Share vs. Asset Acquisition: Which is better for your business?
Acquisition structures: comparing asset purchases and share purchases
Below article will give you an overview of the key differences between a share purchase and an asset purchase transaction in the UK (England and Wales). Below article will sets out some of the main advantages and disadvantages of structuring a private acquisition as a share or an asset purchase.
Commercial factors of Share Purchase
Process: Buyer purchases entire issued share capital of Target from the Seller (quick)
Ownership: Target Company (and any subsidiaries wholly owned by Target) is transferred to Buyer and the business does not change; all assets and liabilities are retained by the Target company
Liability: whole company is acquired and all assets and liabilities pass to the Buyer and are retained by the Target (can include hidden liabilities)
May require internal changes to the company structure to ensure synergies with existing Buyer’s companies
Could keep Target as a separate business or choose to absorb it
Commercial factors of Asset Purchase
Process: only agreed and identified assets and liabilities that make up the business pass to the Buyer needed to carry on the business (the company itself remains or becomes as an empty shell). The seller will usually distribute proceeds as dividends and then dissolve the shell.
Ownership: contracts with 3rd Parties will be automatically transferred to the Buyer and the business may be slotted into the existing company structures
Liability: assets and trade contracts must be individually transferred and only agreed liabilities will be transferred (ways of transfer depending on type of asset, and may require 3rd party consent if restrictions on transfers)
Employees: TUPE provides for the automatic transfer of rights and obligations under contracts of employment where the transfer of the assets represents the ‘transfer of an economic entity which retains its identity
Assets may be more readily absorbed into the existing structure than in share acquisition
Buyer can either continue to run business using assets or absorb into own structure
Seller advantages: share purchase over a asset purchase
Share Purchase
✔️ Clean break from the business as the seller loses its connection with the company and liabilities are enforceable against the Buyer
✔️ Mechanics of transfer far simpler by way of an STF; simple signing of STF
✔️ Target Ltd remains as employer so no rise to employment claims (any later employment claims are the concern of the Buyer)
✔️ Transfer of shares is a capital transaction and seller is in direct receipt of consideration and is therefore liable to tax, but certain reliefs may apply
Asset Purchase
✔️ Seller may obtain an indemnity from the Buyer for 3rd party debts
✔️ Provisions of FSMA do not extend to asset purchases (or private sales)
✔️ Roll-over relief from CGT/CT on qualifying business assets (tax is then due on subsequent sale)
✔️ TUPE applies meaning that rights and obligations owed to each employee are automatically transferred from Seller to Buyer
Seller disadvantages: share purchase over a asset purchase
Share Purchase
❌ Tax Deed of Covenant required by Buyer
❌ Buyer will make detailed investigations about the company (to check what it is taking on) and will seek wide protections (warranties and indemnities) from the Seller in the SPA as to the state of the business
❌ Buyer has much of Seller’s information, so Seller will want strong protections in place and a water-tight confidentiality agreement
❌ Clean break is only actually possible if the Seller is able to negotiate releases from personal guarantee obligations with the bank
Asset Purchase
❌ Generally slower (separate assets) and more onerous; each asset must be transferred in appropriate way (deed of conveyance for land, assigning patents, physical delivery for some)
❌ Possibly problematic where 3rd party consents required (landlord’s consent may be required to transfer leasehold)
❌ Legal liability to 3rd parties for debts and obligations remain with the Seller and 3rd parties can continue to take action against the Seller
❌ Most tax warranties remain with the Seller
❌ Seller is left with an unwanted empty shell
❌ Transfer of capital and income assets results in a capital and income transaction; more complicated two-tier taxation system
Buyer advantages: share purchase over a asset purchase
Share Purchase
✔️ Transfer far simpler by way of an STF; simple signing of STF
✔️ Trade continuity and the lack of disruption to the trade (customers, employees and suppliers will theoretically not see much change in the business and will be more willing to continue trade)
✔️ Banking arrangements will transfer
✔️ Buyer will enjoy wide indemnities and warranties from the Seller
✔️ Target remains as the employer, therefore no rise to employment claims
✔️ Assets and outstanding contracts remain unaffected legally
Asset purchase
✔️ Legal liability to 3rd parties for debts and obligations remain with the Seller, but Buyer gets the benefit
✔️ No need to draft complex taxation warranties because most tax liabilities will remain with the Seller
✔️ Cherry pick the assets and liabilities the Buyer wants and less risk of unknown liabilities (apart from employment / environmental)
✔️ TUPE means Buyer may be better off with transfer of employees
✔️ Less due diligence needed, reducing cost
✔️ Easier to integrate Target into existing business
✔️ Gives the Buyer wider financing options (by giving security over acquired assets), though this would be unlawful financial assistance if a public company under s679 CA 2006
What are the disadvantages of an asset purchase over a share purchase for buyers?
Share Purchase
❌ Liabilities (hidden or otherwise) continue to be enforceable against the company and indirectly become Buyer’s responsibility
❌ 3rd parties may go elsewhere because of the change in management
❌ Some commercial contracts permit termination where control changes hands (change of control clause; check during due diligence)
❌ All underlying assets are indirectly acquired by the buyer (whether they are wanted or not)
❌ Fewer financing options
❌ More difficult to rationalise a share purchase into an existing business
❌ Due diligence is more expensive and costly
Asset Purchase
❌ Generally slower and more onerous
❌ Each separate asset must be transferred (consent may be needed if leasehold)
❌ TUPE 2006 applies to automatic transfer of employees (could be an advantage if employees are very good) and Buyer will be liable to redundancy pay or changes to contract terms afterwards
❌ More likely that suppliers and customers will review their dealings with them following change of control, and may opt to discontinue
❌ The benefit of existing contracts entered into by the Seller will not be automatically transferred to the Buyer (must be by novation or assignment) & the 3rd party may seek renegotiation of the contract
❌ Consent for lease assignment may be needed
❌ Must transfer or re-obtain insurance on all of the assets acquired
❌ Will have to organise banking arrangements
How we can help?
The Dragon Argent team are ready to support you with your acquisition or disposal. We can provide comprehensive, end to end support for the entire transaction or specialist guidance at a crucial stage across corporate law, employment law, accountancy support, tax advice, intellectual property, data & privacy or commercial due diligence. Get in touch with one of the M&A advisors in our transactions team by scheduling a discovery call.
Alternatively, watch our interactive M&A webinar, designed for entrepreneurs, founders and owner operators of small to medium sized enterprises where you will learn about business acquisition process and the structure of some typical corporate transactions.
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