17 November, 2023
When it comes to selling a business, the seller and buyer must decide how the business is to be sold. The two main ways are either a share sale or asset sale. While both transactions broadly achieve the same commercial objective, there are fundamental differences in legal effect.
A share sale consists of the shareholders of a company selling their shares to the buyer. A limited company possesses its own 'legal personality' which is separate from its shareholders, so a company as a legal entity owns its assets, liabilities, and rights independently. A sale of shares in a company is essentially a sale of the entire entity and everything owned by it (including the liabilities), and the buyer wholly assumes responsibility for the company.
Complexities and continuity
This method can be considered less complex, given that it isn't necessary to identify each asset, right or liability being purchased. Therefore, there is no need to deal with specific transfer formalities when dealing with different categories of assets, for instance - obtaining 3rd party consent to a change of control in ownership or dealing with the assignment of a lease - instead, the company's contractual agreements remain largely undisturbed, allowing for continuity of the business.
Acquiring the company wholly
Acquiring the company wholly means that the buyer assumes all of the company's latent liabilities; therefore, thorough due diligence should be performed by the buyer to ascertain all assets and liabilities within the company. This allows a 'clean break' for the seller from the company and any potentially onerous liabilities. Of course, a buyer may seek to obtain a series of protection via warranties and indemnities (subject to negotiation), which will continue to bind the seller post sale. If a seller wanted to retain particular assets before a sale, these would generally have to be transferred out of the company prior, potentially incurring additional costs.
Employees remain contracted with the company, meaning there are no transfer of employment rights or Transfer of Undertakings (Protection of Employment) Regulations 2007 ('TUPE') to deal with. However, this leaves the buyer responsible for honouring the contract terms under which each employee was previously employed, meaning the buyer may have to renegotiate agreements with key employees.
Consideration should be given as to whether there are any shareholders' agreements in place to ensure there are no clauses requiring shareholder approval in order to sell the shares. This can become problematic if there are any dissenting shareholders.
By contrast, on an asset purchase, the buyer is acquiring a bundle of specified assets, rights and sometimes assuming responsibility for certain liabilities (examples include - machinery, business premises, intellectual property rights and stock) from the company itself (not the shareholders). A buyer and seller will negotiate precisely which assets are to be included in the acquisition, and the assets which are not purchased under the agreement will remain with the selling company.
Assets to include
This method allows for a buyer to control and 'cherry pick' which assets to acquire, allowing them to leave any undesired assets and unwanted liabilities behind with the company. Alternatively, if a seller wanted to retain certain desired assets, they would be able to. This essentially means that there is a lower risk of the purchaser assuming undisclosed or unknown liabilities that he would acquire purchasing the whole company.
The Seller may then be left with any unwanted assets, liabilities and obligations. As such there is an additional process to wind down the remaining assets or liabilities and finally close the business. This contrasts to the 'clean separation' from the company and its future trading upon completion of a share sale (despite remaining liable to warranties for a period of time).
TUPE is applicable for both buyer and seller on an asset sale. These regulations seek to ensure that all employment rights of the employees of the target business are protected, imposing strict obligations and restrictions on the parties. These obligations make it extremely difficult to dismiss any employees because of the transfer. It's important that all parties are aware of these regulations, as any breach or failure to adhere to the statutory processes can result in significant financial implications.
Prior to embarking on the sale of your business, you must consider if you would like to make a clean break from your company as well as considering and negotiating what will be viable for the buyer. Before deciding on the type of transaction, you should seek advice from professional advisors. In addition to the legal and commercial elements outlined above, there will also be tax consequences to each method, which may drive a seller's decision. Our corporate team offer clear and comprehensive advice on the type of transaction to use and have significant experience in drafting share and asset purchase agreements.
Learn more about our Corporate department here