Mergers and acquisitions law governs the combination of two or more business entities and the purchase of a major stock interest in one business by another business. Regardless of the type of merger or acquisition, a subsidiary is typically created to hold the new business and protect the existing business from liability. Several different areas of law are involved in governing mergers and acquisitions.

Asset Purchase

With this type of acquisition, the buyer purchases all or a major portion of the selling company's assets. They assume certain liabilities as agreed in the acquisition contract, although state law may require some liabilities to be included with this transaction.

For example, if the selling company owes money to a creditor, it will still have this debt after the sale. The buyer will not be responsible for paying it back.

This type of transaction can include intangible assets such as brand and intellectual property as well as tangible assets such as real estate and equipment.

Stock Purchase

With this type of transaction, the buyer purchases the entirety of the seller's stock shares. They can also purchase a portion of the shares and then require a sale by short-form merger under statutory law. The buyer accepts both the assets and liabilities of a company as a condition of ownership. This transaction is brought about by a tender offer in which the buyer solicits seller shares at a certain price as regulated by securities law.


This transaction is one in which two companies join into one and are issued a merger certificate by the state. The company that is taking over the other company receives all its assets and is responsible for all its liabilities. After the merger is complete, the law declares that the two entities have become a single business entity.

Merger and Acquisition Agreements

Depending on the type of M&A transaction, it may be governed by a merger agreement, an asset purchase agreement, or a stock purchase agreement. However, all of these agreements have four main components, including:

  • Representations and warranties are the statements each party makes about its own business entity. These can be both negative and positive and are offset by the disclosure schedule.
  • Covenants are promises that ensure that the business will not make drastic changes between the time the agreement is signed and the transaction closes. Closing occurs when debt, stock, or cash are transferred in exchange for the stock and assets being purchased. During this time period, each party must take required actions such as getting the consent of shareholders and other third parties. Covenants can also govern actions after the acquisition closes, such as non-compete agreements and buyer indemnification.
  • Conditions to closing indicate what must happen or not happen for the transaction to close. Common conditions include:
    • That the buyer must pay and the seller deliver as agreed
    • That shareholders and the board have approved
    • That the transaction is not legally prohibited
    • That all representations are still true at the time of closing
    • That all required agreements have been signed as agreed
  • Indemnification clauses indicate the party responsible for any liabilities that arise from the transaction. These may include:
    • The length of time in which the buyer can uncover seller breaches in the warranties and representations
    • Whether the transaction has an indemnification cap
    • Whether funds will be escrowed to cover future claims and for how long
    • Whether a minimum amount of damage must occur before indemnity is activated

Employment Agreements

In many cases, the new owners want to retain the existing management team for a specific period of time to ease the transaction. This is documented with an employment agreement, which often provides the employee an incentive to remain with the company under the new regime.

Employment agreements typically detail stock options, bonuses, base salaries, benefits, other forms of compensation, and reasons for termination.

Non-Compete Agreements

This document allows the new owner to prevent an employee or owner of the previous company from going to work for a competitor. State laws vary widely on the legality of non-compete agreements. For this reason, you should have any proposed non-compete provisions reviewed by a qualified employment lawyer.

If you need help with mergers and acquisitions, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.