Asset sale
In an asset sale, the buyer acquires specified assets of the business rather than the shares in the company that previously owned them. The transaction documents need to identify what is included and deal with the transfer or assignment of relevant assets, contracts and leases.
Share sale
In a share sale, the buyer acquires shares in the company. The company itself continues to own its assets and remain party to its contracts and liabilities, subject to any change-of-control provisions or other restrictions.
Why buyers care about liabilities
A share acquisition can expose the buyer economically to liabilities or risks already sitting within the company. This is one reason share transactions often require detailed due diligence and carefully negotiated warranties and indemnities.
Why sellers care about structure
The sale structure can affect tax outcomes, transaction complexity and what the seller retains after completion. It should be considered before the parties become locked into heads of agreement.
Contracts, licences and consents
An asset sale may require separate assignments or novations. A share sale may avoid some transfers, but contracts or licences can still contain change-of-control provisions requiring consent.
Tax treatment
The tax consequences can differ significantly. GST, CGT and other issues should be reviewed with the legal structure so the contract reflects the intended treatment.
What happens to historic liabilities?
In a share sale, the company remains the same legal entity after completion. Its existing tax, employment, contractual and litigation exposures therefore remain inside the company, even though ownership of the shares changes. The buyer usually manages that risk through due diligence, warranties, indemnities, price mechanisms and sometimes escrow or retention.
In an asset sale, the buyer can often choose which assets and liabilities it assumes, but liabilities do not disappear automatically. Employee rules, contractual assumption, statutory successor rules and the practical need to take over customer obligations can still transfer economic risk.
Contracts and change of control
A share sale may avoid the need to assign every contract because the contracting company does not change. However, material contracts may contain change-of-control clauses that allow termination or require consent. Those provisions should be identified before signing.
Employees
In an asset/business sale, employees may move to the buyer under transfer-of-business rules and the parties need to allocate responsibility for entitlements. In a share sale, the employing company usually remains the employer, so employment technically continues, although transaction bonuses, change-of-control rights or key-person retention issues may arise.
Licences and approvals
Some statutory licences attach to the company and may be easier to preserve in a share sale; others require notification or approval when control changes. In an asset sale, a buyer may need a new licence rather than an assignment. Regulatory due diligence should occur before the structure is fixed.
Purchase price and working capital
Share sales often use completion accounts, locked-box mechanisms or working-capital adjustments because the buyer is acquiring the whole balance sheet. Asset sales more commonly allocate the price among goodwill, stock, plant and other assets. Those allocations can have tax consequences for both sides.
Security interests and debt
A share buyer needs to understand company borrowings and securities, including which debts will be repaid at completion and what releases are required. In an asset sale, the buyer should still search for security interests affecting transferred assets and require releases where appropriate.
Which structure is “better”?
There is no universal answer. Sellers may prefer a share sale for tax or clean-exit reasons; buyers may prefer an asset sale to reduce inherited liabilities. Regulatory approvals, licences, customer contracts, property, employees and financing can override those preferences. The structure should be chosen with legal and tax advice before heads of agreement harden into a commercial commitment.
Questions to settle in heads of agreement
- Is the buyer acquiring assets or shares?
- What liabilities stay with or move to the buyer?
- What debt or cash remains in the company?
- How will working capital or stock be adjusted?
- Which consents or regulatory approvals are required?
- What tax treatment does each side assume?