Growing a successful business can often be a lifetime’s work. But what happens when you’ve realised your growth ambitions?
As part our Exploring Exits series, we are delving into the options available to business leaders wanting to plot out the best exit route for them, taking in companies of every size and sector.
In this article, Rachel Brassey explores share sales and asset sales as a route to exit and weighs up the associated benefits and drawbacks.
What is the difference between a share sale and an asset sale?
Share sale – In a share sale, the purchaser will acquire ownership of the company which carries on the target business by purchasing its share capital from its shareholders. Therefore, the buyer will take on the ownership of all the assets, rights and liabilities of the target business.
Asset sale – In an asset sale, the purchaser acquires certain assets and rights and may take on specific liabilities which altogether make up the target business. The assets, rights and liabilities which will be acquired by the buyer will be a point of negotiation for the parties.
What are the positives of an asset sale?
When purchasing the assets of a company, the buyer has the ability to pick and choose exactly what assets and liabilities it wishes to assume. Therefore, the buyer can leave any unwanted assets in the seller’s control. This may also benefit the seller where they wish to dispose of a smaller part of a larger operation.
There is also less requirement for shareholder approval in an asset sale and it may even be possible to forego shareholder consent entirely depending on the company’s articles of association and any investment or shareholder agreements that it is party to.
What are the negatives of an asset sale?
It can often be difficult to identify exactly what is being bought and sold. Furthermore, it can be difficult to gain consent from third parties, for example if the target has the benefit of a contract which the buyer wishes to assume.
The transaction will also be caught by TUPE regulations. TUPE regulations protect the employment rights of the employees of the target and any dismissal made because of a TUPE transfer will be automatically unfair.
What are the positives of a share sale?
Share sales are, in theory, simpler than asset sales as there is no need to identify which assets are transferring because there is no change in the ownership of such assets. They also provide the seller with a completely clean break – they are not left holding any assets nor are they left with the burden of any unwanted contracts.
TUPE regulations do not apply to share sales, therefore there is no need to inform and consult with employees.
What are the negatives of a share sale?
As the whole business of the target is being acquired, it is essential that any buyer undergoes a full due diligence procedure in order to ascertain the extent of the target business’ liabilities and obligations.
If there are multiple shareholders of the target, they will all need to agree to sell their shares if the buyer is looking to obtain 100 per cent of the issued share capital of the target. This can cause problems where there are untraceable or unwilling shareholders and there are no ‘drag along’ provisions contained in the target’s articles of association or any shareholders’ or investment agreement that it is party to.
Rachel is a solicitor in Brabners’ corporate team. She regularly advises on issues such as acquisitions and disposals of shares and assets as well as investments, due diligence and drafting documentation including articles of association.
In the next article in this series, insolvency specialist Nikki Whittle will look at Members Voluntary Liquidation.
