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Key differences between a share and asset sale and purchase

If you are intending to sell or purchase a business, one of the first matters to decide upon and agree with the other side is whether the transaction should be a share sale/purchase or an asset sale/purchase transaction.

To assist in deciding which type of transaction should be used in your set of circumstances, the following key differences should be considered.

What the buyer acquires – assets and liabilities

In a share sale, the buyer will acquire the shares in a company. In this way the buyer takes over the target company with all the assets owned, and all the liabilities owed, by that target company.

In an asset sale, the buyer will only acquire the assets and liabilities of the business specified in the main sale agreement. Therefore in this type of transaction the buyer can ‘cherry pick’ those assets and liabilities of the target business which they intend to take on.

Tax

One of the main and most important differences is the tax treatment of both types of transaction. Therefore it is important to seek tax advice from an accountant with experience in these types of transactions before deciding which type of transaction to proceed with.

In general terms, a seller would usually prefer a share sale whereas a buyer would usually prefer an asset sale for tax reasons.

Employees

In a share sale, employment contracts are generally not affected as the employer will remain the same (ie. the target company).

In an asset sale, the employment contracts of employees automatically transfer to the buyer under the Transfer of Undertakings (Protection of Employees) Regulations 2006 (most better known as ‘TUPE’). 

Both parties will have obligations under TUPE to consider, and comply with, if proceeding this way. For example, if a buyer intends to vary the terms of the employment contracts following completion then there will be a requirement under TUPE to inform and consult with the employees or (if more than 10 employees) their elected representatives as to such changes before completion takes place, which can cause a delay to completion of an asset sale.

Extraction of sale proceeds following completion (where seller is a corporate entity)

In a share sale, the sale proceeds will be paid directly to the target company’s selling shareholders.

In an asset sale where the seller is a corporate entity, the sale proceeds will be paid directly to the corporate entity, as opposed to the individuals behind the corporate entity. Therefore in order for the individuals to realise any profit made from the sale, dividends or some other form of distributions will need to be made to the shareholders. 

Whilst this will cause further administrative work before the sale proceeds are realised and received by the individuals behind the corporate entity, it could also mean the sale proceeds may become ‘double taxed’, in that the seller corporate entity may be taxed on the sale proceeds, and then the dividends or other distributions to the shareholders may then be subject to income tax depending on the exact circumstances that apply. 

In light of the above, generally a seller will prefer a share sale transaction whereas a buyer will prefer an asset sale transaction. However, before deciding which type of transaction you should use, you should always seek advice from professional advisors.

How can Glanvilles help?

If you require any further information or advice on the above, or require assistance with a share or asset sale/purchase transaction generally, please do not hesitate to contact Scott Richardson by phone on 01329 227907 or by email on scott.richardson@glanvilles.co.uk.

 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice, and should not be relied upon as advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. All content was correct at the time of publishing. Legal advice should always be sought in relation to specific circumstances.