Acquisitions and divestitures are the two sides of corporate ownership change: an acquisition transfers control of a target company through a purchase of its stock or its assets, and a divestiture separates a business unit from its parent through a spin-off, split-off, or equity carve-out. Which structure the parties choose drives everything that follows, including the tax bill, the regulatory filings, the liabilities the buyer inherits, and the way employees and contracts move (or don’t).
How Acquisitions Are Structured
Stock Deals
In a stock acquisition, the buyer purchases the target’s voting shares from its shareholders. The corporate entity stays intact, so contracts, licenses, and permits continue without renegotiation. The catch is that every existing liability comes with it: lawsuits, tax exposure, regulatory obligations, unfunded benefit plans. Diligence matters more here because you cannot leave anything behind.
Asset Deals
An asset acquisition lets the buyer pick specific items — equipment, intellectual property, customer lists, real estate — and leave unwanted obligations with the seller. The purchase agreement lists what transfers and what stays. Buyers prefer this structure when the target carries environmental risk, pending litigation, or messy legacy exposure. The price is administrative work: separate title transfers, contract assignments that often need third-party consent, and licenses that may not be transferable at all.
Asset buyers are not automatically shielded from environmental cleanup liability. CERCLA reaches four categories of parties: current owners or operators, anyone who owned or operated the facility when disposal occurred, parties who arranged for disposal, and transporters who selected the disposal site.1Office of the Law Revision Counsel. 42 U.S. Code 9607 – Liability Courts have also found asset buyers liable when the transaction amounts to a de facto merger, the buyer is a mere continuation of the seller, or the buyer expressly or impliedly assumed the liability.
Horizontal, Vertical, and Conglomerate
Acquisitions are also classified by how the two companies relate. Horizontal deals combine direct competitors and draw the closest antitrust scrutiny. Vertical deals link different stages of a supply chain, such as a manufacturer buying a distributor. Conglomerate deals combine unrelated businesses, usually for diversification. The classification often predicts how hard federal regulators will look at the transaction.
How Divestitures Are Structured
Spin-Offs
A spin-off turns a subsidiary into a standalone public company. The parent distributes shares of the new entity to its existing stockholders on a pro-rata basis, so shareholders receive stock proportional to what they already hold without paying anything additional.2FINRA. What Are Corporate Spinoffs and How Do They Impact Investors? After the distribution, the two companies trade independently.
For the spin-off to be tax-free, both the distributing corporation and the spun-off entity must be actively engaged in a trade or business immediately after the distribution, and that business must have been actively conducted throughout the five-year period ending on the distribution date. The business cannot have been acquired in a taxable transaction during that window, and the distribution cannot be used primarily as a device to distribute earnings and profits.3Office of the Law Revision Counsel. 26 U.S. Code 355 – Distribution of Stock and Securities of a Controlled Corporation Miss any requirement and the distribution becomes taxable at both the corporate and shareholder levels.
Split-Offs and Equity Carve-Outs
A split-off requires shareholders to exchange their parent-company shares for stock in the subsidiary, which shrinks the parent’s share count and transfers the subsidiary to a defined group of investors. An equity carve-out is different: the parent sells a minority stake in a subsidiary through an IPO, keeps control, raises cash, and lets the public market set an independent valuation. Some companies use a carve-out as a first step toward a later full spin-off.
How a Deal Moves From LOI to Closing
Letter of Intent
The formal process starts when the buyer issues a Letter of Intent covering the proposed price, structure, and key terms. Most LOIs include an exclusivity (or no-shop) period, typically 30 to 90 days, during which the seller cannot negotiate with other bidders. The price terms are usually non-binding; the exclusivity and confidentiality terms are binding.
Due Diligence
Once the LOI is signed, the buyer’s accountants, lawyers, and industry specialists work through the seller’s data room to verify financial health, confirm the assets exist as described, review outstanding litigation, and identify inherited risks. Change-of-control provisions buried in loan documents and key contracts deserve special attention because they can accelerate debt or let a counterparty terminate when ownership changes hands.
The Purchase Agreement
If diligence checks out, the parties negotiate the definitive purchase agreement, which sets the final price, the representations and warranties on both sides, indemnification obligations, and the conditions that must be satisfied before closing.
Earnout provisions are common when buyer and seller disagree on value. A slice of the price is made contingent on the target’s post-closing performance against negotiated milestones. Earnouts bridge valuation gaps and keep the seller engaged during the transition, but they are among the most litigated provisions in M&A contracts. Precise definitions of the performance metrics and of the buyer’s operating obligations during the earnout period are essential.
Representations and Warranties Insurance
Representations and warranties insurance is now standard in middle-market deals. A buy-side policy covers losses from breaches of the seller’s reps, letting the seller walk away cleanly while giving the buyer an insurer to pursue. Coverage typically runs around 10 percent of the transaction value, with a retention starting at roughly 0.75 percent that drops to 0.5 percent after twelve months. About 97 percent of these policies are purchased by the buyer.
Closing and Post-Closing Adjustments
At closing, the parties sign the transfer documents and the buyer wires the price. Escrow arrangements often hold back a portion to cover indemnification claims or working capital adjustments.
The number at signing is rarely the final number. Most agreements include a working capital adjustment: if actual working capital at closing exceeds the pre-negotiated target, the price goes up dollar-for-dollar; if it falls short, the price drops or the seller supplements the shortfall in cash. Buyers usually have two to three months to verify, and disputes go to independent accounting arbitration.
In a divestiture, the separated business often cannot immediately run its own back office. A transition services agreement covers the gap by having the former parent continue to provide IT support, HR, accounting, and other services for a defined period, with specified service levels, fees, and end dates.
Antitrust Filings Under Hart-Scott-Rodino
Transactions valued above $133.9 million (the 2026 threshold) must be reported to the Federal Trade Commission and the Department of Justice under the Hart-Scott-Rodino Antitrust Improvements Act.4Federal Trade Commission. New HSR Thresholds and Filing Fees for 2026 The threshold adjusts annually; the number that governs is the one in effect at closing.5Federal Trade Commission. Premerger Notification Program
The filing triggers a mandatory 30-day waiting period (15 days for cash tender offers) during which the deal cannot close.6Office of the Law Revision Counsel. 15 U.S. Code 18a – Premerger Notification and Waiting Period If either agency issues a Second Request for more information, the waiting period extends until the parties substantially comply, followed by another 30-day waiting period before closing.7Federal Trade Commission. Premerger Notification and the Merger Review Process Second Requests take months to answer and signal serious competitive concerns.
Filing fees in 2026 are tiered by transaction value:
- Under $189.6 million: $35,000
- $189.6 million to $586.9 million: $110,000
- $586.9 million to $1.174 billion: $275,000
- $1.174 billion to $2.347 billion: $440,000
- $2.347 billion to $5.869 billion: $875,000
- $5.869 billion or more: $2,460,000
These fees took effect February 17, 2026.4Federal Trade Commission. New HSR Thresholds and Filing Fees for 2026
Foreign Buyers and CFIUS Review
When a foreign buyer acquires a U.S. business, the deal may need clearance from the Committee on Foreign Investment in the United States. A filing is mandatory when the target produces, designs, or manufactures critical technologies that would require export authorization to the acquiring foreign person.8eCFR. 31 CFR 800.401 – Mandatory Declarations Transactions involving critical infrastructure or sensitive personal data can also trigger a filing.
CFIUS runs on a defined clock. A short-form declaration triggers a 30-day assessment. A full notice triggers a 45-day review, followed by a 45-day investigation if unresolved national security concerns remain. If the matter goes to the President, a decision must come within 15 days after the investigation ends.9U.S. Department of the Treasury. CFIUS Overview Failing to file a mandatory declaration can bring a civil penalty of up to $5 million or the value of the transaction, whichever is greater.10eCFR. 31 CFR Part 800 Subpart I – Penalties and Damages
Tax Treatment
Tax-Deferred Reorganizations
Section 368 of the Internal Revenue Code defines the corporate reorganizations that qualify for tax-deferred treatment: statutory mergers, stock-for-stock acquisitions where the buyer gains control, and asset acquisitions solely in exchange for voting stock, among others.11Office of the Law Revision Counsel. 26 U.S.C. 368 – Definitions Relating to Corporate Reorganizations The common feature is that shareholders receive stock rather than cash, deferring capital gains until they eventually sell. Missing a specific requirement makes the whole transaction taxable.
Section 338(h)(10) Elections
When the buyer purchases stock but wants the tax benefits of buying assets, the parties can jointly elect under Section 338(h)(10) to treat the transaction as if the target sold all its assets and then liquidated; the stock purchase is disregarded for tax purposes.12Office of the Law Revision Counsel. 26 U.S.C. 338 – Certain Stock Purchases Treated as Asset Acquisitions The buyer gets a stepped-up basis in the target’s assets equal to the purchase price, producing higher depreciation and amortization deductions going forward. The seller recognizes gain as if it sold assets. The election is only available when the target is a member of a consolidated group or an S corporation.
Purchase Price Allocation
Both sides in an asset acquisition, or a deemed asset sale under a 338(h)(10) election, must file Form 8594 with their tax returns to report how the price was allocated across asset classes.13Internal Revenue Service. About Form 8594, Asset Acquisition Statement Under Section 1060 The allocation uses a residual method that assigns value first to tangible assets and last to goodwill.14Internal Revenue Service. Instructions for Form 8594 – Asset Acquisition Statement Buyers want more allocated to depreciable assets for faster tax recovery; sellers want more to capital gains property for the lower rate. The purchase agreement should lock the allocation to avoid disputes between the parties and with the IRS.
Employees, Benefits, and the WARN Act
Employers with 100 or more full-time workers must give at least 60 days’ written notice before ordering a plant closing or mass layoff. The notice goes to affected employees (or their union representatives), the state’s rapid response agency, and the chief elected official of the local government where the closure or layoff will occur.15Office of the Law Revision Counsel. 29 U.S.C. 2102 – Notice Required Before Plant Closings and Mass Layoffs Divestitures that produce significant headcount cuts can trigger this requirement, and missing it exposes the employer to back pay and benefits for each affected worker.
Benefit plans deserve their own attention. In a stock deal, the buyer inherits the seller’s plans with all compliance obligations, funding shortfalls, and pending claims. In an asset deal, the seller typically keeps its plans unless the purchase agreement says otherwise. The agreement should spell out who handles COBRA continuation coverage, incurred-but-not-reported health claims, pension funding, and the termination or transfer of retirement plans.
Administrative Filing Costs
Beyond legal and accounting fees, closing a deal carries administrative costs that add up when multiple entities and states are involved. Filing articles of merger with state agencies typically runs $7 to $300 depending on the state. Certificates of good standing, which both sides usually need, generally cost under $100. UCC-1 financing statements used to record liens on acquired assets vary by jurisdiction but commonly fall between $10 and $100. Overlooking these can delay closing even when the substantive terms are agreed.