Stock Sale

In a stock sale, the buyer acquires the target company's shares. What happens to the target's existing liabilities, known and unknown, as a general matter?

1. A.The buyer generally assumes all of the target's liabilities, known and unknown, along with the entityCorrect. Acquiring the stock means acquiring the whole legal entity, liabilities included.
2. B.All liabilities are automatically extinguished upon a stock saleWrong. Liabilities are not erased by a change of ownership; they remain obligations of the acquired entity.
3. C.The seller's individual shareholders personally remain liable for all company debts after closingWrong. In a stock sale, liabilities generally stay with the acquired entity itself, not with the selling shareholders personally.
4. D.The buyer may select which specific liabilities to assume and which to leave with the sellerWrong. That selective assumption of specific liabilities is characteristic of an asset sale, not a stock sale.

Why: In a stock sale, the buyer acquires the entire legal entity, including all of its liabilities, both known and unknown, since the company itself (with everything attached to it) simply changes ownership.

A C-corporation target's shareholders generally prefer a stock sale over an asset sale primarily because an asset sale can result in:

1. A.A requirement that the deal be structured as a tender offerWrong. Choosing an asset sale does not require using a tender offer; these are separate structural choices.
2. B.A complete exemption from any taxation at either the corporate or shareholder levelWrong. An asset sale does not create a tax exemption; if anything, it can create additional tax exposure through double taxation.
3. C.Automatic disqualification of the buyer from obtaining a step-up in asset basisWrong. An asset sale is actually the structure that typically allows the buyer to obtain a step-up in the tax basis of the acquired assets.
4. D.Two layers of taxation — corporate-level tax on the asset sale gain, then shareholder-level tax on distributed proceedsCorrect. This double-taxation exposure is the classic reason C-corp sellers favor a stock sale.

Why: An asset sale by a C-corporation can trigger tax at the corporate level on the gain from the asset sale, and then a second layer of tax when the after-tax proceeds are distributed to shareholders — a double-taxation result that a stock sale (taxed once, at the shareholder level, on the sale of their shares) generally avoids.