The buyer demands an asset purchase structure to leave legacy operational and employment liabilities behind, but our key customer contracts and software vendor licenses contain strict anti-assignment clauses that require third-party consent. How do we resolve this asset versus stock standoff without jeopardizing client continuity?

Question

Tyler Smith · Accepted Answer

Buyers prefer asset sales for two reasons: a stepped-up depreciation basis and clean separation from past corporate liabilities. However, forcing an asset sale on a business built on non-assignable contracts creates severe operational vulnerability. If key customers use consent requests to renegotiate pricing, or if enterprise software vendors demand punitive assignment fees, closing value drops rapidly.

Resolve this deadlock with intermediate structures:

- Equity Purchase with Special Indemnities: Propose a stock sale or equity purchase to ensure operational continuity, since equity transactions generally do not trigger anti-assignment clauses. To satisfy the buyer's risk profile, carve out specific, identified legacy risks such as historical payroll classification, pending disputes, or sales tax liabilities into uncapped special indemnities backed by a dedicated escrow account.

- Reverse Subsidiary Merger: Structure the deal as a reverse subsidiary merger where the buyer forms a transient merger sub that folds into your corporate entity. In many jurisdictions, this passes title by operation of law, bypassing standard contract assignment restrictions while giving the buyer full corporate ownership.

- Section 338(h)(10) Election: If the buyer's primary objective is the tax step-up rather than liability avoidance, agree to a stock sale paired with a joint Section 338(h)(10) or Section 336(e) election. This treats the transaction as an asset sale for federal tax purposes while legally executing as a stock transfer. Ensure the buyer pays an asset-to-stock tax gross-up to cover your resulting ordinary income tax differential.