Structuring an Acquisition: The Difference Between Asset Purchases and Share Purchases
posted 28th March 2019
If you are thinking of acquiring a business, it is worth bearing in mind the different legal structures which are available to you in order to select an option which best fits your specific circumstances.
Here, Greenaway Scott take a look at asset purchases and share purchases, providing an overview of the key characteristics of each to help you decide which route is best for you and your business.
Asset Purchase
An asset purchase consists of the buyer (which is likely itself a company) buying the assets that make up a business. These assets could include the more commonly thought of assets including property, plant and machinery (known as tangible assets), or alternatively could be intangible assets including intellectual property or goodwill. To effect an asset purchase the buyer must purchase each asset it wishes to buy under an asset purchase agreement from the owner of the asset(s). It may also follow that whilst entering the asset purchase agreement contractually commits the buyer to buy and the seller to sell the assets, the assets in question may have a particular procedure that needs to be followed in order to effect the legal transfer. This could mean that more legal work is required which could be seen as a drawback. However, a key advantageous feature of the asset purchase is that the buyer can elect which assets it wishes to buy.
Share Purchase
A share purchase consists of the buyer purchasing the shares in a company which owns all of the assets that make up the target business under s share purchase agreement. An important distinction from an asset purchase is that with a share purchase the buyer becomes the owner of the company which owns all of the assets. This has both advantageous and disadvantageous implications. Positively, the buyer will avoid the need to follow different procedures to transfer certain legal assets separately, however a potential drawback of using a share purchase is that the buyer cannot be as selective as it could if it were to use the asset purchase. Whilst the buyer can elect to not pick up responsibility for certain liabilities if using an asset purchase using the share purchase will mean that the buyer picks up the liabilities of the target company if there are any.
How do the structures affect key areas of my acquisition?
Contracts
Asset Purchase: if you as the buyer elect for an asset purchase agreement, any contracts that the target business has in place with third parties will need to be novated to reflect the fact that the party to the contract has changed. Novation is a legal procedure and will result in further legal work and its success is dependent upon getting the consent of the third party to the contract.
Share Purchase: If you as the buyer elect for a share purchase, in theory the above issue is avoided as the target business stays as the party to the contract so no novation is required. However, be wary of any change of control clauses that allow a party to a contract to terminate if the control i.e. ownership of the target business changes. This would be a matter for the buyers legal advisers to look out for during the due diligence exercise.
To summarise, both asset purchases and share purchases have their distinct features however many of the perceived drawbacks can be dealt with by seeking legal advice early on in your plans.
If you want to discuss how best to structure your acquisition including some options which have not been detailed in the above article, please feel free to get in touch with someone from our corporate team who would be happy to assist you. Please contact us at corporate@greeenawayscott.com or call us on 029 2009 5500 to speak to one of our team.
The information contained in this article is for information purposes only and is not intended to constitute legal advice.
