This article is the first in a series of two which discusses some of the main aspects that need to be considered when choosing whether to acquire the assets or the shares of a company - in this article we consider asset acquisitions. We strongly recommend that, if you are considering the purchase of the assets or the shares of a company that you consider each of the two parts of this series as the themes of the parts are linked. Part 2 of this two part series is available here.
There are two principal mechanisms to acquire an incorporated business in the UK: an asset sale or a share sale.
Both mechanisms achieve broadly the same commercial objective, but choosing the right structure of the deal will ultimately depend on the parties' personal, financial, and legal circumstances - there is no one-size-fits-all so it is important for anyone looking to buy or sell a business to understand the key differences, advantages and disadvantages between asset and share sales and to take legal advice before making a decision.
Asset Sale v Share Sale: What's the Difference?
In an asset sale, the buyer takes over the target business by acquiring the business and assets (both tangible and intangible), together with any liabilities that it chooses i.e. the buyer can effectively 'cherry pick' the assets and liabilities that it wants to acquire, thereby allowing it to be selective (subject to commercial negotiation) about the risks it is prepared to take on.
In a share sale, the buyer acquires the shares of the company which owns the business and assets ie the shares are the asset that is acquired. The transaction is between the company's shareholders and the buyer of their shares. Typically, therefore, the new owner of the company will acquire all of the assets, liabilities, and obligations of the company – "warts and all" (though it may negotiate certain contractual protections in the purchase agreement).
Asset Sale: Advantages and Disadvantages?
Seller Advantages
- The seller is the company, meaning that any warranties or guarantees are given by the company and not the individual shareholders of the company. However, there may be express agreement to the contrary in the contract – eg a personal or parent company guarantee.
- The seller can retain parts of the business of value or sell them to a different purchaser later.
- The seller can exclude any assets from the sale that are not intended to be transferred.
- Usually, because the seller retains parts of the business and/or certain assets and liabilities, they will give fewer warranties and indemnities to the buyer.
- The buyer takes on fewer risks, making the transaction itself, and the contract, more straightforward.
- Although a seller will generally prefer a share sale if certain tax reliefs are available, an asset sale can offer particular tax advantages in some circumstances, including:
- Allowable losses. Where an asset is disposed of at a loss, that loss can often be set against other chargeable gains, reducing the seller's liability to Capital Gains Tax.
- Balancing allowance. Similarly, an allowance may be available where the sale price of an asset is lower than the written down value for capital allowance purposes. Again, the resulting deficit can be set against other income or chargeable gains.
Seller Disadvantages
- Generally, any liabilities of the selling company will remain with it on completion
- The sale may be logistically complex e.g. individual contracts and assets may require consent/further negotiations with third parties to ensure that all the relevant parts of the business are legally transferred to the buyer i.e. any properties, employees, or contracts. This may make it more difficult to keep the sale confidential.
- Prior to completion the seller will need to obtain releases of any securities affecting the assets of the business from their financiers.
- An asset sale can lead to a double tax charge. An initial Corporation Tax charge will arise on any capital gains in the hands of the company following the sale. A further tax charge may be incurred when the proceeds of the sale are extracted from the company or distributed to the company shareholders (this can be particularly undesirable where the shareholders are individuals who are likely to suffer high rates of income tax on the distribution).
Buyer Advantages
- Usually, the liabilities of the selling company remain with it and do not transfer to the buyer.
- The buyer can leave any unwanted assets with the selling company.
- The buyer is likely to be in a better position to assess and provide for any potential future tax exposure arising from the acquisition of selected assets.
- A range of tax reliefs may be available depending on the circumstances and the type of assets being acquired.
Buyer Disadvantages
- Individual assets, rights or contracts may require additional formalities (eg third party consent and/or registrations) to effect the transfer.
- Third parties may not consent to assign or novate contracts or other assets which the buyer considers essential to their decision to buy the business.
- The Transfer of Undertakings (Protection of Employment) Regulations ("TUPE") apply to automatically transfer employees from the seller to the buyer on existing Terms & Conditions, which constitutes an exclusion to the Buyer's ability to cherry-pick obligations.
- Unlike a share sale, an asset sale may be subject to VAT unless the transaction is a transfer of a going concern ("TOGC"). The specifics of TOGC's are beyond the scope of this article but broadly, if the buyer is not using the acquired assets to carry on the same kind of business as the selling company following the acquisition, then VAT may be levied on the purchase consideration (which may or may not be fully recoverable by the buyer).
- If there are real property assets being acquired, depending upon the value, the tax on acquisition (LBTT, SDLT or LTT depending on the jurisdiction) may be greater than the equivalent stamp duty cost of acquiring shares.
If you are considering an asset sale or purchase please also see our "Top 10 Tips for Acquiring a Business and its Assets".
How Brodies can help
Brodies lawyers have significant experience of advising on, drafting and negotiating asset (and share) agreements.
If you have any questions in relation to the matters discussed in this article, or wish advice in relation to the acquisition or sale of assets (or shares) of a company please get in touch with corporate partner David Lightbody, or your usual Brodies contact, who would be happy to assist.
