Asset sale vs. Share sale – key considerations from a buyer and seller perspective when structuring a business sale

March 10, 2023
Business Law

Asset sale vs. Share sale: When buying or selling a business owned by a private company, the two most common sale structures are a share sale or an asset sale. Each structure has its advantages and disadvantages, and understanding the differences between the two is crucial for both buyers and sellers. In this article, we explain the key differences between asset sales and share sales from the perspective of both buyers and sellers, highlighting the factors that should be taken into account when deciding which structure to use.

What is a Share Sale?

A share sale is where the shareholders of the company which carry on a business agree to sell 100% of their shares in that company to the buyer (or any other percentage of their shares as the case may be). On completion the buyer will become the controller of the seller’s company and take ownership of all of its assets and liabilities.

What are the legal implications of a Share Sale from a buying and selling perspective?

The advantages and disadvantages from a buying and selling perspective for a share sale are set out in the table below.

Share Sale	Advantages	Disadvantages
Buyer	Where the company has significant goodwill and a positive reputation, it may be preferable to buy the business by way of a share sale in order to maintain consumer/third party familiarity with the underlying entity behind the business. If the selling company has entered numerous third-party contracts such as leases or supply agreements, or owns a significant number of business names or other intellectual property, those assets will continue to be owned by the company after settlement. This can avoid the time-consuming and expensive process of obtaining each third-party’s consent to formally assign their agreements. A share sale structure can help the buyer to avoid or reduce stamp duty costs in relation to particular assets.	The main downside for a buyer in a share sale is the heightened risk which the buyer is exposed to. When acquiring shares in a company, a buyer steps into the shoes of the company and inherits all elements of the business and its prior conduct. This includes any pre-existing tax liabilities, liabilities owing to creditors and potential or active litigation claims against the company. As a result of this heightened risk, the buyer often needs to conduct a thorough due diligence process to uncover these potential liabilities and risks before acquiring the company. This can be a time-consuming and expensive process for both parties. Some third-party agreements entered into by the company may still require third party consent where there is a ‘change in control’ clause contained in the underlying agreement with the company.
Seller	The seller will avoid the need to deal with the release of security interests over the company itself, expediting the progress of the sale from a selling perspective. There can be a higher return for shareholders if the shareholders are able to access tax concessions which are not available in an asset sale. All client, supplier and employment contracts are able to remain with the company, and there is less administration and risk to the seller to ensure clients, suppliers and employees stay with the company for the benefit of the buyer after settlement.	Due to the increased liability taken on by the buyer, the seller is often required to provide more extensive indemnities and warranties to provide the buyer with comfort to enter the transaction. These warranties and indemnities can extend for a significant period after settlement, and may require the directors of the company to provide personal guarantees, exposing them to personal liability. The buyer may require a portion of the purchase price to be withheld from the seller after settlement for an extended period of time to protect the buyer from any breach of warranty by the seller which arises after settlement. The seller will need to ensure it deals with its internal share transfer policies, such as any pre-emptive rights offered to existing shareholders, before entering a binding agreement with the buyer.

Share Sale

Advantages

Disadvantages

Buyer

Where the company has significant goodwill and a positive reputation, it may be preferable to buy the business by way of a share sale in order to maintain consumer/third party familiarity with the underlying entity behind the business.

If the selling company has entered numerous third-party contracts such as leases or supply agreements, or owns a significant number of business names or other intellectual property, those assets will continue to be owned by the company after settlement. This can avoid the time-consuming and expensive process of obtaining each third-party’s consent to formally assign their agreements.

A share sale structure can help the buyer to avoid or reduce stamp duty costs in relation to particular assets.

The main downside for a buyer in a share sale is the heightened risk which the buyer is exposed to. When acquiring shares in a company, a buyer steps into the shoes of the company and inherits all elements of the business and its prior conduct. This includes any pre-existing tax liabilities, liabilities owing to creditors and potential or active litigation claims against the company. As a result of this heightened risk, the buyer often needs to conduct a thorough due diligence process to uncover these potential liabilities and risks before acquiring the company. This can be a time-consuming and expensive process for both parties.

Some third-party agreements entered into by the company may still require third party consent where there is a ‘change in control’ clause contained in the underlying agreement with the company.

Seller

The seller will avoid the need to deal with the release of security interests over the company itself, expediting the progress of the sale from a selling perspective.

There can be a higher return for shareholders if the shareholders are able to access tax concessions which are not available in an asset sale.

All client, supplier and employment contracts are able to remain with the company, and there is less administration and risk to the seller to ensure clients, suppliers and employees stay with the company for the benefit of the buyer after settlement.

Due to the increased liability taken on by the buyer, the seller is often required to provide more extensive indemnities and warranties to provide the buyer with comfort to enter the transaction. These warranties and indemnities can extend for a significant period after settlement, and may require the directors of the company to provide personal guarantees, exposing them to personal liability.

The buyer may require a portion of the purchase price to be withheld from the seller after settlement for an extended period of time to protect the buyer from any breach of warranty by the seller which arises after settlement.

The seller will need to ensure it deals with its internal share transfer policies, such as any pre-emptive rights offered to existing shareholders, before entering a binding agreement with the buyer.

What is an Asset Sale?

An asset sale is the sale of some or all of the assets owned by the seller to another individual or entity. Assets which are commonly sold include plant and equipment, land, buildings, machinery, stock, goodwill, contracts, records and intellectual property (including domain names and trademarks). After the sale occurs, the seller retains ownership of its company structure.

What are the legal implications of an Asset Sale from a buying and selling perspective?

The advantages and disadvantages from a buying and selling perspective in relation to an asset sale are set out in the table below.

Asset Sale	Advantages	Disadvantages
Buyer	The buyer will not inherit the liabilities or prior conduct of the seller’s company after settlement, and will only need to worry about its liability associated with the assets it purchases. This gives the buyer greater certainty and protection in the transaction. The buyer can choose which assets it wants to purchase and leave unwanted assets with the seller. The buyer may be able to select which employees it wishes to transfer with the business without any concern for unfair dismissal claims, and may be able to negotiate with the seller for reduced liability over the employee entitlement liabilities accrued prior to settlement.	The buyer will need to negotiate with the seller and third parties for the transfer of individual contracts with third parties (e.g. suppliers, clients, manufacturers). This will include obtaining the consent of those third parties for the novation of those agreements. Some third parties may not agree to this process, or may impose onerous conditions or fees for their transfer, which can often cause delay or frustrate a transaction between exchange and settlement. Increased stamp duty costs may be payable on the transfer of any dutiable assets included in the sale.
Seller	The seller will often be required to provide fewer warranties and indemnities to the buyer as the transaction exposes the buyer to significantly less liability. The seller can exclude any specific assets which are not intended to be included in the sale.	The liabilities of the company which owns the asset(s) will remain the responsibility of the seller after settlement. The seller will need to procure the releases of all security interests affecting the assets of the business to ensure they are free from all encumbrances. This may also require paying out funds owing to a financier of a particular asset on settlement.

Asset Sale

Advantages

Disadvantages

Buyer

The buyer will not inherit the liabilities or prior conduct of the seller’s company after settlement, and will only need to worry about its liability associated with the assets it purchases. This gives the buyer greater certainty and protection in the transaction.

The buyer can choose which assets it wants to purchase and leave unwanted assets with the seller.

The buyer may be able to select which employees it wishes to transfer with the business without any concern for unfair dismissal claims, and may be able to negotiate with the seller for reduced liability over the employee entitlement liabilities accrued prior to settlement.

The buyer will need to negotiate with the seller and third parties for the transfer of individual contracts with third parties (e.g. suppliers, clients, manufacturers). This will include obtaining the consent of those third parties for the novation of those agreements. Some third parties may not agree to this process, or may impose onerous conditions or fees for their transfer, which can often cause delay or frustrate a transaction between exchange and settlement.

Increased stamp duty costs may be payable on the transfer of any dutiable assets included in the sale.

Seller

The seller will often be required to provide fewer warranties and indemnities to the buyer as the transaction exposes the buyer to significantly less liability.

The seller can exclude any specific assets which are not intended to be included in the sale.

The liabilities of the company which owns the asset(s) will remain the responsibility of the seller after settlement.

The seller will need to procure the releases of all security interests affecting the assets of the business to ensure they are free from all encumbrances. This may also require paying out funds owing to a financier of a particular asset on settlement.

Conclusion: Asset sale vs. Share sale

In conclusion, the decision between a share sale and an asset sale is a crucial one for both parties involved in a business sale transaction. Each approach has its own advantages and disadvantages, which must be carefully considered in light of the specific circumstances of the transaction, and from a buying and selling perspective. Ultimately, the choice between a share sale and an asset sale will depend on the priorities and goals of the parties involved and should be made with the guidance of experienced legal counsel and tax advice.

Important Disclaimer: The content of this article is general in nature and for reference purposes only. It does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.

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