Share Sale v Asset Sale: Key Differences
There are two key ways of acquiring a business in the UK, by asset purchase or share purchase. As the name suggests, in an asset purchase, the buyer acquires certain assets and rights relating to a business. Whereas in a share purchase, the buyer acquires shares in the company carrying on the business (i.e. the only transferring assets are the shares in the company).
In this article, we set out the key differences between the two approaches from a buyer’s perspective.
Key differences
| Asset purchase | Share purchase | |
| Assets | Buyer can pick and choose the specific business activity and individual assets of the company it wants to purchase e.g. customer lists, benefit of contracts, leases, business name, licenses, goodwill and inventory. Seller remains the owner of the entity that runs the business. If third party does not agree, transfer of asset may not be possible i.e. contract with restrictions on assignment (leases). | Buyer is taking over a company including its assets, so it is not necessary to identify each asset or right of the target business. |
| Customers/suppliers | Customers and suppliers who are signed up to automated payments or recurring payments will need to be transferred to the buyer upon completion. Some may not follow the buyer. | Normally move with the business, though they may leave post-sale e.g. if there are any change of control provisions in the contracts with them. |
| Liabilities/obligations | Seller usually retains its liabilities and obligations. | Buyer purchases historic liabilities and ongoing/future obligations of the company (whether or not aware of them). |
| Contracts/licenses | Any contracts being acquired will need to be assigned or novated and may need to be renegotiated. | Continuity is generally maintained as contracts remain in place, subject to change of control provisions, which need to be considered. |
| Seller(s) | The company that owns the assets will conclude the sale (subject to director approval) and individual shareholder consent is not required (unless there is a shareholders’ agreement). | Buyer must obtain approval from each selling shareholder – if any of the shareholders are untraceable or unwilling to participate – deal is unlikely to proceed unless there are ‘drag-along’ provisions in any shareholders agreement between the selling shareholders or the articles of the company. |
| Due diligence | Because exposure to unknown liabilities is limited, the buyer typically spends less time and money on conducting due diligence. | Due diligence is usually longer and more intrusive in a share purchase as the buyer will inherit all the company’s liabilities and so wants to be fully aware of these. |
| Employees | Asset purchases usually require consultation with employees and prescribed procedures are to be followed in accordance with TUPE¹. | Buyer responsible for honouring existing employee contracts. |
| Buyer protections | Since the seller retains parts of the business and/or certain assets and liabilities, they usually give fewer warranties and indemnities to the buyer. | Seller usually retains responsibility for certain existing obligations, through lengthy warranty and indemnity cover as well as guarantees. |
| Transfer formalities | There will be specific transfer formalities for different categories of assets and rights. | Transfer formalities relate to the stock transfer form(s) and any other appointments that may change on completion of the share sale (e.g. appointment and resignation of directors of the company). |
Summary
In summary, the most significant difference between a share purchase and asset purchase is that in an asset purchase, the buyer has the ability to control and pick which assets are being purchased, allowing the buyer to choose only the best or key assets and leave behind any liabilities.
In contrast, when buying the shares of a company, the company’s separate legal personality means that the buyer has no control over what is obtained and will need to carry out legal and financial due diligence to ascertain all of the assets and liabilities.
The flexibility of an asset deal means that this structure is often favoured by buyers and sellers, especially where a business has significant liabilities which can be left behind. In some ways an asset purchase can be more like starting a new business as the original company that runs the business will still exist, but with the new owner of assets taking the business forward.
Share purchases are often the acquisition method of choice as they offer a clean break for a seller and, owing to the transfer occurring at a shareholder level, is generally a less complex transaction.
The Corporate & Commercial team at Greenwoods has significant experience of advising on, drafting and negotiating asset and share purchase agreements. If you want advice concerning the acquisition or sale of assets or shares, we would be happy to assist.
¹ Transfer of Undertakings (Protection of Employment) Regulations 2006
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