News & Insight

M&A September 17, 2019
UK acquisitions: do you buy shares or assets?  And how do US buyers approach that question?

UK acquisitions: do you buy shares or assets? And how do US buyers approach that question?

Shares or assets?

A threshold question for a buyer (if not also a seller) in UK M&A is whether to acquire the target company’s share capital or the target company’s assets.  The choice of approach will send the parties down fundamentally different paths.  Failing to choose the correct path at the outset of a deal usually results in delay and increased costs, if not endangering the closing of the deal itself.

Set out below is our take on the pros and cons of structuring a transaction as a share deal and then an equivalent analysis for an asset or business deal.  These are the key points to think about when structuring a UK acquisition.

Further below are brief thoughts from a US perspective on how US buyers think about the shares vs assets decision, written by one of our best friend law firms, Loeb & Loeb LLP.

Do bear in mind of course that nothing in this Insight piece constitutes legal advice nor should it be relied upon when entering into any particular transaction, and in entering into any particular transaction you should take professional advice from suitably qualified advisors.  Thoughts in this piece will also go out of date one day.  When market practice changes so too should the advice on structuring deal.

Share deals

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.

Share deal

The Buyer buys the Target Ltd shares from Seller shareholders 

Pros

Cons

 

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

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 this is restricted by a range of anti-avoidance legislation)  

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
 

 

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 an 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
Individual sellers may qualify for entrepreneurs’ relief or investors’ relief (and therefore a lower rate of capital gains tax (currently 10%))

Corporate sellers may qualify for the substantial shareholding exemption (“SSE”) (from corporation tax on chargeable gains) – where the SSE applies, it may also apply to de-grouping charges

No VAT chargeable on the sale

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

Professional costs usually lower than on an asset deal

Asset (and business) deals

On an asset deal, the Buyer will acquire the assets of Seller Ltd if not also the Seller Ltd’s business as a going concern.

Since it is Seller Ltd that is selling the assets and business to the Buyer – and not Seller Ltd’s shareholders – an asset deal is fundamentally different to a share deal where it is the Target Ltd shareholders selling their shares to the Buyer.

The pros and cons of this approach are set out below, and in setting these out we have assumed that we are also looking at a cash only deal with no equity issued as consideration.

 Asset (and business) deal

 The Buyer acquires target business and assets from Seller Ltd, which may then distribute the proceeds to Seller Ltd shareholders

Pros

Cons

Control – the Buyer (and Seller Ltd) can ‘cherry-pick’ the assets it acquires and leave behind anything else it does not want (including liabilities)

In a distressed/insolvency scenario or where Seller Ltd business is the subject of significant potential liabilities, buying only the assets is often desirable

Useful/desirable if buying a division from a group not housed in a separate subsidiary (absent a hive-down)

Complicated and ‘messy’ – assets don’t transfer automatically by law and need to be individually assigned or transferred across piecemeal

It is sometimes hard to identify exactly which assets are part of a business being sold and care needs to be taken that the purchase documents accurately reflect what is and what is not being transferred

Integration of those assets post-close into the Buyer/Buyer group is often a major exercise – they don’t come pre-packed as is the case on a share sale

The Buyer may be more relaxed about due diligence as it is concerned with acquiring specific assets only and can specifically exclude liabilities from the sale

In particular, the Buyer will not inherit Seller Ltd’s tax history in full (although care should be taken with regard to certain types of taxes and compliance obligation, such as VAT and PAYE) – this means that normally relatively few tax warranties and no tax deed will be required

 

 

Instrument(s) of transfer required for each asset class – e.g. real estate requires formal conveyances/assignments, contracts have to be formally assigned or novated, IP will require formal assignments, new permits & licences may be required for Buyer Ltd, etc

If not done properly then legal title to certain assets may inadvertently be left behind

Some of these will require consent or action from a third party which can add significant complications and/or delays

Great care will need to be taken if personal data is amongst the assets being sold – further thoughts on data further below from HLaw’s Husna Grimes >>>
Complexity as regards sale proceeds – consideration payable usually needs to be moved out of Seller Ltd and into the Seller Ltd shareholders’ hands post completion

Tax treatment of extraction needs to be assessed by Seller Ltd shareholders

 

 

Existing customers and business relationships do not automatically transfer over to the Buyer – specific written assignments are usually required, if indeed the assets can be transferred at all
 

 

Assuming there is a transfer of a business, TUPE applies as regards Seller Ltd’s employees meaning that certain employees may automatically transfer with the business by operation of law

Buyer Ltd may have no option but to take on employees on their current terms

There will probably be an obligation on Seller Ltd and the Buyer to inform and consult the employee representatives of their affected employees pre-completion – this may impact on the sale timetable.  There are potentially costly penalties for failing to do this

Certain tax relief may apply for intangible assets, where they wouldn’t on a share deal

The amount paid by Buyer for individual assets will normally be those assets’ base cost

Conversely, on a share deal, there is no step up in base cost for assets held by Target Ltd

If the transfer is not the sale of a going concern, VAT (at a current rate of 20%) is payable to HMRC to the extent the transfer of Target’s assets gives rise to a taxable supply so the VAT treatment of the transfer of each type of assets needs to be evaluated

SDLT may be payable on real estate transferring

Tax assets (such as carried forward trading losses) are not available to be utilised going forward from completion

Position as regards capital allowances to be diligenced

Since Seller Ltd is selling, limited involvement is required from its shareholders Sale of the business and key assets may need investor consent, if Seller Ltd is VC/PE backed
If there is nothing left in Seller Ltd following the sale, Seller Ltd would usually be wound up post completion, incurring further professional costs and admin
Legal and professional costs are usually higher, sometimes much higher, than on a share deal

 

Thoughts from a US perspective

“Most of the considerations described above in comparing the pros and cons of share and asset deals apply equally to deals done in the US market.

If a US entity is the buyer, tax considerations and accounting treatment will most often be the primary determinants of the acquisition structure. As a general rule, where such treatment is possible, US buyers acquiring US private companies often prefer that for tax purposes they be treated as buying assets rather than shares (even if the transaction is actually structured as a share purchase), and obtaining that treatment can be more complicated when acquiring foreign companies.

Traditionally, US buyers prefered acquiring stock of a foreign target and elect to treat the transaction for tax purposes as an asset purchase.  This allowed them to isolate tax and legal liability in the foreign jurisdiction to the local subsidiary.  In light of recent US tax reform, however, this is not quite so clear-cut; this is now determined on a case-by-case basis.

As in any transaction, a US buyer will want to conduct legal and financial due diligence commensurate with the size and complexity of the target and any issues specific to the target or its industry. Due to the differences in legal and regulatory regimes between the US and the UK, US buyers that do not acquire many foreign companies will rely heavily on their UK attorneys to advise them on the customary scope of due diligence.

Similarly, because the form of acquisition documents and market practice in negotiating these documents differs between the US and the UK, US buyers will rely on their UK attorneys to advise them on market practice for UK deals of the relevant type. For example, the common UK practice of disclosing against warranties by reference to materials provided in a virtual data room is uncommon in the US and may be met with resistance by some US buyers.

From the perspective of a UK seller, significant time may be spent during the course of the transaction in educating the US buyer on differences in both the legal and regulatory environment and UK market terms. Sellers should not assume that the US buyer will appreciate the intricacies of concepts like stamp duty, the requirement of limited companies to file audited financials, or the need to comply with the requirements of GDPR, to name just a few items.”

                                 Steve Hurdle, Corporate Partner, and Shahrooz Shahnavaz, Tax Partner, from Loeb & Loeb LLP

 

Thoughts from a UK data protection/privacy perspective

“From a UK and European perspective, thinking about the data and privacy aspects of the transaction is of fundamental importance.

Personal data will likely be processed during the due diligence stage through the data room/site.  Do existing privacy notices refer to M&A transactions as a potential processing purpose?  If not and data subjects need to be informed of additional processing of their data – thereby publicly disclosing that there is a transaction in play – then how does that sit with the parties and their various legal and regulatory obligations?

On an asset deal, a Buyer acquiring personal data did not collect that data itself and would need to inform the data subjects within one month of completion.

 If personal data was transferred pre-completion for purposes of integrating the Target Ltd’s/Seller Ltd’s and Buyer’s systems, the Buyer (and Target Ltd/SellerLtd) need to satisfy themselves that there is a legal basis to do so as well as ensuring appropriate data sharing terms are in place.  The same one-month deadline for notifying data subjects also needs to be considered, noting that the clock starts ticking at point of transfer and not completion (although exemptions may apply).

 Where the Buyer acquires a Target Ltd’s/Seller Ltd’s customer lists, B2C e-marketing will only be permitted if the customers consented/consent to receive marketing by opting in. 

 On an asset purchase, the Buyer will not be able to rely on existing opt-in consents or ‘soft opt-in’ and the Buyer will most likely need to ask Seller Ltd to email its customers for opt-in consent before completion, whilst also taking account of risks that such communication might be seen as a marketing email. Customers may of course not give their consent which is something to consider if customer lists are important to the Buyer and baked into the valuation.”

                                                    Husna Grimes, data protection specialist at Humphreys Law

 

If you would like to discuss a particular M&A deal or any of the issues raised by this piece then do please contact us at enquiries@humphreys.law.

This piece was written by Henry Humphreys with input from Nick Westoll, Annette Beresford, Husna Grimes, Robert Humphreys and Amy Cunningham, and with US perspective provided by Steve Hurdle and Shahrooz Shahnavaz from Loeb & Loeb LLP.

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website.  None of the above constitutes legal advice in any jurisdiction.  None of the above should be relied upon.  Always seek your own independent professional advice.

 Humphreys Law

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