Identifying a target business can be a lengthy process. However, once identified, just as much thought needs to be given to the structure of the transaction.
There are two main ways in which a buyer will acquire a business which is currently being operated by a company. The first is the acquisition of the shares of the company itself. The alternative is to purchase specific assets (and, often, assume specific liabilities) of the business operated by the company. This is known as an asset purchase.
When making a decision on which is the most appropriate / desirable structure, it is important to understand the key differences between share and asset purchases. These are as follows:
- Historic liability and obligations – Share purchases involve acquiring the legal “person” that owns and operates the business (i.e. the company). Consequently, the business is purchased “warts and all” by the buyer. This presents a risk to a buyer as the company will be sold with the historic liabilities of the business. On the other hand, a seller is likely to want to sell the entirety of the business without permitting the buyer to cherry pick only the parts it wants , leaving behind the historic liabilities for the seller to deal with post-completion.
- Simplicity – A share purchase can sometimes make for a simpler transaction since only the shares in the company (neatly wrapped around the business) are to be acquired. Asset purchases can be more complex as specific parts of the business need to be identified and extracted from the company and / or excluded from the transaction. Some assets will automatically drag liabilities with them (which the seller may have to give the buyer indemnities for) and the transfer of some assets and liabilities may also require third party consents before they can be transferred.
- Due diligence – Asset purchases can lessen the burden of the due diligence exercise to be undertaken by the buyer if he is excluding liabilities from the acquisition. This can decrease the transaction costs since those historic liabilities do not require detailed investigation. The due diligence exercise in share purchases is often a more extensive process because the business must be thoroughly investigated to identify potential liabilities being acquired with the company. A buyer is also going to be keen to ensure that any liabilities it acquires as part of a share deal are limited to its understanding of the business operated by the company, including the need for appropriate warranties and indemnities from the seller in the share purchase agreement.
- Shareholder consent – In order for a buyer to acquire 100% of the share capital of a company, a share purchase will require all of the shareholders to agree to the sale, whereas (unless the shareholders agreement or articles state otherwise) an asset purchase is likely to only require the director’s consent to the transaction. This should be a key consideration if not all of the shareholders wish to sell their shares. However, the seller should also consider any drag provisions the company may have within its articles of association which may entitle the majority to force the minority to sell their shares.
- Property – If a lease is to be acquired as part of an asset purchase, the landlord’s consent to an assignment will be required. This may become an expensive and time-consuming process. A share purchase will not usually require landlord consent because the company will remain the tenant under the lease.
- Employees – Employment legislation sets out the buyer’s obligations to an employee who is transferred to a new employer as part of an asset acquisition (known as the ‘TUPE Regulations’). The TUPE regulations require the buyer and/or seller to undergo a consultation process with employees and retain employees on broadly identical terms to their existing employment contracts. Share purchases do not usually require a consultation with employees because there is no change of employer but engagement with employees, at the appropriate time, is often advisable for the purposes of maintaining employee relations.
- Tax – A share purchase will typically attract stamp duty (a tax of 0.5% of the purchase price, payable by the buyer).. A share sale will also usually require the seller to enter into a tax deed with the buyer in order to indemnify the buyer from pre-sale tax liabilities of the company. These are not features of an asset purchase. An asset purchase may benefit from a VAT exemption on the assets which are purchased so long as the business is sold as ‘a going concern’. Notwithstanding these observations, it is always imperative to obtain tax advice prior to committing to either transaction structure.
The structure of the deal will usually depend on the negotiating positions of the parties, whether the buyer is to retain an element of the business post-sale, tax advice from the parties’ respective advisors and the format which is the most mutually advantageous. It is very often a balancing act and it is important to determine the structure as early as possible in the transaction.
If you wish to discuss any of the issues raised above, or a business acquisition generally, please contact the Corporate at Commercial team at Morrisons by getting in touch with your usual advisor or emailing Greg Vincent, a Partner in the team at [email protected]