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The key difference between an asset sale and a share sale is the nature of what a potential buyer will acquire.
In a share sale, the buyer acquires the shares of the company which may own an underlying trade and assets of a business. The buyer will be acquiring everything on a share sale “warts and all” which means all assets, all liabilities and assuming all obligations – even those a prospective buyer may not know about.
In an asset sale, the buyer acquires the assets which make up the business (and most likely the business as a going concern). The assets can be both tangible (for example property, land, machinery and stock) and intangible (intellectual property and goodwill). In theory the buyer could leave unwanted liabilities behind and “cherry pick” the assets they wish to take. This may have an impact on price in that the purchase price may be higher because the assets and their value have not been depressed by the value of liabilities which are not to be assumed. However there may be less risk for the buyer.
Structure of the Deal
Asset purchases can be more complex because there may be a need to transfer particular assets separately and there may be a need for third party consents – for instance to assign or novate a contract. Similarly if there is a lease or licence in respect of land which needs to be assigned or transferred it is likely that the landlord’s consent will be required. Obtaining third party consents and the timing of these may influence whether a share or asset purchase ultimately is the preferred route.
With a share sale, there is greater control on the time frames for completion of the transaction. On an asset purchase, leased equipment may be important to the target business and the buyer may need to arrange for the leases to be assigned or novated to it at completion, which is likely to necessitate agreeing terms beforehand. The target business may be involved in something which needs a licence, permit or other regulatory approval and the buyer may need to obtain approval from the relevant regulator for the licence or approval to continue or for a new licence or approval in the buyer's own name.
Employees
Another important facet of a business and asset transaction is TUPE (the Transfer of Undertakings (Protection of Employment) Regulations 2006) which protects the employment rights of the employees of the target business and imposes obligations on both the buyer and the seller to inform and, in some cases, consult with representatives of affected employees before the transaction takes place.
TUPE and the potential financial sanctions available to employees if the buyer and/or the seller fail to comply with their TUPE obligations may make a business and asset transaction less attractive.
Due Diligence
Due diligence is an essential preliminary step to ensure contractual protection and can help identify the level and areas of protection needed as well as any risks that the buyer should avoid completely.
With a share sale, arguably a greater level of due diligence would be required (or may be considered) given that the company is being acquired with its liabilities. Legal due diligence may be less extensive with an asset sale, as the focus would be on the assets/liabilities being assumed by the buyer. This would involve, for example, reviewing contractual obligations being assumed, investigating title to key assets being transferred, and investigations into the employment liabilities.
On a share sale, contracts to which the target company is a party should be checked during due diligence to ensure that they do not have any “change of control” provisions, that is to say any clauses whereby the contract would automatically terminate if “control” (typically ownership of over greater than 50% of the shares) is gained by a third party/buyer.
Banking and security arrangements should be checked to ensure that any assets are released from any security and can be transferred unencumbered to the buyer.
Summary
An asset sale is often more attractive to a buyer because it can choose and control which assets and liabilities it is taking on. The “warts and all” concept can make share sales a riskier proposition and there may be something which comes out in due diligence that makes an asset sale more appropriate.
From a costs perspective, there is little difference between the two. Whilst the costs of due diligence would most likely be higher for a share sale, the various practical steps required for an asset sale can be as time consuming, including dealing with any property (for example any lease assignment) and employment (to deal with the employee transfers).
If you or your business require information regarding anything in this blog or generally about your business or any other corporate matter, please call Sarah Ward, one of our Corporate partners, on 07889 589596 or e-mail Sarah at sward@georgegreen.co.uk for advice and assistance.