On a share deal, the buyer will normally acquire the entire issued share capital of the target company (‘Target Ltd’) from the shareholders of Target Ltd (the ‘Sellers’).
Some of the principal pros and cons of this approach are set out below, and in setting these out we have assumed that we are looking at a cash only deal with no equity issued as consideration.
The Buyer buys the Target Ltd shares from Seller shareholders
|Simplicity – the Buyer picks up all desired assets and business in a single package, which remain housed in Target Ltd – nothing is lost/left out||‘Warts & all’ – buyer picks up Target Ltd liabilities (whether or not known pre-completion – buyer beware!)
If Target Ltd owns assets, businesses or subsidiaries that the Buyer does not wish to acquire, a restructuring exercise may need to be carried out prior to completion – see below under ”Hive downs’ and other pre-sale restructurings’.
|The Buyer may want to extensively diligence for Target Ltd liabilities and will usually seek a fuller suite of warranty and indemnity protection than on an asset deal|
|Means of transfer is a stock transfer form as only one type of asset is being transferred, the Target Ltd shares|
|The acquisition of shares may be attractive to the Buyer if Target Ltd houses valuable tax assets, such as trading losses or capital losses that may be available to mitigate future tax liabilities of Target Ltd (although the use of carried forward losses following a change of control may be restricted by a range of anti-avoidance legislation aimed at preventing tax benefits from ‘loss buying’)||Tax history and liabilities remain with Target Ltd, and usually require a tax deed between the Buyer and the Sellers to apportion risk as regards tax issues|
|Sale proceeds usually paid straight to Target Ltd’s shareholders|
|Individual sellers may qualify for business asset disposal relief or investors’ relief (and therefore a lower rate of capital gains tax (currently 10%) on the sale proceeds)
Corporate sellers may qualify for the substantial shareholding exemption (‘SSE‘) (from corporation tax on chargeable gains) – where the SSE applies, it may also cover de-grouping charges that might otherwise arise (under the tax regime for chargeable gains) in respect of assets previously transferred intra-group to Target Ltd. De-grouping charges that would otherwise arise under the tax regime for intangible assets (such as patents, trade marks and goodwill) may be similarly ‘turned off’ where the SSE applies
No VAT chargeable on the sale of shares
|Stamp duty at 0.5% of the consideration is payable to HMRC (the Buyer usually pays)|
|Usually 100% shareholder approval is required to close (because they are all selling…!)
An uncontactable or dissident sell-side minority might need to be ‘dragged’ into the sale
|Watch out for change of (Target Ltd) control clauses in commercial contracts, senior executive employment contracts and leases (although consent process usually easier than on a business/asset sale, an email alone from the supplier/customer might be sufficient)|
|TUPE regulations usually do not apply (and usually there is no formal obligation to inform and consult employee representatives as to the change of control), but… >>>||Target Ltd still employs all employees and all historic and live employment obligations and liabilities remain in place – cost of redundancies and down-sizing to be factored in by the Buyer|
|Statutory controls on financial promotions and financial assistance may need to be considered|
|Professional costs usually lower than on an asset deal|