Acquisitions Structures – Shares or Assets?

When deciding whether to buy or sell a business, you will need to decide on the structure and whether the deal should be structured as an asset purchase or a share purchase. While both structures achieve broadly the same commercial objective, there are fundamental differences in the legal and tax treatment.

Corporate & Commercial Solicitor, Mairead Platt explores the difference between an asset purchase and a share purchase.

An asset purchase involves the buyer acquiring some of the assets and rights in the business, such as plant and machinery, buildings, contracts etc. It is the target company which sells the assets to the buyer. The target company will continue to exist after the sale, however, if all of the assets have been bought, it will become an empty shell.

A share purchase, on the other hand, involves the buyer acquiring all of the shares in the target company from the individual shareholders. The target company will continue to operate its business, however, the ownership of the company will have changed.

Choosing a transaction structure

There are a number of factors to take into account when considering which transaction structure to choose. The parties will need to balance a range of legal, commercial and tax factors.

A buyer may wish to acquire the assets of the target company rather than the shares, as he will have control over which assets and liabilities he wishes to acquire. Subject to limited exceptions, the liabilities of the target company will remain with the company on completion. This will be particularly attractive to a buyer if the target business has extensive known liabilities or there are unquantified liabilities unacceptable to the buyer.

A seller may also wish to opt for an asset sale as limited involvement is required from the shareholders, which may be an advantage to the seller if there are uncooperative or untraceable minority shareholders. However, this will need to be balanced against the directors’ duties to avoid any breach of statutory duties.

Although there may be advantages of an asset purchase to both the buyer and the seller, there are also a number of disadvantages to consider. An asset purchase involves additional structural complexity. The parties will need to identify exactly what is being sold, as assets do not automatically transfer on an asset purchase. The parties will also need to deal with transfer formalities such as conveyances or assignments for the transfer of freehold or leasehold property, legal assignments or novations for the transfer of contracts. Other drawbacks to an asset purchase include obtaining third party consents, application of TUPE, and double tax charge when extracting the sale proceeds.

To avoid the structural complexities of an asset purchase, the parties may prefer the simplicity of a share purchase. When the buyer is acquiring the shares in the target company, the only asset that needs to be transferred is the share capital and there is no change in the ownership of the other assets and rights. A seller may also prefer to opt for a share purchase as it delivers a clean break from the target company. The seller’s liability is therefore limited to the extent of any warranties, indemnities and covenants under the share purchase agreement. A seller will also benefit from direct receipt of the sale proceeds under a share purchase, and avoid the double tax charge. However, as all the liabilities and obligations will continue to reside with the target business post completion, this may be unattractive to the buyer if the target company’s liabilities are extensive. The buyer can, however, mitigate the risk by requiring extensive warranties and indemnities from the seller. Other disadvantages of a share purchase include the requirements of shareholder approval, which could cause issues if any of the shareholders are untraceable or uncooperative.

There are also different tax consequences to consider, and the tax considerations will influence which structure would be most appropriate to both parties. On deciding which structure to use, the buyer will need to uncover any issues in the target business during the due diligence process, and both parties will need to balance and consider all commercial, legal and tax factors.