While they sound similar, “stock” vs. “asset” purchase agreements are very different in nature and have meaningful implications for company management, boards and investors. At Locust Walk, we work with myriad small, single-product companies that are looking for help “transacting.” To them, a transaction means one of the following things:
- Licensing deal (regional or global)
- Sale of the company
- Private financing or becoming a public company through either an initial public offering or reverse merger.
In thinking about the first two options, there a few, but meaningful, distinctions between licensing or selling an individual asset pursuant to a license or asset purchase agreement (APA) or selling your entire company pursuant to a stock purchase or merger agreement (SPA). Teams that ignore these differences are likely to do so at their peril.
Companies on the sell-side often begin the strategic partnering processes with the goal of forming a licensing arrangement. A traditional license structure usually involves an upfront payment and downstream milestones and royalty payments as the licensed product progresses. For a company with multiple products in their pipeline, such a deal often provides important “cash as well as caché.” While license agreements are conventional, we advise sell-side clients to remain flexible regarding deal structure and to consider the trade-offs of an APA vs. an SPA. For a buyer, doing a license agreement for a single asset is usually preferable as they get to pick the product they want and are not on the hook for corporate liabilities. In addition, the buyer may prefer an asset purchase approach due to more favorable tax treatment, clear ownership rights and easier internal buy-in. However, there are significant tax implications for corporate licensors that do APA’s (and most biopharma companies are traditional C-corporations). First, the upfront license fee or purchase price is taxable income at the corporate level (and there may be insufficient Net Operating Losses to shelter this income). Furthermore, a second level of tax is triggered at the individual shareholder level should those proceeds be distributed (creating the dreaded “double tax” scenario). For a single product company, this is a big deal and has a significant impact on realized value. Additionally, the agreement for an asset purchase is often just as (and sometime more) complicated then in a SPA.
Therefore, single product companies often suggest that a potential partner buy the entire company through a stock purchase or merger as the product, in essence, is the company and the investors / employees are seeking a clean exit. The advantages to such an approach are:
- The upfront purchase price is often more attractive
- There’s usually only one level of taxation (often at the capital gains tax rate assuming the one-year holding period is met with respect to the stock)
- The management team can move on to other opportunities.
The disadvantage in this case accrues to the buyer in that, along with the asset of interest, come all of the company’s liabilities. These can be a big deal in that biopharma companies often have contracts in place with various vendors and consultants, may own real estate, and have employment contracts with severance obligations that the buyer does not want to assume. Most of these liabilities are handled as part of the extensive negotiation of “Representations and Warranties,” which can take considerable time.
The key question for sellers regarding structure is how to sufficiently satisfy the selling company’s shareholders who are looking at after-tax returns while convincing the buyer to accept all that comes with a purchase of a complete operating business (e.g. all assets and liabilities).
While it’s not easy, for single-product biopharma companies, a SPA is typically preferable to an APA. Getting the buyer comfortable with assuming the company’s liabilities takes careful negotiation and sizeable legwork to reduce the burden for an acquirer. Each transaction is often unique and we strongly encourage engagement of knowledgeable transaction, legal and tax counsel early in the negotiation process.
We at Locust Walk have a team of dedicated specialists that are experienced in dealing with licensing, APA, and SPA and merger transactions and, as a registered broker-dealer, have the infrastructure and expertise to help companies of all sizes pursue whichever route affords the most value. Feel free to contact me at chris@locustwalk.com for a consultation.
Written by Chris Ehrlich