The structure to any acquisition or sale of a business in the UK is a fundamental decision on which the parties to a transaction must agree on. There are two principal structures:
- A sale of individual assets owned by a company, partnership or sole trader; or
- A sale of the shares of the company.
While both structures are capable of achieving broadly the same commercial objective, there are advantages and disadvantages to each, together with fundamental differences in both the legal effect and the tax treatment.
In an asset sale, the parties pick and choose which assets and liabilities and which parts of the target business are acquired or sold.
In a share sale, ownership of the company owning and operating the target business itself is transferred to the buyer. The company retains its assets (and liabilities) and continues to operate the business under the buyer’s ownership. This means that, as a general rule, the buyer will take over the target company with the benefit of all its assets and rights as a continuing entity, and subject to all of its liabilities and obligations.
Advantages and disadvantages
- Control over what’s transferred – in an asset purchase the parties are able to control what is being transferred, meaning the buyer can cherry pick any assets or liabilities it wants to acquire.
- Shareholder involvement – in a share purchase a buyer will usually want to acquire the entire issued share capital of the target company and must obtain approval from each selling shareholder. If any of the shareholders are untraceable or unwilling to participate in the transaction, the deal is unlikely to proceed. In an asset sale, the company that owns the assets will conclude the sale, and the individual shareholders need not be required.
- Financial promotion of financial assistance constraints – unlike in an asset purchase, a share purchase will likely fall within the scope of the statutory controls of the Financial Services and Markets Act 2000 (FSMA) and may be subject to controls on financial assistance governed under sections 678 and 679 of the Companies Act 2006.
- Structural complexity – a share purchase is usually more structurally simple as the only asset transferring is the share capital of the target company. Therefore, in a share purchase:
- it’s not necessary to identify each asset, right or liability of the target business;
- there’s no need to deal with the specific transfer formalities for different categories of assets and rights; and
- the target company’s contractual and licensing arrangements are largely undisturbed by the sale.
- Application of the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) – TUPE often applies to asset purchases but does not usually apply to share purchases. Where TUPE applies, the employment rights of the employees of the target business are protected and obligations are imposed on the buyer and the seller. Dismissals that are made because of a TUPE transfer are likely to be automatically unfair, and there are financial sanctions available to employees if the buyer and/or the seller fails to comply with their TUPE obligations. Specific employment advice should be taken when dealing with any such transfers.
- Complexities around extracting sale proceeds – in an asset purchase the selling company receives and is taxed on, the consideration paid by the buyer. In order for the seller’s shareholders to subsequently extract the proceeds of sale from the company, it will usually be necessary to pay a dividend or make some other form of distribution to its shareholders. By contrast, on a share purchase, the proceeds of sale are paid directly to the target company’s shareholders.
- Clean break for the seller – in a share purchase, the seller has a clean break from the target business and its associated liabilities. This may be a concern for the buyer as it will be purchasing the target, warts and all, particularly if the target company’s liabilities are extensive, or there is a risk that it is exposed to significant contingent or unknown liabilities, and the buyer will look for assurance from the seller by way of a due diligence process and warranties on the business.
- Tax – an individual seller of assets or shares will likely be subject to capital gains tax while a company selling assets will be subject to corporation tax. For specific tax advice please consult an accountant or tax adviser.
We are able to advise you on acquiring or selling a business, contact Arran Brooker in our Corporate Department on 01689 887859 or email firstname.lastname@example.org
For details on a share purchase consideration see our article on Types of share deals