One of the very first questions to consider when looking at a business acquisition from a corporate Vendor is whether to structure the transaction as a share sale (whereby the Purchaser acquires the target company itself by taking a transfer of shares in the target company) or an asset sale (whereby the Purchaser acquires some, or all, of the assets and liabilities of the Vendor company, together with the business, leaving the shares in the Vendor company with its shareholders). The Vendor may favour one approach and the Purchaser another. Each approach has its own advantages and disadvantages, and these are discussed in more detail below.
Share sale
On the face of it, share sales sound more straightforward than asset sales. But in reality they can be much more complicated with the need for detailed due diligence, warranty protection and complicated completion accounts provisions. The key characteristics are:
Warts and all – the Purchaser takes the benefit of all of the assets of the target company but also becomes responsible for all of the target company’s liabilities and responsibilities;
Continuity of business - the target company will continue in existence, carrying on its business, after completion but there will be a change in the ownership and management (in favour of the Purchaser);
Contracts – contracts to which the target company is a party will continue following the acquisition (subject to any change of control provisions);
Employees – employees will continue to be employed by the target company (the identity of their employer does not change) and there will normally be no need for TUPE consultations;
Property – the target company’s interest in any freehold or leasehold property remains with the target company following the acquisition and, as there has been no change in ownership, there is no need to register any transfer at Land Registry or to pay any SDLT;
Change of control – some caution is needed in the due diligence exercise to ascertain whether any of the contracts of the target company contain “change of control” clauses. These can give the other party to the contract the right to terminate the contract if there is a change in the majority shareholders of the target company;
Stamp Duty (but no VAT) – a transfer of shares for more than £1,000 will attract Stamp Duty of 0.5% of the value of the consideration given for the shares. However, a share sale will be VAT exempt;
Vendor released? – usually the Vendor will seek to be released from any ongoing liabilities arising out of the business once the purchase is completed, however that will be a matter for negotiation between the parties.
Share sales tend to be favoured by the Vendor and also will often be required where the Purchaser is particularly interested in retaining the contracts of the target company. However, because of the extensive due diligence required to ascertain the position regarding the assets and liabilities of the target company, and the associated warranty protection that is often sought by the Purchaser, they can be somewhat more expensive than an asset sale.
Asset sale
Asset sales are often favoured where the Purchaser is only after one or a number of specific assets from the Vendor. They can be more straightforward as warranty protection and due diligence are only required for those specific assets. But they do also have their complexities as they involve specific transfers of each asset which the Purchaser wishes to acquire. Of course, an asset sale is required if the Target is not a corporate entity (and a share sale is unavailable). The key characteristics are:
Cherry pick - the Purchaser can pick and choose which assets or parts of the target business they wish to acquire;
TUPE – the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) will generally apply, meaning that the employees of the target engaged in the business being acquired by the Purchaser will automatically transfer to the Purchaser on their existing terms and conditions. A formal consultation procedure needs to be followed and any failure to comply with the requirements can result in financial penalties for the Purchaser and claims for unfair (constructive) dismissal by the relevant employees;
Assignment/novation - existing contracts may need to be assigned or novated to the new entity in order for them to be able to be operated by the Purchaser. The consent of the other contracting party (novation) will be needed if there is a prohibition on assignment in the relevant contract;
Landlord consent – any leasehold property to be acquired/occupied by the Purchaser will need to be transferred to the Purchaser and the consent of a Landlord will be required before that can take place;
SDLT – if an asset sale includes the transfer of an interest in land and buildings, such interest will be subject to Stamp Duty Land Tax (payable by the Purchaser), the maximum rate of which is currently 4%;
No VAT if a ToGC – if an asset sale is a transfer of a going concern, it will not attract any VAT.
Asset sales tend to be favoured by the Purchaser where the continuity of the business is not such an issue, and will often be required where there are liabilities in the Vendor company that the Purchaser does not wish to assume.
Tax
In addition to the points referred to above, the tax treatment of any acquisition should be carefully considered with your tax advisor. Things to consider in relation to share sales will include the use of trading losses, rollover relief and entrepreneur’s relief. Things to consider in relation to asset sales will include capital gains tax and capital allowances. In asset sales careful consideration should also be given to the correct apportionment of the purchase price between the various assets.
How we can help
Our acquisitions team delivers streamlined and efficient advice dealing with all aspects of buying and selling businesses and companies in England and Wales, acting for vendors, purchasers and funders.
For more information or advice about corporate transactions, or if you need someone to act for you in relation to a proposed sale or acquisition, please contact Mark Lewis on 01926 880700.
