Share vs. asset sales and purchases: the key distinctions

If you are thinking about selling or buying a business, one of the key questions is whether to structure the deal as a share or asset sale/purchase. There are important distinctions between these two structures, and you should obtain professional legal advice before committing to one or the other.

What are the structural differences? 

A share sale involves the shareholders selling the shares they own in a limited company. The buyer would step into the shoes of the sellers in terms of ownership, and would effectively acquire everything owned by the company including all its assets and liabilities (whether known or unknown). The only asset which actually changes hands between the buyer and seller at completion are the shares in the company. 

An asset sale allows the parties to cherry pick the individual items of the business being sold and purchased. Examples of assets which are usually listed include goodwill, plant and equipment, machinery, stock, intellectual property (including domain names and trademarks), contracts and business records. A buyer will often prefer an asset sale because it offers certainty over exactly what is being taken on and assumed at completion. 

Because an asset sale involve the transfer of individual items, it is important to make sure that all relevant legal formalities are completed so that the buyer becomes the new owner of the item e.g. contracts must be validly assigned or novated and all real estate interests (such as freehold or leasehold premises) must be validly assigned to the buyer and duly registered at HM Land Registry, as appropriate.

What other differences are there?

Liabilities

When it comes to share purchases, the buyer will want to fully assess the potential liabilities of the company as the buyer will inherit all liabilities from the seller. Usually, a thorough disclosure exercise will elicit such information from the seller and shed light on any potential liabilities. However, in an asset sale the buyer is at liberty (broadly speaking) to choose which liabilities it is willing to take on. 

Employees

An asset sale is likely to trigger an automatic transfer of all relevant staff to the buyer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (as amended) (TUPE). This means that the buyer will become the new employer of the staff and the parties will need to ensure compliance with their respective duties under TUPE.

However, in a share sale, TUPE will not apply as the employee contracts are generally not affected and the employer remains the same.

Due Diligence

A buyer would usually undertake a greater level of due diligence in a share sale transaction; this is because the buyer will take on all the assets and liabilities, whether known or unknown. As such, the transaction timetable may be longer in a share sale and the purchase contract will normally contain a more comprehensive set of warranties.

In an asset sale, the buyer will only need to conduct their due diligence in respect of the assets and liabilities actually being acquired.

Stamp Duty and other tax treatments

Both acquisition structures will have different tax implications for both the buyer and seller. The parties will need to obtain specific advice from their own accountant on the tax and accounting implications of each structure, however the following tax treatments will almost always need to be considered as a minimum (although this will differ for each transaction):

• Stamp Duty on Shares: is payable on the purchase of shares at a rate of 0.5% of the purchase price (rounded up to the nearest £5). If the target company owns real estate, Stamp Duty Land Tax will not be payable in addition but the implications of the real estate being owned within a company structure (and any future dealings of the same) should be considered before the acquisition.

• Stamp Duty Land Tax (SDLT): is charged on land and buildings being transferred but this will only directly apply on an asset sale. The SDLT position is often determinative of the chosen deal structure when dealing with property-holding companies.

• Value Added Tax (VAT): is generally chargeable on assets unless exempt or outside the scope for VAT treatment. A share sale is currently a VAT-exempt activity. VAT is chargeable on the purchase price in an asset sale unless the sale qualifies as a transfer of a business as a going concern (TOGC) (in which case the sale will be treated as outside the scope of VAT). It is normal practice to address the VAT treatment in the asset purchase agreement.

• Capital Allowances: on an asset sale, the disposal of certain assets may result in a balancing charge to the sellers if capital allowances have been claimed. On a share sale, the capital allowances position will be inherited by the buyer as part of its ownership of the target company. Specialist advice should be obtained from a suitably qualified accountant or other tax advisor.

• Business Asset Disposal Relief (BADR): is a capital gains tax (CGT) relief – previously known as entrepreneurs’ relief – which is currently subject to a £1 million lifetime limit on gains. The relief can apply to sellers on both an asset and a share sale, but tailored advice should be obtained from a suitably qualified accountant or other tax advisor.

While working with us you will have access to our strong network of other professionals, which includes accountants.

Disclaimer

Content on the Site is provided for your general information purposes only and to inform you about us and our products and news, features, services and other websites which may be of interest. It does not constitute technical, financial, or legal advice or any other type of advice and should not be relied on for any purposes. While we use reasonable efforts to include accurate and up-to-date information on the Site, we do not represent, warrant or promise (whether express or implied) that any information is or remains accurate, complete and up to date, or fit or suitable for any purpose. Any reliance you place on the information on the Site is at your own risk.