect the parties' choice of structures.
This further increases the importance of full disclosure in stock sales, since the anti-fraud rules can subject sellers to liability for statements that are misleading or incomplete. Once the parties have agreed on key terms, they often sign a short letter of intent or term sheet summarizing their agreement. A letter of intent ordinarily requires the parties to negotiate in good faith to reach a final agreement, but does not obligate them to complete the transaction until they sign an acquisition agreement that sets out all the details of the transaction. Acquisition agreements address in detail the key terms covered by the letter of intent. The parties' representations involve key facts about the participants, such as the accuracy of financial statements and the amount or absence of various liabilities.