When looking to either sell or purchase a business, one of the first questions to consider is whether the transfer should be of the assets of the business or shares of the company that operates the business.
There are commercial, legal, and taxation concerns in structuring an asset or share sale. Both the purchaser and vendor should always seek legal, taxation, and financial advice.
Where the vendor wishes to sell all of the assets and transfer all of the liabilities of their business, the vendor is likely to want to sell the shares of its company. The sale of shares results in a transfer of liabilities both known and unknown to the purchaser. Conversely, where the vendor wishes to retain part of its business, or the purchaser is concerned about the acquisition of liabilities, and asset sale may be appropriate.
By an asset sale, the purchaser acquires only those assets that are specified in the sale document and, unless otherwise agreed, all of the liabilities of the business that were incurred up to the point of transfer remain with the vendor. In an asset sale, if a purchaser wishes to have the benefit of existing contracts (i.e. supply agreements, customer agreements, and leases), those contracts will need to be novated. Novation typically requires the consent or agreement of all parties to a contract. Similarly, any licences that are required to operate the business must be transferred to the purchaser.
By a share sale the purchaser acquires all of the assets of the business and all of the liabilities of the company remain with the company. There is no need to novate existing contracts, however contracts may require certain steps to be taken if there is a change of control of one of the parties or may allow for termination on the basis of a share transfer. It is therefore important that all contracts be examined in detail as part of the due diligence phase. The vendor in a share sale should carefully consider any existing shareholders agreement in terms of restrictions and in how each shareholder is to participate in the sale.
From the purchaser’s perspective, there are also a number of benefits to a share acquisition as opposed to the purchase of assets. These may include the ability to take advantage of tax losses that can be carried forward and set off against future profits. Further, a share purchase is typically quicker.