Asset Sales vs Share Sales

There are two ways in which to sell a company. Both have pros and cons and the choice of which one to use in any particular deal will depend on the deal structure as well as the bargaining of the power of the parties.

The two ways are referred to as Asset Sales or Share Sales.

Asset sales

When speaking about the structure of an acquisition it is sometimes helpful to visualise a container (the company) filled with all the bits and pieces the company needs in order to function such as premises, intellectual property, staff, software and desks and computers.

The container is a legal person and it is with the container that contracts are made. The container is liable for taxes and any litigation will be directed against the container. The container turns out to be a fairly risky object.

An asset sale will take place when all the bits and pieces inside the container are sold to a new container (the acquisition vehicle) leaving the old container behind with all its potential liabilities.

Asset sales are generally preferred by buyers as it reduces the risk of purchasing a company with too many liabilities. It also allows a buyer to cherry pick the assets they are particularly interested in and which will fit in nicely with the buyer’s company.

Asset sales are not always favoured by sellers as they are left with a company that retains the main liabilities. When an asset sale takes place the purchase price is paid into the company selling the assets. The shareholders of the company are then facing the difficulty of taking the sale price out of the company without attracting high tax charges. A seller is also not able to benefit from entrepreneurs’ relief if he or she qualifies which would mean that the purchase price would only be taxed at 10% instead of a dividend rate of 17% in the case of an asset sale.

Share Sale

A share sale takes place when the entire container and the bit and pieces inside it are sold. In this case the purchase price is paid to the shareholders. A share sale allows a buyer to ensure that they take ownership of all aspects of a company. The sellers may qualify for entrepreneurs relief if they were shareholders as well as officers of the company being sold. However, a share sale carries with it a risk for the buyer of unpaid tax liability, litigation liability, debt liability. Because of TUPE, employment liabilities will carry over to the buyer whether the deal is structured as an asset deal or a share deal.

In order to deal with risk lawyers have come up with various tools to apportion risk to the parties of a contract. The basic principle being that if there is a potential risk, the seller is required to warrant or promise that no such risk exists. If the promise turns out not to be true the buyer will then have a action in court against the seller for a breach of warranty. This is a stronger action that a simple breach of contract. Furthermore, a buyer may insist that the identifiable areas of risk are covered through the use of indemnities given by the seller. An indemnity if easier and faster to enforce than a breach of warranty.

Despite the marked differences between the two approaches to the sale of a business, the tools lawyers have developed over the centuries allow us to find an even ground so that the interests of both parties are protected as much as possible.