Share Acquisitions Versus Business Acquisitions

A business sale or acquisition is likely to be a one-off or rare event for the owners. When buying or selling a company or its assets, the owners and the sellers need to decide which transaction to go for. The transaction can be a purchase and sale of shares, or a purchase and sale of the assets. This guide examines the share acquisitions vs business acquisitions decision in detail.

A company’s business can be acquired in one of two main ways:

1. A share purchase or sale

This involves the acquisition of most or all the shares in the capital of that company which is known as a share purchase.

In a share purchase/sale transaction, the buyer takes over a company by purchasing all (or a majority) of the share capital of the company from the company’s shareholders. Here, the sellers are the shareholders of the company, the company will remain intact, but it will now be under new ownership.

2. An asset purchase or sale

This involves the purchase of specific assets of the business operated by the company.

In contrast, under an asset purchase transaction, the buyer only buys the assets of the company which comprises the business (a business or asset sale) that are precisely specified in the purchase agreement. The company is the seller in an asset purchase transaction.

Key differences between share and asset purchases

Although both routes will achieve the same economic objective – ownership and control of the business in question, they are structurally very different. When planning which is the most suitable and desirable structure to go for, it is important to understand the key differences between share and asset purchases. These are as follows:

Tax considerations

The differing tax consequences of the two acquisition structures will usually be a fundamental driver in determining which route to choose. Generally, the sellers are more likely to favour a share sale as tax advantages of a share sale to the sellers are likely to be greater than an asset sale. In a share sale transaction, the sellers can avoid a potential double tax charge as they are only taxed on the proceeds of the disposal of their shares. In contrast, in an asset sale transaction, there is an initial tax charge at the level of the company selling its assets and a further tax charge on the shareholders when they withdraw the sale proceeds from the company.

Conversely, an asset purchase tends to be more tax-efficient for the buyer than the seller. This is because an asset purchase transaction may facilitate the purchase price, or part of it, to be written off for tax purposes, for example, where qualifying patents or other tax depreciable assets are acquired. It also allows for a tax deduction to be obtained in the future for the price paid for any trading stock acquired as part of the deal.

The taxation area is a complex area, depending on the parties’ specific circumstances and the parties’ availability of reliefs, allowances and exemptions, it is critical for both buyers and sellers to obtain specialist tax advice before signing any agreements.

Liabilities

Under a share sale transaction, the buyer takes over a company that will include all of its assets, liabilities and obligations and consequently any inherent or historic problems. This means that the buyer acquires the company “warts and all” with all its assets, liabilities, and obligations. Due to this reason, a share sale transaction is more attractive to the seller as it offers the seller a clean break as, after the share sale, the seller will no longer have any direct responsibility for the company, apart from the liability that the seller owes to the buyer under the terms of the warranties and indemnities agreed in the sale and purchase agreement.

On the other hand, under an asset purchase transaction, only specific business activity and related assets and/or employees which the buyer agrees to purchase are acquired and everything else stays with the company.  The buyer can cherry-pick the assets the buyer wants. This limits the buyer’s exposure to legal and financial problems and/or liabilities that are large, unknown or not stated by the seller.  It is worth noting that the appropriate formalities for the transfer of all assets included in the sale are required and contracts with suppliers and customers do not automatically transfer and will need to be assigned. This route is more attractive to the buyer as, other than in respect of employees, the buyer is isolated from the historic risk factors of the company.

Even though buyers may not desire a share purchase transaction, there are some measures that a buyer can take to protect themselves from liability under a share purchase transaction. Buyers should carry out appropriate due diligence precautions by conducting searches and investigations before entering into a share purchase transaction. Additionally, buyers may also consider requesting an indemnity from the sellers to ensure that they will not be responsible for unforeseen liabilities that arise within a specified time period.

Simplicity

A share sale transaction can be considered a simpler transaction since only the shares in the company are to be acquired. As the company is a separate legal entity, its assets (including its business contracts, agreements and licences, if any) remain with the company whilst the shareholders of the company will change.

Asset purchase transactions, on the other hand, can be more complex as specific parts of the business need to be identified and extracted from the company and/or excluded from the transaction. Further, some of the assets and liabilities may also require third party consent before they can be transferred. These third parties include but are not limited to customers, suppliers, landlords and licensors. There is likely to be more disruption to the business than on a share sale and the buyer may need to build confidence with the customers and suppliers of the business to maintain existing business relationships.

Employees

Under an asset sale transaction, employment legislation sets out the buyer’s obligations to an employee who is transferred to a new employer as part of an asset acquisition. This process is known as the TUPE Regulations which means the Transfer of Undertakings (Protection of Employment). Buyers and sellers should be aware that they will have specific obligations to the employees about their plans and may need to consult with employees prior to completion of the sale. Certain pensions rights may also transfer to the buyer by virtue of the TUPE regulations.

However, on a share sale transaction, there is no change of employer and the employees simply remain employed by the target company.

How to move forward with share and asset purchases and sales

Whether you are looking to purchase or sell a company, there is a lot to consider when deciding between a share or asset transaction. As a seller, it is worth considering income tax implications and potential employment law liability. As a purchaser, it is critical to consider the potential liability and tax implications and steps to protect your investment. While generally, sellers favour a share transaction and purchasers favour an asset transaction, special circumstances, and desired outcomes may result in a change of preferences. It is best to consult with your advisors and explore all of your available options before determining the structure of the transaction.

Here to Help

For guidance about how to proceed with buying or selling a business, contact Michael Budd, our Head of Company Commercial.

Please note the contents of this article are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.