The terms "merger" and "acquisition" are frequently used interchangeably in the media, but they describe legally distinct transactions with very different implications for the companies involved. Understanding the difference is not an academic exercise: the choice of one route over the other determines the liability structure, the tax treatment of the transaction and the timeline and cost of the process.
What is a merger and what does it involve?
A merger is a structural modification of companies regulated in Spain by Law 3/2009 on structural modifications of commercial companies, under which two or more companies integrate into a single legal entity. The defining feature of a merger is the block transfer of assets: all assets, liabilities, contracts, licences and employment relationships are transferred to the resulting company without the need for individual assignment of each element.
An absorption merger — the most common form — involves one absorbing company integrating the absorbed company, which is dissolved without going into liquidation. The shareholders of the absorbed company receive shares or participations in the absorbing company as consideration. There is no cash transfer between the parties: the consideration is exclusively in securities.
What is an acquisition and what does it involve?
An acquisition is the purchase of a company’s shares or participations (share deal) or of certain assets of that company (asset deal). Unlike a merger, the acquired company retains its own legal personality and its contracts, licences and employment relationships. The buyer obtains control of the company by paying a price in cash (or in securities, in certain stock-for-stock structures).
In a share acquisition, the buyer assumes all of the acquired company’s liabilities — including hidden or contingent liabilities not identified in the due diligence — although that liability can be mitigated through representations and warranties in the purchase agreement.
The key differences
Legal structure and liability
In a merger, all entities are integrated into one: there is no separation of liabilities. In an acquisition, the acquired subsidiary retains its own limited liability, separate from the acquirer’s balance sheet. For a buyer seeking to isolate the risks of the acquired company, acquisition with subsequent holding as a subsidiary is the safer route.
Transaction taxation
Mergers and acquisitions have different tax treatments. A merger covered by the special regime does not generate immediate taxation: the capital gain is deferred. A share acquisition may generate a capital gain for the seller subject to Corporate Income Tax (if the seller is a company) or income tax (if the sellers are individuals). For the buyer, in a share purchase, the implicit goodwill cannot be amortised for tax purposes; in an asset purchase (asset deal) it can, which makes the asset deal an attractive option for the buyer — though more costly from a tax perspective for the seller.
Process and timeline
A merger requires the preparation of a merger plan, directors’ reports, possibly an independent expert’s report, shareholder approval at each company, statutory publication and, once registered at the Companies Registry, a one-month challenge period. The total timeline is three to six months for domestic transactions without complications. An acquisition can close more quickly (one to three months), although due diligence can extend this.
Contracts and licences
In a merger, all contracts and licences are transferred en bloc without requiring the consent of counterparties (unless otherwise agreed or required by special regulation). In an asset acquisition, each contract must be individually assigned, which may require the counterparty’s consent and generate operational friction.
When to choose each structure
A merger is preferable when:
- The objective is to simplify a complex corporate structure (merger of operating subsidiaries into the parent)
- Both entities are complementary and full integration is the ultimate goal
- There are tax losses at one entity to be utilised (subject to anti-avoidance limits)
- The transaction is intra-group and no external capital is being introduced
An acquisition is preferable when:
- The buyer wants to maintain the acquired company as an independent entity
- There are contracts or licences with sensitive change-of-control clauses
- The buyer wants a faster process with fewer formalities
- The seller requires cash consideration (rather than securities in the acquirer)
Due diligence: the pivotal step in an acquisition
The due diligence process is more critical in an acquisition than in a merger, because the buyer in a share deal assumes the target’s historical liabilities. A thorough due diligence should cover:
Tax due diligence: Review of tax returns for the last four years (the statute of limitations period), open tax inspection proceedings, transfer pricing documentation, deferred tax positions and the accuracy of tax loss carry-forwards.
Legal due diligence: Review of corporate documents, material contracts, litigation and claims, intellectual property ownership, employment arrangements and regulatory licences.
Financial due diligence: Quality of earnings analysis, working capital normalisation, off-balance-sheet liabilities, covenant compliance under existing debt facilities.
The cost of due diligence — typically between €20,000 and €80,000 for a Spanish SME acquisition — is invariably less than the cost of discovering a material undisclosed liability after closing.
How BMC can help
Our mergers and acquisitions team advises both buyers and sellers in the structuring, negotiation and closing of corporate transactions. Our service integrates corporate legal advice, transaction tax planning and due diligence coordination under a single project team.
If you are evaluating a merger, an acquisition or a divestiture of a business line, contact us for an initial analysis of the most appropriate structure for your situation.
