Deciding to sell a business built up over the years might be a difficult decision for a seller to make. However, there are circumstances where selling the business may be the right decision, rather than passing it on to the next generation. Once a seller decides to sell and identifies a potential buyer, the parties need to consider which transaction structure is most appropriate. In the UK, there are two principal ways to sell or acquire a business: selling the company itself by transferring its shares, or selling selected assets of the company. This article highlights several practical legal differences to consider when selling or acquiring a business.
Sale of shares
In a share sale, the buyer usually purchases all or a majority of the shares from the seller and becomes a new shareholder of the company. The company continues to operate under new ownership. If the sellers intend to sell the entire company, a sale of all the shares can provide a clear exit, because the buyer will usually acquire ownership of the company together with its assets, rights, liabilities and employees. As the buyer effectively takes on the company with its existing rights and liabilities, this may also include unwanted or unexpected liabilities. It is therefore important for both parties to take legal advice and protect their position before completing the sale.
Sale of assets
In an asset sale, the buyer purchases certain assets, which usually include goodwill, contracts, intellectual property rights and other assets connected with the business, either from a selling company, or the individuals or partners operating the target business. This structure can put the buyer in a preferable position because it may allow the buyer to choose the desired assets and leave unwanted assets and related liabilities with the seller. This may be less favourable for a seller, because, when operating through a company, the company will need to continue to deal with the retained assets and liabilities.
What happens to the business contracts?
Dealing with the transfer of business contracts is usually simpler in a share sale than in an asset sale. In a share sale, the company remains a party to its business contracts, so those contracts will usually remain in force. However, certain contracts may contain change of control provisions or restrictions relating to changes in the company’s shareholders or directors. If a contract contains this type of provision, the relevant counterparty may need to be notified before the sale and their consent obtained to avoid them being able to terminate the contract.
In an asset purchase, once the parties have identified which assets will transfer to the buyer and which assets will remain with the seller, they must deal with the formalities of transferring those assets. Certain contracts may require the consent of the relevant counterparty before they can be transferred. This is usually dealt with by assignment or novation. In some cases, contracts do not allow automatic assignment to a new buyer, and novation of each contract may be required to transfer the benefit and the burden of the company’s business contracts to the buyer. For this reason, transferring assets, including business contracts and intellectual property rights, is usually more complex in an asset purchase than in a share purchase.
What happens to the company’s employees?
One of the key differences between a share sale and an asset sale relates to the protection and transfer of employees.
In a share sale, the company remains the employer and the company’s employees remain employed by the company. Therefore, the process relating to the employment relationship is more straightforward, and employees are usually informed about the change in the company’s shareholders after completion of the share sale.
By contrast, in an asset sale, both the seller and the buyer may have obligations to inform and consult with employees before completion. Where a business is transferred as a going concern, the seller and buyer must comply with the Transfer of Undertakings (Protection of Employment) Regulations 2006/246 (TUPE). To ensure continuity of employment under TUPE, employees are generally automatically transferred to the buyer as their new employer. Under TUPE, the seller is also required to provide the buyer with employee liability information and related employment particulars at least 28 days before the asset transfer takes place.
Take tax advice before making a decision
Alongside the legal differences between a share sale and an asset sale, the tax treatment differs significantly and may influence which approach the parties decide to take. A share sale is often more tax efficient for the seller, whereas an asset sale may provide certain tax advantages for the buyer. It is therefore important for the parties to take appropriate tax advice before proceeding with the transaction.
How we can help
Overall, both approaches—the sale of shares and the sale of assets—serve the same broad objective: enabling a seller to sell the business and a buyer to acquire it. However, the legal and practical implications can be very different. This article highlights several important differences, but the list is not exhaustive. Our legal team can provide advice and support throughout the sale or purchase process, helping to make the transaction more straightforward and work towards a successful and favourable outcome for the parties.
