Shares or assets? A great deal more than meets the eye

When deciding whether to buy or sell a business one of the first decisions for the parties will be whether the deal should be structured as a share purchase or an asset purchase. Although the commercial objective of the two structures is the same – the buyer acquiring the profits and related assets of the target business – the legal effect of the two transactions is very different. Whether a party is a buyer or seller will affect how they perceive the two alternatives and which they would prefer. Part of the negotiation process will involve agreeing which is the best method to adopt.

So what are the differences between the two structures and how do they each affect a seller and a buyer?

Share purchase and asset purchase – what is the distinction?

A company is a separate entity in its own right, distinct from its owners – the shareholders. Whilst the shareholders own shares in the company, it is the company that owns its assets and liabilities.

  • share sale involves the shareholders selling their shares in the target company to the buyer. The target company continues to operate its business and it is only the ultimate ownership of that company that changes. For employees, customers and suppliers of the business, it will appear to be “business as usual” as they continue to be employed by, and contract with, the target company. The sale may have little impact on their day to day business.
  • With an asset sale, however, it is the target company itself which sells its assets (such as land, plant and machinery, contracts, debts, etc) to the buyer. To the outside world dealing with the business it will be obvious that ownership of that business has changed as it moves from the selling company to the buyer. The target / seller will continue to exist after the sale although, if it has sold all its assets and undertaking, it will be an empty shell.
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