Share Acquisition vs Asset Acquisition

Share Purchase Asset Purchase

Commercial
Factors
Parties: shareholders and the buyer
Process: buyer purchases entire issued share
capital of Target from seller
Ownership: does not change all ownership of
the company is transferred (together with any
wholly owned subsidiaries)
Liability: all assets and liabilities pass to the
buyer and are retained by the Target (this may
include hidden liabilities)
o Buyer is likely to insist on extensive
contractual protection
May require internal changes to the company
structure to ensure synergies with existing
Buyers companies
Continuity: target company otherwise remains
in exactly the same shape and still owns and
runs the business
Parties: Target and the buyer
Process: only agreed and identified assets and
liabilities pass to the buyer needed to carry on the
business
Ownership: contracts with 3
rd
Parties will be
transferred to the Buyer and the business may be
slotted into the existing company structures
Liability: assets and trade contracts must be
individually transferred; only agreed liabilities will
be transferred
o Ways of transfer depend on the type of
assets (e.g. a conveyance for land)
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
Diagrams


Advantages and Disadvantages

Share Purchase Asset Purchase
Seller:
Advantages
Clean break from the business to retire as the
seller loses its connection with the company and
liabilities are enforceable against the B
The mechanics of transfer far simpler by way of
a Stock Transfer Form
Target Ltd remains as the employer, therefore
no rise to employment claims (any later
employment claims are the concern of the B)
Transfer of shares is a capital transaction and
seller is in direct receipt of consideration and is
therefore liable to tax:
Target owned by Corporation:
o CT: Any gain is exempted if S company
is disposing of a substantial
shareholding in a trading company:
Both the S company and the
company in which the shares
are being sold are trading
companies; and
S has at least 10% of the
shares; and
For a continuous period of 12
months in last 2 years
Target owned by Shareholders:
o CGT: each SH is directly liable for tax on
proceeds of sale for their shares
Reliefs may apply (ER; EIS)
Seller may obtain an indemnity from the buyer
for third party debts
Provisions of FSMA do not extend to this
Roll-over relief from CGT/CT on qualifying
business assets (see below for tax liability)
TUPE applies meaning that rights and obligations
owed to each employee are automatically
transferred from S to B
Seller:
Disadvantages
Buyer will make detailed investigations about
the company and will seek wide protections
(warranties and indemnities) from the Seller in
the SPA as to the state of the business
o The B has much of Ss information, so S
will want strong protections in place
and a water-tight confidentiality
agreement
Clean break only possible if the Seller is able to
negotiate releases from personal guarantee
obligations with the bank
FSMA implications (see s.21 restriction), but the
takeover exclusion (Art 70) usually applies see
separate Financial Considerations notes
Generally slower and more onerous
Legal liability to third parties for debts and
obligations remain with the Seller and 3
rd
P can
continue to take action against the S
o S will want liabilities from B which may
be problematic if B is insolvent
Most of the tax warranties remain with the S
Each separate asset must be individually
transferred (consent may be necessary for lease)
Transfer of capital and income assets results in a
capital and income transaction. More
complicated two-tier taxation system
Tax Point 1
o Selling company pays CT on assets sale
o Capital assets taxed as chargeable gains and
proceeds from stock are chargeable as
income receipts
o ER and EIS are not available to corporate Ss
Tax Point 2
o When individual SHs receive proceeds by:
A winding up results in CGT on the
disposal of the shares; or
Dividends will result in IT
o Corporate SHs unlikely to pay CT because on
a winding-up, the substantial shareholdings
exemption can apply
o Group relief available on intra-company
o Roll-over relief is possible depending if
further plans involve acquiring further assets
o S is left with an unwanted empty shell
Buyer:
Advantages
The mechanics of transfer far simpler by way of
a Stock Transfer Form
Trade continuity and the lack of disruption to
the trade (customers, employees and suppliers
will theoretically not see much change in the
business and be more willing to continue trade)
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
Carry forward trading losses (s.45 CTA 10)
Tax liabilities are less than asset purchase:
o SDLT: only 0.5% on purchase price due
on the shares to the nearest 5 (much
cheaper than asset purchase)
o VAT: is not chargeable on the purchase
Tax relief is available on loans taken out to buy
ordinary shares in a close trading company (one
in which B owns more than 5% of the ordinary
shares or spends a lot of time managing it)
Legal liability to third parties for debts and
obligations remain with the S, but B gets 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
Less due diligence is needed, which reduces cost
Easier to integrate Target into existing business
Gives the buyer wider financing options (by
giving security over acquired assets) (but this
would be unlawful financial assistance if a public
company under s.679 CA 06)
CGT: B benefits from a higher base cost on any
subsequent disposal because HMRC will value at
the date the B acquired the asset which results in
a smaller gain
o Potentially higher tax relief on capital
allowances for expensive machinery
o Stock and work-in-progress is treated as a
deductible expense
o Replacement on qualifying business assets
available if B disposed of any in last 3 years
and wants to roll-over the gain
SDLT: rather than on whole of purchase price, it
is only taxed on dutiable assets (chiefly land and
shares), and none on commercial land valued 0-
125k but see Disadvantages too
VAT: none is chargeable on a transfer of a going
concern under Art 5 SI1995/1268
Buyer:
Disadvantages
Liabilities (hidden or otherwise) continue to be
enforceable against the company and indirectly
become Buyers responsibility
Third parties may go elsewhere because of the
change in management: some commercial
contracts permit termination where control
changes hands check during due diligence
All underlying assets are indirectly acquired by
the buyer (whether wanted or not)
Fewer financing options
More difficult to rationalise a share purchase
into an existing business
Due diligence is more extensive and costly
There is a deferred tax liability meaning a
prudent buyer should seek a discount
The buyer is acquiring the existing tax position
of the companies: may give rise to unknown tax
liabilities for pre-sale activities:
o CGT: when B disposes of shares, the
base cost for calculating gain is the
value at which originally acquired by
Target (therefore paying tax on Ss gain
too), so seek a discount
o Buyer will want to be indemnified by
way of a Tax Deed of Covenant
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 (this could be an advantage if the
employees are very good) and B will be liable to
redundancy pay after rationalisation
More likely that suppliers and customers will
review their dealings with them following change
of control
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 third party may seek renegotiation of the
contract
Consent for lease assignment may be needed
Must transfer or redo insurance on the assets
VAT: is chargeable on the transfer of chargeable
assets (goodwill, stock and capital assets) under
s.491 VATA 1994 unless it is a transfer of a going
concern under Art 5 SI1995/1268
SDLT: potentially very expensive:
Up to 125k = 0%
125k - 250k = 1%
250k - 500k = 3%
500k - 1m = 4%
1m - 2m = 5%
Over 2m (from 22 March 2012) = 7%
Over 2m (purchased by corporate bodies from
21 March 2012) = 15%