Asset Sale Versus Share Sale: What is the difference and the implications?
At times, business owners and founders will find themselves in a position of considering the disposal of their businesses for different reasons, including restructuring of their business, to focus on other ventures, retirement, or shutting down the business. It is very crucial for business owners to understand the transaction they are approaching prior to processing the same and identify the implications. Disposal in most cases will be either through the transfer of assets or the transfer of shares. In this article, we will elaborate on the main differences, the documents involved, and the advantages and disadvantages from a seller's standpoint.
WHAT IS AN ASSET SALE?
In an asset sale, typically the entire business undertaking is being sold. The parties to the transaction will be the company owning the assets that operates the business, and the counterparty will be the buyer. Thus, the recipient of the purchase price will be the company and not the shareholders of the company.
The buyer will be buying selected assets that are owned by the company and not the company as a whole. Thus, the buyer will not be receiving all the rights enjoyed by, and liabilities belonging to, the selling company unless such rights and/or liabilities are agreed to be transferred as part of the sale.
Assets that will be sold will vary according to the type of business and may include (i) movables such as machinery, furniture, goods, raw materials; (ii) real property, which can be in the form of leasehold, tenancy, and/or freehold; (iii) commercial agreements such as those with suppliers, clients, consultants; (iv) intellectual property rights such as trademarks, trade names, patents, trade secrets, and copyrights; (v)business/operating licenses; and (vi) business information such as clients details, suppliers, and business models.
If the asset subject of sale results in the business provided by the selling company being carried out by the buyer after the sale, then the Transfer of Undertakings (Protection of Employment) Regulations 2006 (known as TUPE) will apply and all employees who worked under the business will automatically transfer to the buyer. This means all the selling company’s employer rights, powers, duties and liabilities under or in connection with the transferring employees’ contract will pass to the buyer as the new employer.
It is crucial to note that every asset to be sold will need be specified in the transaction documents, as nothing will be assumed as part of the sale, contrary to the share sale, in which everything is assumed unless a clear carve-out is made. Therefore, if the asset is not specified in the transaction documents, then the asset will not be sold to the buyer.
WHAT IS A SHARE SALE?
In a share sale, the parties to the transaction will be the shareholders of the company owning its shares, and the counterparty will be the buyer. Thus, the recipient of the purchase price will be the shareholders and not the company.
The buyer will be buying the shares of the company with all its assets, rights, and liabilities. Normally, nothing owned by the company will be excluded however, exclusions to specific assets can be made and risk allocation in relation to certain liabilities can be shifted if it is agreed between the parties.
In a share sale, because the buyer is buying the company without having the option to pick and choose which asset to buy and which to avoid, the amount of protection needed and the due diligence to be undertaken by the buyer shall be extensive to understand the extent of liabilities and obligations the target company is committed to and bearing. An asset sale, on the other hand, gives the buyer the right to choose and pick what they want to buy. Accordingly, while a buyer will still undertake extensive due diligence, it is usually limited to the assets that they are looking to acquire.
WHAT ARE THE TRANSACTION DOCUMENTS INVOLVED?
Asset Purchase Agreement:
In an asset sale, the main transaction document will be the asset purchase agreement (APA). Additional documents may also be needed, including a disclosure letter and/or supplementary agreements that will always be determined in light of the assets subject to transfer.
An APA will entail the description of all assets that have been agreed to be sold by the seller company, the purchase price, the terms of payment, conditions precedent (if any), warranties, and in some events restricted covenants. According to the nature of the assets, if supplementary agreements are required, they will either be annexed to the APA or will be a condition precedent for the completion of the sale.
The APA will govern the general terms and conditions of the transaction, while the details regarding the specific transfer of some assets would be in specific agreements, which could include licensing agreements for the use of the intellectual property rights of the company, the sale or lease of the real property, and tripartite agreements with third parties to assign the relevant agreements.
Share Purchase Agreement:
In a share sale, the main transaction document will be the share purchase agreement (SPA). Additionally, share transfer forms will always be needed, and in some cases, a disclosure letter, tax deed, or service agreement with top management/directors could be required as part of the transaction. The SPA will entail the details of the target company, the shares, the purchase price, the terms of payment, conditions precedent (if any), warranties, warranty limitations, indemnities, and in some events restricted covenants.
For more details about the terms of an SPA, please visit (https://www.dragonargent.com/da-blog/what-legal-documentation-is-needed-for-buying-or-selling-a-company)
ADAVANTAGES AND DISADVANTAGES OF ASSET SALE AND SHARE SALE FROM SELLER PERSPECTIVE
After elaborating the main features of each type of sale and the main transaction documents involved, we will assess the advantages and disadvantages for each kind of sale in order to make it smoother for the seller in determining which structure could be more beneficial and efficient prior to initiating any steps.
| Advantages to the Seller in a Share Sale | Advantages to the Seller in an Asset Sale |
|---|---|
| Faster and less complex process, as the company is transferred as a whole, with all its rights, obligations, assets, and liabilities. | The company could choose to sell assets to different sellers or sell at a later stage. |
| No risk will remain with the sellers in relation to the target company except any potential liability under the transaction documents as a breach of warranty or an indemnity. | The seller is the company, so all warranties are given by the company and not the individual shareholders. Thus, less financial exposure for the individual shareholders. |
| Commonly used for raising funds and receipt of investments as well. | More practical if the company is only doing divestment of part of its business and retaining part of the business. |
| Disadvantages to the Seller in a Share Sale | Disadvantages to the Seller in an Asset Sale |
| The exposure is personally subject to the limitation on liability in the relevant agreements, as the warranties and indemnities are given by the seller shareholders individually. | Based on the nature of assets and business, it could entail a complex process for the transfer of operational agreements, real properties, and intellectual property licensing. Thus, negotiating several agreements. |
| Risk of price reduction in the event that the due diligence outcome highlights potential major issues and liabilities. | Some risks will remain with the company, including historical liabilities, taxes, and any asset that will not be transferred as part of the asset sale. |
| Warranties will be more extensive, and thus a disclosure letter will be needed to protect sellers. Thus, negotiations could be lengthier. | Some of the assets to be transferred, including agreements, may require consent of the counterparty in the relevant agreement. Accordingly, negotiations with a third party could affect the transferable assets. |
| Obtaining regulatory approvals in the event of a change of control in some industries could be complicated and not straightforward and is a lengthy process. | Following the sale, if all assets were sold, the shareholders have to deal with the liquidation of the company or striking it off. |
How can Dragon Argent help?
Dragon Argent’s corporate and commercial team can guide you through the processes including the most convenient structure based on the needs of each business owner, their circumstances and objectives. We can take the lead in drafting and negotiating all relevant transaction documents and ancillaries to make sure that the sale from initiation to completion is protecting the sellers’ interest, fair and following market practice.
Schedule a call with a member of our corporate and commercial team today to discuss you’re your needs under any disposal of your business either through a share sale or assets sale.
Written by:
Head of Corporate & Commercial Solicitor
Corporate & Commercial Solicitor
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