If a seller has possible "hidden liabilities," which type of deal structure would the seller prefer?

In the context of mergers and acquisitions, when a seller faces potential hidden liabilities, a stock deal is generally the most advantageous structure for them. This preference primarily stems from the fact that in a stock deal, the buyer acquires shares of the seller’s company, which includes all of its assets and liabilities—known and unknown—upon transfer of ownership.

For the seller, this means that any hidden liabilities that may not be disclosed or identified during due diligence generally remain with the buyer after the transaction is completed. As a result, the seller can divest their business while minimizing their exposure to future claims or losses related to those hidden liabilities.

In contrast, an asset deal allows the buyer to select specific assets and liabilities, which means that any undisclosed liabilities can potentially remain with the seller. Joint ventures may involve sharing risks and liabilities but do not completely relieve the seller from potential issues. An equity swap also involves ownership transfers that may not protect the seller from hidden liabilities as effectively as a stock deal would.

This understanding is key in M&A negotiations, as it enables the seller to protect their interests while efficiently structuring the transaction.