Mergers and acquisitions in California follow the same basic deal structures used nationwide (asset purchases, stock purchases and statutory mergers), but California adds its own layer of rules on shareholder approval, dissenters’ rights, securities exemptions, employee obligations and successor tax liability. The right structure depends on taxes, liabilities, contracts and how the buyer will pay. Planning for these issues early tends to make a deal faster and less expensive.
Whether you are a founder fielding an acquisition offer or a company looking to buy a competitor, the vocabulary can be confusing. “Merger” and “acquisition” are often used interchangeably, but they describe different legal mechanics. Here is what business owners should know before signing a letter of intent.
Merger vs. Acquisition: What Is the Difference?
In everyday use, an acquisition is any deal in which one company buys control of another. A merger is a specific legal event in which two entities combine under state statute and one of them (or a new entity) survives, automatically taking on the other’s assets and liabilities. Many acquisitions are completed through a merger, so the terms overlap.
Business commentators also classify deals by the relationship between the companies: horizontal (competitors), vertical (a company and its supplier or customer), market or product extension (related businesses in different markets or product lines) and conglomerate (unrelated businesses). These labels matter mainly for antitrust analysis, not for how the deal is documented.
The Three Main Deal Structures
Asset Purchase
The buyer purchases specific assets, such as intellectual property, contracts, equipment and customer relationships, and assumes only the liabilities it agrees to take. Buyers often prefer this structure because it limits exposure to unknown liabilities and can provide a stepped-up tax basis in the assets. Drawbacks include the need to assign contracts (many require counterparty consent) and, for C corporations, potential double taxation when sale proceeds are distributed to shareholders.
Stock Purchase
The buyer purchases the outstanding shares directly from the shareholders. The company stays intact, with all of its contracts and liabilities. Sellers often prefer this structure for tax reasons, but it works best when there are few shareholders, because every shareholder must agree to sell.
Merger
In a statutory merger, the target combines with the buyer or a buyer subsidiary under the California Corporations Code (or Delaware law, if the target is a Delaware corporation). A common form is the reverse triangular merger, in which a buyer subsidiary merges into the target and the target survives as a wholly owned subsidiary. This structure can bind all shareholders once the required approvals are obtained and often avoids the need to assign contracts, although change-of-control provisions must still be reviewed.
California-Specific Issues
- Shareholder approval: California generally requires approval of a merger or sale of substantially all assets by the board and by the outstanding shares of each class entitled to vote, subject to the company’s articles and any investor consent rights.
- Dissenters’ rights: Chapter 13 of the Corporations Code gives shareholders who do not approve certain reorganizations the right to demand payment of fair market value, subject to exceptions and strict procedural steps.
- Securities law: When the buyer pays with its own stock, that issuance must be registered or exempt. Private buyers often rely on Regulation D or, where many target shareholders are not accredited, a California fairness hearing under Corporations Code section 25142, which can support an exemption under Section 3(a)(10) of the Securities Act.
- Employees: The federal WARN Act and California’s WARN Act may require advance notice if a deal leads to a mass layoff, relocation or termination. California final-pay rules, including payout of accrued vacation, apply when employees are terminated at closing. See our guide to planning a reduction in force in California.
- Successor tax liability: In an asset purchase, a buyer can inherit a seller’s unpaid California sales and use tax and certain employment tax obligations unless it obtains clearance or withholds from the purchase price.
- Bulk sales: California still has a bulk sales law in Division 6 of the Commercial Code that can require advance notice to creditors in certain asset sales.
Federal Issues That Often Apply
- Antitrust (HSR): Deals above the Hart-Scott-Rodino size thresholds, which are adjusted annually, require premerger filings with the FTC and Department of Justice and a waiting period before closing. The HSR form was substantially expanded in 2025, increasing preparation time.
- Foreign investment (CFIUS): Investments by foreign buyers in certain technology, infrastructure or sensitive-data businesses may require or benefit from review by the Committee on Foreign Investment in the United States.
- Golden parachutes: Payments to executives tied to a change in control can trigger Section 280G excise taxes. See our post on Section 280G and golden parachutes.
The Typical Deal Process
- Letter of intent: Usually nonbinding on price and structure, but binding on exclusivity and confidentiality.
- Due diligence: The buyer reviews corporate records, the capitalization table, contracts, IP, employment matters, privacy compliance and finances.
- Definitive agreement: Representations and warranties, indemnification, escrows or holdbacks, earnouts, closing conditions and covenants.
- Approvals and closing: Board and shareholder approvals, third-party consents, regulatory filings and closing deliverables.
- Integration: Employee transitions, contract notices and post-closing adjustments.
Frequently Asked Questions
Is an asset sale or stock sale better for a seller?
Sellers often prefer a stock sale or merger because it can produce a single level of capital gains tax and leaves liabilities with the company. Buyers often prefer an asset purchase. The right answer depends on the entity type, tax attributes and how liabilities are allocated, so run the numbers with a tax advisor.
Do all shareholders have to approve a merger in California?
No. A merger generally requires approval by the board and by the required vote of the outstanding shares, not unanimous consent. Shareholders who do not approve may have dissenters’ rights in some transactions.
What is a fairness hearing?
A fairness hearing under California Corporations Code section 25142 is a proceeding before the Department of Financial Protection and Innovation to approve the fairness of a securities issuance, often in an acquisition paid in stock. A permit issued after the hearing can allow the buyer to issue shares without federal registration.
Does an acquisition require government approval?
Most small deals do not. Larger transactions may require an HSR filing, and some deals involving foreign buyers or regulated industries require additional approvals.
The Takeaway
The structure of a California M&A deal drives taxes, liability exposure, approvals and timing. Identify the structure, the approvals you need and any California-specific issues before you sign a letter of intent, and get your corporate records in order before diligence begins.
How Sutter Law Can Help
Sutter Law advises buyers and sellers on deal structure, letters of intent, due diligence, definitive agreements and closing. Learn more about our mergers and acquisitions practice. Contact us for a free consultation.
This article is general information, not legal advice. Reading it does not create an attorney-client relationship.
