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Abstract

The purchase and sale of a closely held corporation is a commonly occurring transaction which may be accomplished by a transfer of stock or a transfer of assets. Structuring such a transaction as a sale of stock, however, may offer certain advantages not attainable if the transaction is structured as a sale of assets. For example, non-assignable contracts and leases, not transferable with a sale of assets, may pass to the transferee of corporate stock. The transferor generally will be absolved of all of the enterprise's liabilities since, by law, they pass with the transfer. Transferors subject to compliance with Article 6 of the Uniform Commercial Code, if they sell certain assets, are not so subject if the same assets are transferred by a sale of stock. A further consideration favoring a stock transfer is the fact that a transfer of assets may involve difficult and time-consuming transactional tasks, such as the valuing of each asset and the perfecting of titles to various items of real and personal property. Transfers of titles to assets may, in turn, subject the transaction to local transfer, sales, and recording taxes. In contrast, a transfer of a business by a sale of stock may be effectuated simply by transferring the ownership of the stock certificates on the books of the corporation. A stock sale may offer, then, a less complex, less expensive means of transferring a business than does a sale of assets. Effectuating the sale of a corporation by stock transfer, however, raises concerns about the application of the federal securities laws to the transaction, because sales of securities generally are subject to the provisions of the Securities Act of 1933 (the Securities Act) and the Securities Exchange Act of 1934 (the Exchange Act). In particular, under the Securities Act, sellers of securities are required to register such sales or find an exemption from the requirement of registration, if the transaction falls within the jurisdictional scope of the Act. The sale of a closely held corporation by stock transfer, however, typically can be consummated without registration. A potentially more important consequence of structuring such a transaction as a sale of stock would be the possibility of an allegation of fraud under the Securities Act or the Exchange Act. A suit under either or both of these Acts would allow a plaintiff a federal forum, which may be more advantageous than the state forum which would hear an allegation of common law fraud. Further, federal securities law provisions may be more advantageous to plaintiffs since, generally speaking, they are broader in scope than common law remedies.

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