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This document compares and contrasts share acquisitions and asset acquisitions. In a share acquisition, the buyer purchases the entire share capital of the target company from the seller. This transfers ownership of the company and all its assets and liabilities to the buyer. In an asset acquisition, only specific agreed upon assets and liabilities are transferred to the buyer. There are advantages and disadvantages to each for both the buyer and seller in terms of taxation, liability, continuity of business, and integration with existing operations. Key considerations include things like hidden liabilities, employment obligations, tax treatment of gains and losses, and costs of due diligence.
This document compares and contrasts share acquisitions and asset acquisitions. In a share acquisition, the buyer purchases the entire share capital of the target company from the seller. This transfers ownership of the company and all its assets and liabilities to the buyer. In an asset acquisition, only specific agreed upon assets and liabilities are transferred to the buyer. There are advantages and disadvantages to each for both the buyer and seller in terms of taxation, liability, continuity of business, and integration with existing operations. Key considerations include things like hidden liabilities, employment obligations, tax treatment of gains and losses, and costs of due diligence.
This document compares and contrasts share acquisitions and asset acquisitions. In a share acquisition, the buyer purchases the entire share capital of the target company from the seller. This transfers ownership of the company and all its assets and liabilities to the buyer. In an asset acquisition, only specific agreed upon assets and liabilities are transferred to the buyer. There are advantages and disadvantages to each for both the buyer and seller in terms of taxation, liability, continuity of business, and integration with existing operations. Key considerations include things like hidden liabilities, employment obligations, tax treatment of gains and losses, and costs of due diligence.
Commercial Factors Parties: shareholders and the buyer Process: buyer purchases entire issued share capital of Target from seller Ownership: does not change all ownership of the company is transferred (together with any wholly owned subsidiaries) Liability: all assets and liabilities pass to the buyer and are retained by the Target (this may include hidden liabilities) o Buyer is likely to insist on extensive contractual protection May require internal changes to the company structure to ensure synergies with existing Buyers companies Continuity: target company otherwise remains in exactly the same shape and still owns and runs the business Parties: Target and the buyer Process: only agreed and identified assets and liabilities pass to the buyer needed to carry on the business Ownership: contracts with 3 rd Parties will be transferred to the Buyer and the business may be slotted into the existing company structures Liability: assets and trade contracts must be individually transferred; only agreed liabilities will be transferred o Ways of transfer depend on the type of assets (e.g. a conveyance for land) Employees: TUPE provides for the automatic transfer of rights and obligations under contracts of employment where the transfer of the assets represents the transfer of an economic entity which retains its identity Diagrams
Advantages and Disadvantages
Share Purchase Asset Purchase Seller: Advantages Clean break from the business to retire as the seller loses its connection with the company and liabilities are enforceable against the B The mechanics of transfer far simpler by way of a Stock Transfer Form Target Ltd remains as the employer, therefore no rise to employment claims (any later employment claims are the concern of the B) Transfer of shares is a capital transaction and seller is in direct receipt of consideration and is therefore liable to tax: Target owned by Corporation: o CT: Any gain is exempted if S company is disposing of a substantial shareholding in a trading company: Both the S company and the company in which the shares are being sold are trading companies; and S has at least 10% of the shares; and For a continuous period of 12 months in last 2 years Target owned by Shareholders: o CGT: each SH is directly liable for tax on proceeds of sale for their shares Reliefs may apply (ER; EIS) Seller may obtain an indemnity from the buyer for third party debts Provisions of FSMA do not extend to this Roll-over relief from CGT/CT on qualifying business assets (see below for tax liability) TUPE applies meaning that rights and obligations owed to each employee are automatically transferred from S to B Seller: Disadvantages Buyer will make detailed investigations about the company and will seek wide protections (warranties and indemnities) from the Seller in the SPA as to the state of the business o The B has much of Ss information, so S will want strong protections in place and a water-tight confidentiality agreement Clean break only possible if the Seller is able to negotiate releases from personal guarantee obligations with the bank FSMA implications (see s.21 restriction), but the takeover exclusion (Art 70) usually applies see separate Financial Considerations notes Generally slower and more onerous Legal liability to third parties for debts and obligations remain with the Seller and 3 rd P can continue to take action against the S o S will want liabilities from B which may be problematic if B is insolvent Most of the tax warranties remain with the S Each separate asset must be individually transferred (consent may be necessary for lease) Transfer of capital and income assets results in a capital and income transaction. More complicated two-tier taxation system Tax Point 1 o Selling company pays CT on assets sale o Capital assets taxed as chargeable gains and proceeds from stock are chargeable as income receipts o ER and EIS are not available to corporate Ss Tax Point 2 o When individual SHs receive proceeds by: A winding up results in CGT on the disposal of the shares; or Dividends will result in IT o Corporate SHs unlikely to pay CT because on a winding-up, the substantial shareholdings exemption can apply o Group relief available on intra-company o Roll-over relief is possible depending if further plans involve acquiring further assets o S is left with an unwanted empty shell Buyer: Advantages The mechanics of transfer far simpler by way of a Stock Transfer Form Trade continuity and the lack of disruption to the trade (customers, employees and suppliers will theoretically not see much change in the business and be more willing to continue trade) Buyer will enjoy wide indemnities and warranties from the seller Target remains as the employer, therefore no rise to employment claims Assets and outstanding contracts remain unaffected legally Carry forward trading losses (s.45 CTA 10) Tax liabilities are less than asset purchase: o SDLT: only 0.5% on purchase price due on the shares to the nearest 5 (much cheaper than asset purchase) o VAT: is not chargeable on the purchase Tax relief is available on loans taken out to buy ordinary shares in a close trading company (one in which B owns more than 5% of the ordinary shares or spends a lot of time managing it) Legal liability to third parties for debts and obligations remain with the S, but B gets benefit No need to draft complex taxation warranties because most tax liabilities will remain with the seller Cherry pick the assets and liabilities the Buyer wants and less risk of unknown liabilities Less due diligence is needed, which reduces cost Easier to integrate Target into existing business Gives the buyer wider financing options (by giving security over acquired assets) (but this would be unlawful financial assistance if a public company under s.679 CA 06) CGT: B benefits from a higher base cost on any subsequent disposal because HMRC will value at the date the B acquired the asset which results in a smaller gain o Potentially higher tax relief on capital allowances for expensive machinery o Stock and work-in-progress is treated as a deductible expense o Replacement on qualifying business assets available if B disposed of any in last 3 years and wants to roll-over the gain SDLT: rather than on whole of purchase price, it is only taxed on dutiable assets (chiefly land and shares), and none on commercial land valued 0- 125k but see Disadvantages too VAT: none is chargeable on a transfer of a going concern under Art 5 SI1995/1268 Buyer: Disadvantages Liabilities (hidden or otherwise) continue to be enforceable against the company and indirectly become Buyers responsibility Third parties may go elsewhere because of the change in management: some commercial contracts permit termination where control changes hands check during due diligence All underlying assets are indirectly acquired by the buyer (whether wanted or not) Fewer financing options More difficult to rationalise a share purchase into an existing business Due diligence is more extensive and costly There is a deferred tax liability meaning a prudent buyer should seek a discount The buyer is acquiring the existing tax position of the companies: may give rise to unknown tax liabilities for pre-sale activities: o CGT: when B disposes of shares, the base cost for calculating gain is the value at which originally acquired by Target (therefore paying tax on Ss gain too), so seek a discount o Buyer will want to be indemnified by way of a Tax Deed of Covenant Generally slower and more onerous Each separate asset must be transferred (consent may be needed if leasehold) TUPE 2006 applies to automatic transfer of employees (this could be an advantage if the employees are very good) and B will be liable to redundancy pay after rationalisation More likely that suppliers and customers will review their dealings with them following change of control The benefit of existing contracts entered into by the Seller will not be automatically transferred to the Buyer (must be by novation or assignment) & the third party may seek renegotiation of the contract Consent for lease assignment may be needed Must transfer or redo insurance on the assets VAT: is chargeable on the transfer of chargeable assets (goodwill, stock and capital assets) under s.491 VATA 1994 unless it is a transfer of a going concern under Art 5 SI1995/1268 SDLT: potentially very expensive: Up to 125k = 0% 125k - 250k = 1% 250k - 500k = 3% 500k - 1m = 4% 1m - 2m = 5% Over 2m (from 22 March 2012) = 7% Over 2m (purchased by corporate bodies from 21 March 2012) = 15%