| SHARES | ASSETS |
| Clean break from Business TIMING | However, Buyer will require Seller to provide warranties + indemnities + guarantors as to the state of Co. & its liabilities. Thus, possible right of comeback for Buyer to remedy undisclosed problems (e.g. to bank for lending). Buyer will want to carry out DD to find out hidden liabilities they may be taking on TIMING: Simple, sign stock transfer forms to transfer title and hand over share certificates | Legal liability to 3rd parties for debts and obligations of business remains with Seller. 3rd P can continue to take action against Seller. Applies if Buyer has contracted to assume responsibility for certain liabilities. Right of indemnity, but not always concrete. Thus, the Seller will want indemnities from the Buyer, this can be problematic if the Buyer becomes insolvent, or has not accepted liability for certain matters. Better option for Buyers looking to limit their liability TIMING: Longer and more Onerous: each asset must be transferred in the appropriate form e.g. a deed of conveyance for land, assigning patents and contracts, physical delivery of certain assets. Possibly problematic when 3rd P consents are required, e.g. LL consent to transfer/assign leasehold property. |
| Employees | NO TUPE as No direct effect on contracts of employment as there is no change of employer. Doesn’t create potential claims in and of itself. Any later redundancies or changes to contract terms will be of concern to the Buyer Not the Seller. No direct interest unless warranties given in SPA. | TUPE applies: rights and obligations owed to each employee are transferred automatically from the Seller to the Buyer. Seller has no interest in those employment contracts, except insofar as it has given warranties to the Buyer If TUPE does not apply, the Seller still has obligations. The application of TUPE could be a DISADVANTAGE: after an acquisition, a business is likely to undergo rationalisation, which will often require redundancies. The Buyer is now liable for payments relating to this and any claims arising out of it. |
| Scope of warranties & DD | | |
| Transfer of title | | |
| FSMA restrictions CONCERN for LAWYER | A purchase of shares qualifies as an “investment s.21 FSMA 2000. Lawyers advising must ensure they comply with FSMA 2000 if carrying out a regulated activity or that the transaction falls under an exclusion in SI 2001/544 (e.g. take over exclusion = at least 50% of Co. is being bought) Shareholders must be careful not to breach s.21 FSMA when communicating with the Buyer. Thus, it is more onerous - s21 restricts issue of ‘an invitation or inducement to engage in an investment activity’ Includes advising/arranging purchase/sale of shares. Any communication/approach about this would be caught by this restriction. Exceptions (p5) Breach = sale unenforceable | |
| Extracting cash | | |
| TAX For SELLER See more detailed notes p2-3 | Company Owned by Shareholders (SH) Company Owned by Corporation Company = substantial shareholding thus receives consideration directly and is liable to corporation tax on the capital gain. The Main tax advantage here is that the gains may be exempted where Seller is disposing of a substantial shareholding in a trading company: Both Selling Co and Company in which shares are being sold are trading Co.s and The Seller has held at least 10% of the shares… … for a continuous period of at least 12 months in previous 2 years (applies also where assets transferred intra-grow pre hire-down. See FA 2011. Relief may be available under the TCGA 1992 e.g. “share for share exchange”. | DOUBLE TAXATION Tax point 1: Seller Co receives the purchase price and pays corporation tax on it (capital assets taxed as chargeable gains; proceeds from stock chargeable as income receipts). Note that Entrepreneur’s Relive is NOT available to corporate seller. Tax Point 2: a) Individual SH’s receive proceeds On winding-up pay CGT on the disposal of the shares(entrepreneur’s relief available = attractive) If dividend = IT (more tax efficient) By dividend pay Income Tax (ITTOIA pt4) b) Corporate SH’s are unlikely to pay any corporation tax because: On winding-up only, the substantial shareholding exemption can apply. See left. Group Relief is available on intra-company dividends. Roll over relief is possible for CGT/CT (s152 TCGA 92); depending on whether expansion plans involve acquiring further assets. |
| FACTORS AFFECTING CHOICE OF ACQUISITION FOR BUYER |
| SHARES | ASSETS |
| Trade Continuity | Lack or little disruption to trade as contracts not legally affected by change of ownership of Co (customer, employees and suppliers will not, in theory, see much change which should mean willingness to carry on dealing with the Co). But 3rd parties may not be contractually obliged to deal with Co. after change of ownership. May contain ‘change of control clause’ = contract terminated on change of Co. control. This is a risk for the Buyer. Thus, Watch out for a Change of Control clause -do DD. | Benefit (NOT the burden) of existing contracts must be transferred through assignment or novation, i.e. transfer is not automatic & may need 3rd party approval. Extra cost for consent and slows acquisition process Must arrange insurances to be transferred or take out new covers. Customer and suppliers may review dealings. If the benefit of existing contracts is NOT transferred to the Buyer, it will need to get consent to assign or transfer them through tri-partite novation agreement. 3rd P’s will usually grab this opportunity to renegotiate terms. Leases may require LL’s consent to assign (causes delay and uncertainty) Need to transfer or redo insurance on assets Overall, the process is generally slower and more onerous than in a share acquisition. |
| Choice of assets and liabilities | Assets: all underlying assets are acquired by Buyer – no cherry picking. Liabilities: Buyer is Indirectly responsible for all liabilities. Warranties and indemnities insufficient to protect Buyer fully (hard to prove if warranty covers specific matters) NO need to assign the contracts | Assets: Greater flexibility, can pick and choose what assets it wants to buy Liabilities: Can select liabilities it wants to take on (statutory exceptions = employees & environmental) Less risk of unknown liabilities. BUT liabilities may transfer automatically in USA, France and Germany Need to assign the contracts |
| Integration | Useful if want to acquire a stand-alone company, and thus keep it as a separate business. Can also absorb | Useful if assets can be readily be absorbed into existing operations or Corporate structure. |
| Securing Finance | If Buyer wants to finance the acquisition through debt, it can offer the Target Co.’s assets as security for loan. But If target is plc, charge over target Co’s assets = unlawful financial assistance (s.679 CA 2006). Similar laws exist in many jurisdictions. Tax relief is available on loans taken out to buy ordinary shares in a close trading Co., i.e. relief on the interest payable. A close trading Co. is one in which the Buyer owns more than 5% of the ordinary shares (including those owned as a result of the purchase) or spends the greater part of his time in managing the Co | If Buyer is financing through debt, it can offer assets that will be bought as security for the loan. Tax relief is available on loans taken out to acquire certain assets. Interest can usually be claim as a deductible expense, for tax purposes. |
| TAX BUYER (also see WS 7 p7) | CGT BASE COSTS – As acquiring Co’s assets as well, when they are sold, CGT charged on gain from when Co....
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