Whilst negotiating the sale of a company, one of the first decisions to be made is whether to go down a share purchase or an asset purchase route. These distinctly different transactions each have various pros or cons for both seller and buyer, and may greatly affect the length and complexity of the sale.
The decision between share purchase agreement v asset purchase agreement will sometimes be affected by the sector and nature of the business - in some sectors asset purchases are more common, for example. Ultimately, however, it will depend on the positions and preferences of both buyer and seller. This article does not constitute legal advice, but lays out some of the key differences between the two approaches.
Share Purchase v Asset Purchase
A share purchase is where the entire company is purchased as one legal entity, incorporating all its assets and liabilities. The buyer effectively steps into the seller’s shoes and becomes the new owner of the existing company. In a share purchase, the shareholders are selling their shares of the business to the buyer and receive direct payment from the transaction.
An asset purchase is when the buyer purchases the assets of a company – such as real estate, physical assets and commercial contracts - whilst the liabilities remain in the original company. In this case it is the company, rather than its shareholders, who is the seller. The shareholders retain ownership of the now empty company. They then use the money from the sale to first repay any debt and subsequently withdraw profits from the sale, before (typically) liquidating the company.
As a general rule, buyers prefer asset sales, since this gives them a greater element of control over the purchase. Sellers usually prefer share sales, owing to the simplicity of the transaction and generally preferable tax treatment.
What are the key differences?
Below are some key differences between a share purchase agreement and an asset purchase agreement:
Simplicity vs Control
In a share purchase, the buyer acquires all the assets and commercial contracts within one simple transaction. There is no danger of anything being left out or missed, and no need to negotiate over the values of each individual asset.
In contrast, asset purchases are more complex, but there is room for negotiation, affording both buyer and seller more control over the purchase. The buyer can pick and choose which assets or liabilities they wish to include or leave out, whilst the seller can negotiate a good price for assets of value. This is particularly attractive if the company being purchased is insolvent or in financial difficulties.
Risk and Liability
By buying the shares of a company, the buyer acquires all of the company’s liabilities – known or unknown - including any debt the company owes. The buyer therefore assumes the risk of purchase, while the sellers walk away free from ongoing responsibilities (subject to any warranties or indemnities given as part of the sale). In an asset purchase the buyer can avoid taking on liabilities, leaving these remaining in the company still owned by the original shareholders. This can result in a faster sale, with less risk of it falling through, since there is less due diligence required from the buyer.
Employment
With a share purchase, all employees remain employed by the business. Any ongoing or historic HR issues are passed to the new owner and they must go through the due process in the case of redundancies etc.
However, this has the advantage of avoiding TUPE regulations. If you are purchasing the assets only, you may be required to inform and consult with all employees about the sale. Not only does this slow down the sale, it also carries confidentiality issues and runs the risk that staff members may choose to leave before the completion of the sale, which could downgrade the value of the business.
Tax
There are various tax implications for each purchase option. For example in an asset purchase tax may effectively have to be paid twice by the sellers, first by the company on the sale of the assets, and secondly by the shareholders on the eventual withdrawal of profits. In a sale share the seller can usually benefit from Entrepreneur’s relief. Furthermore, stamp duty on the purchase of shares (generally 0.5% of the purchase price) is likely to be less than the stamp duty of assets if there are significant property assets involved.
Transfer of Assets
In an asset purchase, different types of asset may require specific action. Purchase of real estate will involve individual conveyancing and property contracts and - as mentioned above - stamp duty payments. Similarly, IP may need new permits or licences in order to ensure the new company holds the legal title to each asset. GDPR requirements would also need to be monitored wherever transfer of data is involved.
A share purchase would automatically result in the buyer acquiring all the real estate, IP, contact lists etc. connected to the company, which will continue to exist as before, thus simplifying the process.
Commercial Contracts
When the shares of the company are purchased, all existing commercial contracts would automatically transfer to the new owner as part of the company (other than where the contracts contain specific clauses relating to a sale).
However, in an asset purchase, these would not automatically transfer. Each contract would need to be novated to the new company, subject to negotiation with each customer, landlord or supplier. This could result in the loss of customers, or in less favourable terms with suppliers.
Share purchase agreement v asset purchase agreement
Choosing between a share purchase agreement v an asset purchase agreement will ultimately depend on the nature of the business in question, as well as on the strength of both buyer and seller’s positions.
Always seek legal advice before entering into a deal, to ensure the best option for yourself as either buyer or seller.
The contents of this article do not constitute legal advice and are provided for general information purposes only.
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