This article is the second 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 share 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 1 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).

Share Sale: Advantages and Disadvantages?

Seller Advantages

  • The selling shareholders usually have a clean break from the business and do not remain connected with it after completion - in buying the shares the buyer takes on all existing assets and liabilities of the target company.
  • A share sale is simpler for the seller than an asset sale as the company is sold as a ‘going concern’ in its entirety which makes it easier to ensure trade continuity and keep the sale confidential.
  • There are a number of tax reliefs which may be available on the disposal of shares which can make a share sale more attractive. The availability of reliefs will depend on a range of factors. Some of the most common reliefs include:
    • Substantial Shareholding Exemption (SSE). Corporate sellers may be exempt from a corporation tax charge on gains arising from a sale of shares in another trading company where the seller held a 'substantial shareholding' in the target over a certain period of time (provided various other conditions are met). Where the SSE applies, it may also be relied upon to negate any 'degrouping' charges arising on the share sale.
    • Business Asset Disposal Relief. Qualifying individuals who are officers or employees of the target company may benefit from a reduced 10% Capital Gains Tax rate on gains arising from the disposal of shares subject to a lifetime limit of £1m.
    • Share for Share exchange. If the consideration for the share sale is in the form of share or loan notes in the buyer, then the selling shareholders may be able to defer or 'rollover' the gain until such time as they subsequently dispose of the acquired shares or loan notes.

Seller Disadvantages

  • Generally, the target company retains all historical, actual, and contingent liabilities (including tax liabilities) of the business, as such the selling shareholders are typically required to provide extensive warranties and indemnities as protection for the buyer. The directors of the target company may also be required to provide personal guarantees, potentially exposing them to unlimited personal liability.
  • Part of the purchase price may need to be held on trust, or the selling shareholders may need to provide a bank guarantee as security for any breach of a warranty.
  • A buyer may apply a discount to the purchase price to reflect the increased risks for it when involved in a share sale.
  • If there are particular assets of the company that the seller would like to retain, then the deal may require those assets to be extracted from the target company in advance of completion. Extraction of those assets may trigger a tax liability in the hands of the company and/or the seller.
  • 'Degrouping' charges may arise on a change of control of the company where there have been prior intra-group transfers of assets.

Buyer Advantages

  • If the target company has a recognised brand, goodwill and reputation, the buyer may be able to profit from this.
  • There is no need to formally assign contracts and other property from the target company to the buyer, so – unless the relevant contracts or agreements contain "change of control" provisions - there should be no reliance upon third party consent.
  • Stamp Duty. Subject to there being available relief, Stamp Duty will normally be charged at 0.5% of the consideration paid for the shares. Stamp Duty rates are therefore far more favourable than LBTT, SDLT or LTT which are levied on the consideration given for any interests in land and buildings (at approximately 5%). This can be a significant saving where the target company holds valuable interests in land.
  • No VAT. A share sale is not a supply upon which VAT is charged.
  • Allowable Losses/Reliefs. The tax attributes of the target company will be retained and should be capable of use by the company going forward.

Buyer Disadvantages

  • The buyer is exposed to additional risk so should engage in extensive and detailed due diligence to detect any liabilities associated with the target company.
  • Even if the selling shareholders provide indemnities for any liabilities incurred by the company, there is a risk that the seller may not have the resources to indemnify the buyer if/when required to do so (unless an amount representing the value of the indemnities/warranties is held on trust as security or a bank guarantee is obtained – please see above).

How Brodies can help

Brodies lawyers have significant experience of advising on, drafting and negotiating share (and asset) 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 shares (or assets) of a company please get in touch with corporate partner David Lightbody, or your usual Brodies contact, who would be happy to assist.


Scott Bell

Senior Solicitor

Lesley Wisely

Practice Development Lawyer