Important benefits and drawbacks of asset sales vs share sales Solicitor Scotland

This article is the first of two that addresses some of the important factors one should take into account while deciding whether to buy the assets or the shares of a company: in this article we cover asset purchases. If you are thinking about buying the assets or shares of a company, we highly advise that each of the two elements of this series be the topics of the parts since they are linked.

An asset sale or a share sale is the two main ways one could acquire an incorporated company in the UK.

Although both systems have generally the same commercial goal, choosing the appropriate structure of the deal will finally depend on the personal, financial, and legal situation of the parties; hence, it is crucial for everyone wishing to buy or sell a business to know the main differences, advantages and disadvantages between asset and share sales and to consult legal advice before deciding.

Share Sale v Asset Sale: What distinguishes them?

In an asset sale, the buyer effectively “cherries pick” the assets and liabilities it wants to acquire, so enabling it to be selective (subject to commercial negotiation) about the risks it is ready to take on. The buyer takes over the target business by acquiring the business and assets and liabilities, both tangible and intangible.

In a share sale, the buyer gains the assets—that is, the shares of the company that owns the firm. The deal is between the acquirer of the company’s shares and the shareholders themselves. Though it may negotiate some contractual protections in the purchase agreement, generally the new owner of the company will receive all of the assets, liabilities, and responsibilities of the company — “warts and all”.

Sale of Assets: advantages and disadvantages

Seller Benefits

• Since the seller is the company, any warranties or guarantees are issued by the company rather than by any one shareholder of the firm. But the contract can have a written agreement to the reverse, say for a personal or parent company guarantee.
• Parts of the business of value can be retained by the seller or sold to another buyer later.
• Any assets the seller wants excluded from the sale—that which are not meant to be transferred—can be done so.
• Usually, the seller would provide fewer warranties and indemnities to the buyer since they keep portions of the company and/or certain assets and liabilities.
• The buyer reduces more risks, so the transaction itself and the contract become simpler.
• If certain tax reliefs are available, a seller will usually favour a share sale; but, in some cases, an asset sale can provide specific tax benefits.
• Acceptable losses. Where an item is sold at a loss, the loss can usually be offset against other chargeable gains, therefore lowering the seller’s liability to capital gains tax.
• Expense allowance. Similarly to, for capital allowance purposes, an allowance may be available where the written-down value of an asset is less than its selling price. Once more, the resulting shortfall can be balanced by other income or chargeable gains.

Seller Disadvantages

• Usually, any debts of the selling corporation would follow her on completion.
• The sale could be logistically complicated; for example, specific contracts and assets may need permission or further agreements with third parties to guarantee that all the pertinent business assets—that is, any property, staff member, or contract—are lawfully transferred to the buyer. Keeping the sale private could prove more challenging as a result.
• The seller must get releases of any securities influencing the assets of the company from their financiers before completion.
• A double tax charge results from an asset sale. Any capital gains the company has following the sale will result in an initial Corporation Tax charge. Should the sales proceeds be taken from the firm or passed to the company shareholders, a further tax charge could be paid (this can be especially unwelcome where the shareholders are persons who are expected to suffer high rates of income tax on the distribution).

Buyer Advantages

• Usually, the obligations of the selling company stay with it and do not pass to the buyer.
• Any undesirable items can be left by the buyer with the selling company.
• The buyer is probably better suited to evaluate and accommodate any possible future tax liability resulting from the acquisition of particular assets.
  The situation and the kind of assets being bought will determine the range of tax reliefs accessible.

Disadvantage for the Buyer

• To complete the transfer, individual assets, rights or contracts may call for extra formalities (third-party approval and/or registrations).
• Third parties could not agree to assign or novate contracts or other assets which the buyer believes necessary for their purchase of the company.
• The Transfer of Undertakings (Protection of Employment) Regulations (“TUPE”) exclude the Buyer’s ability to cherry-pick duties by automatically moving employees from the seller to the buyer on current Terms & Conditions.
• Unlike a share sale, an asset sale could be liable to VAT unless the transaction is a transfer of a continuing company (“TOGC”). Although the details of TOGC’s are outside the purview of this article, generally VAT may be imposed on the purchase consideration (which may or may not be fully recoverable by the buyer) if the buyer is not using the acquired assets to run the same kind of business as the selling company following the acquisition.
• Depending on the valuation, the tax on acquisition (LBTT, SDLT or LTT depending on the jurisdiction) may be more than the comparable stamp duty cost of purchasing shares if real property assets are purchased.