by Tom Allen
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Buying or selling a company is a significant undertaking, and one you want to get right, whether you are the acquirer or the seller. Determining the appropriate structure – whether to acquire shares or assets – is critical to a successful transaction and is a consideration to be made at the outset of any M&A strategy.
In contemplating selling or acquiring a company or its assets there are a range of different structures that may be used (to varying degrees of complexity) to bring about a change in ownership. In essence these structures fall under to two distinct categories (or, sometimes a combination of the two). They are:
- (i) Purchase of company/business assets (“Asset purchase”);
- (ii) Purchase of shares from the existing shareholders (“Share purchase”);
- (iii) A third possibility is for a merger or share-for-share exchange.
As may be expected, the tax implications that the acquirer and seller need to consider will be amongst the key drivers of the method of acquisition/sale ultimately decided upon (potential liabilities will also be a primary concern for an acquirer of shares). As a generalization, the tax advantages to the selling party under a share deal will usually be greater than the tax advantages enjoyed by the acquirer, while an asset purchase will often be more tax efficient for an acquirer than a seller. For this reason, sellers usually prefer share deals and acquirers, asset deals. Overall, however, the choice of share or asset deal will be influenced by a myriad of other legal, financial and personal considerations.
Some assets may be more desirable to an acquier than others.
Share or Assets?
When assets are acquired in an M&A context, only specific assets of a company identified are transferred (sometimes referred to as “cherry picking” – which may or may not substantially cover all of the Target’s assets). Assets may include equipment, fixtures, property, leaseholds, licenses, goodwill, trade names, and inventory. However, the most valuable “assets” in an asset deal are usually the employees, intellectual property (product IPR) and customer contracts/relationships. Asset deals typically do not include the transfer of liabilities or cash and the seller will usually retain any debt obligations.
Unless the seller is only divesting a part of its business operations, they will typically not continue operations. The selling company may become a “shell company” that is “wound-up” with funds (net of any outstanding debt obligations) distributed to shareholders - this process is typically referred to as liquidation. It will be the responsibility of the shell company to terminate contracts with any employees, etc. not transferring as part of the asset deal. The shell company will retain all the liabilities (which will need to be settled before funds can be distributed to shareholders). When acquiring shares, the acquirer obtains legal ownership of the Target, including all of its assets, liabilities and obligations (even those a prospective acquirer may not know about at the time of deal close).
The assets falling under a share deal tend to be similar to that of an assets sale. Any assets (or liabilities) not wanted by the acquirer will need to be disposed of or settled prior to the deal. Unlike an asset deal, share deals do not require separate conveyances of each individual asset because the title of each asset lies within the Target.
A purchase of assets is often logistically more complex than a share deal due to the need to transfer each of the separate assets comprising the company and to obtain approvals of any third party contractors (or funders). However, a share deal is typically the subject of lengthier acquisition documents (notably the SPA) because of the acquirer’s need for assurances and protections in the form of warranty protection and tax covenants in respect of any known and unknown liabilities within the Target (the due diligence process can serve to allay some initial concerns of the acquirer in these areas).
An asset deal will typically offer more flexibility, where the acquirer will often take the opportunity to “cherry pick” the assets it wishes to acquire. This is not possible under a share deal unless the desired assets are “hived down” (transferred) to a separate company by the seller pre-deal. If, for instance, a seller has liabilities, which an acquirer wants to avoid, or if only part of the business operations of the Target are to be sold, an asset purchase will be preferable.
An asset deal can provide an acquirer with the opportunity to "cherry pick."
Overall, the structure of any deal can have a significant impact on the future for both the acquirer and seller. Many other factors, such as the acquirer’s and Target’s corporate structures, and the industries in which they operate, can also guide the decision of Shares or Assets. It is therefore important for both the acquirer and seller to speak with their respective legal and financial advisers early in the process to fully understand the issues at play and to decide on an approach that will produce the intended results.