One technique used in business combinations is direct negotiation between the management teams and the boards of directors of the two firms. After negotiations have been worked out, the plans are presented to both shareholder groups for approval. Negotiation must identify what the firms will exchange, at what prices, and the method of payment. Assume that Firms A and B negotiate so that Firm B acquires all the assets (except cash) of Firm A and pays for these assets with its own cash. Now Firm A has cash as its only asset, and it may pay off its creditors and distribute any remaining cash as a liquidating dividend to its shareholders. If, however, Firm B pays for the assets of Firm A with its own shares of stock, then Firm A may sell off the stock and distribute the cash or distribute the stock directly to its shareholders. Note that the effect of these negotiations on the balance sheet of Firm B is an increase in the assets account, to reflect the acquired assets, and a decrease in cash or an increase in the capital accounts, to reflect the method of payment. Assume now that Firm B acquires the common stock of FirmA(and not the assets directly). Firm B may acquire the shares for cash, either in exchange for some of its shares or by some more complex plan. In the extreme case in which the shareholders of Firm A surrender all their shares for shares of Firm B, Firm A ceases to exist and Firm B assumes all the assets and liabilities of Firm A. State laws specify that once a certain percentage of A’s shareholders agree to an exchange of shares, all shareholders must comply. Holdout shareholders of Firm A may go to the courts to earn a fair price for their shares in the event that they are not satisfied with the negotiated price. In a less extreme case, Firm B may acquire less than all of the shares of Firm A and maintain an interest in Firm A. In this case, the shares of Firm A appear as an investment on the balance sheet of Firm B.