Selling Your Business: Share Sale or Asset Sale?
Deciding to sell a business can be a difficult and weighty decision. Beauchamps partner Shaun O’Shea outlines the key legal factors from a seller’s perspective of an asset sale versus a share sale
WHAT IS THE DIFFERENCE?
A share sale involves the sale of the shares in the company that owns and operates the business. The consideration for the shares is paid to the shareholders.
A business or asset sale involves the sale of the specific assets that make up the business and the consideration is paid to the owner of those assets, which could be a company where the business is incorporated or an individual/group in the case of an unincorporated business.
WHAT IS FOR SALE?
If the plan is to sell only a division of the business, it may be more practical to structure the transaction as an asset purchase. Otherwise, it will be necessary first to set up a new company and transfer (or ‘hive off ’) the relevant division to the newly formed company, following which the shares in that company can be sold. The tax implications around this type of hiveoff would need to be considered.
LIABILITIES
In a share sale, all the liabilities of the business remain with the company (and indirectly the buyer, as new owner of the company, albeit with the benefit of limited liability), and the seller’s post-sale liability will usually be limited to the warranties and indemnities provided to the buyer under the transaction documents. If the asset sale route is chosen, and the liabilities of the business are not specifically transferred to the buyer, then they remain with the seller.
TAX
Tax will often be the main driver in deciding the structure, so it is important to obtain tax advice before deciding whether to pursue the share sale or asset sale route. The base cost of the shares or assets and
the tax efficiency of who receives the consideration (the shareholder or the company) are tax factors for the vendor. On an asset sale for example, the corporate seller receives the consideration, and there will normally be further tax charges in distributing the sale proceeds. On a share sale, tax reliefs such as participation exemption and entrepreneurial relief may be available to the seller. The main buyer tax to be considered is stamp duty, which ranges from 1% on shares (7.5% in some cases involving companies holding immoveable property) and 7.5% on most assets.
EMPLOYEES
In a share sale, the employees continue to be employed by the company being sold and their status remains unchanged. In an asset sale, the new owner is legally obliged to take on the employees of the transferring business on the same terms and conditions (save for certain pension benefits) as they enjoyed with their previous employer. The seller and buyer are also obliged to notify and consult with employees in connection with the proposed business transfer.
DUE DILIGENCE
Due diligence is the informationgathering process by which the buyer investigates the target company and its business. By reason of the nature of the transaction and what is being acquired, a due diligence exercise on a share purchase isnormally more protracted than in a business/asset acquisition.
KEY DOCUMENTATION
The most important documents are the share sale and purchase agreement (in a share sale) or the business sale and purchase agreement (in an asset transaction), with the warranties and indemnities within them being a key focus for both seller and buyer. The seller usually prepares a disclosure letter, which sets out the general and specific disclosures against the warranties in the sale agreement. The starting position is that if any warranty in the sale agreement is untrue, the buyer has a claim for breach of contract unless the facts giving rise to the breach were adequately disclosed in the disclosure letter.
ADVICE
To avoid any pitfalls, potential sellers and buyers should obtain tax and legal advice early on in the process and before heads of terms are agreed.