Two different transactions
In an asset sale, the purchaser acquires specified business assets and rights from the operating entity. In a share sale, the purchaser acquires ownership of the company itself. The business remains in the same company, with its historical contracts, assets and liabilities.
The commercial objective may look similar, but the legal and tax consequences are materially different.
Asset acquisition
An asset deal allows the parties to identify what transfers and what is excluded. The purchaser may have greater ability to avoid unknown historical liabilities, although liabilities can still arise through legislation, assumed contracts, employee arrangements or the transaction documents.
Individual assets, licences, leases, employees and contracts may require separate transfer, consent or novation. That can make implementation more involved.
Share acquisition
A share purchase can preserve the operating entity’s contracts and business relationships, subject to change-of-control provisions. However, the purchaser acquires the company with its history. Due diligence, warranties, indemnities, retention arrangements and tax protections therefore become particularly important.
Due diligence and price
The structure affects valuation and the matters investigated.
- Ownership and condition of assets
- Material contracts and consent requirements
- Employees and accrued entitlements
- Tax filings and disputed positions
- Litigation, complaints and compliance
- Debt, security interests and working capital
- Intellectual property and data
- Lease and property arrangements
Decide early
Structure affects duty, GST, income tax, capital gains tax, financing and the drafting of the agreement. Legal and tax advisers should coordinate before the parties become committed to a headline structure or price mechanism.