Share vs. Asset Purchases: Finding the Right Structure

One of the earliest decisions in any M&A transaction involves choosing between a share purchase (acquiring the entire company) or an asset purchase (selectively acquiring business assets and liabilities). This choice can significantly influence risk allocation, tax treatment, and the level of consent required from third parties. Below, we explore the core distinctions, the pros and cons of each approach, and considerations that drive buyers and sellers toward one path or the other.

Liability Differences

1. Share Purchase—Taking It All
   • Historical Liabilities: When buying shares, the new owner inherits all existing and potential liabilities (tax arrears, litigation, environmental exposures) of the target company.
   • Warranties & Indemnities: To mitigate risks, buyers typically demand robust warranties and indemnities from sellers concerning any undisclosed liabilities.
2. Asset Purchase—‘Cherry-Picking’
   • Selected Assets Only: The buyer can acquire specific assets (such as inventory, equipment, IP) while excluding less desirable ones.
   • Limited Liability Transfer: In principle, unwanted debts or legacy disputes remain with the seller’s entity. However, certain liabilities (e.g., environmental or employee-related) may still follow the assets if mandated by law.

Key Takeaway: A share purchase is simpler from an operational continuity perspective but riskier for liabilities. An asset purchase allows greater control over what is acquired but may be more logistically complex.

Tax Implications

1. Stamp Duty & Transfer Taxes
   • Share Deals: Typically attract lower stamp duty rates in many jurisdictions; in some cases, reliefs may apply if the shares are in a company incorporated in a favorable jurisdiction.
   • Asset Deals: Certain assets (especially real estate) can trigger higher transfer taxes or capital gains obligations for the seller.
2. Depreciation & Carry-Forward Losses
   • Buyer Considerations: Acquiring shares means inheriting the company’s existing tax attributes (like carry-forward losses), which might be beneficial.
   • Seller Considerations: In an asset sale, the seller’s entity might face capital gains tax on assets sold at a profit, and potentially liquidation taxes on distributing proceeds.
3. Cross-Border Nuances
   • VAT & Customs: In international contexts, transferring tangible assets across borders can incur customs or VAT liabilities.
   • Tax Relief Mechanisms: Some jurisdictions offer relief for business reorganizations or intra-group transfers.

Practical Insight: Both buyer and seller should work closely with tax advisors early to project net proceeds (for the seller) and after-tax cost (for the buyer). This can influence the final negotiation of purchase price.

Consent & Third Parties

1. Lease Transfers
   • Share Purchase: The company remains the tenant, so typically no landlord consent is needed for a change in the shareholder base (though some leases have “change of control” clauses).
   • Asset Purchase: The buyer must formally assume or re-negotiate leases, often requiring explicit landlord approval.
2. Supply & Customer Contracts
   • Share Purchase: Contracts remain in force since the contracting entity isn’t changing; again, watch for “change of control” provisions.
   • Asset Purchase: Contracts might need to be assigned or novated, requiring supplier or client cooperation.
3. Employee Considerations
   • Share Purchase: Staff remain employed by the same entity; no new employment contracts required.
   • Asset Purchase: TUPE (Transfer of Undertakings) or similar labor laws may mandate automatic transfer of employees to the buyer on existing terms, necessitating notifications and possibly consultation.

Note: Failing to secure the appropriate consents or notify key contract parties can jeopardize the viability of an asset transaction.

Complexity & Cost

1. Asset Deals—Multiple Consents & Filings
   • Legal & Logistical Steps: Each asset (real estate, intellectual property, equipment) may demand a separate transfer deed or contract.
   • Timing: Negotiations with landlords, suppliers, and regulators can prolong the timeline.
   • Higher Transactional Costs: Increased documentation, potential valuations for each asset, and possible “cherry-picking” negotiations can drive fees upward.
2. Share Deals—Often Operationally Simpler but Risk-Laden
   • Single Transaction: One share purchase agreement covers the entire company—fewer separate documents needed.
   • Due Diligence & Post-Closing Protections: Because the buyer inherits all liabilities, more extensive due diligence and carefully drafted warranties/indemnities are critical.
   • Ongoing Entity Structure: The corporate identity remains intact, which can be advantageous for continuity in contracts, permits, and licenses.
3. Negotiating Price & Risk-Sharing
   • Buyer’s Perspective: If an asset deal is more complex but significantly reduces liability exposure, the buyer might be willing to pay a premium.
   • Seller’s Perspective: A share deal could secure a cleaner exit—particularly if indemnity durations and liability caps are set—but might yield a lower price if the buyer demands risk discounts.

Conclusion

Choosing between a share purchase and an asset purchase fundamentally shapes the deal’s risk profile, tax outcomes, and contractual overhead. A share purchase is usually less burdensome regarding consents but burdens the buyer with the target’s entire history, including hidden liabilities. An asset purchase allows selective takeover of profitable segments while limiting exposure to undesirable obligations, yet often requires multiple third-party consents and can be more complex to execute. Thorough legal, financial, and tax planning—aligned with the overarching strategic goals of both buyer and seller—ultimately determines which route best serves their interests.