This article will focus on the exploration of the fundamental aspects of each method and the key drivers behind adopting one method over another.
SHARE SALE
On a share sale nothing changes except the owner of the shares and the only asset being sold is shares.
Tax on a share transaction
An individual seller may qualify for:
- Business Asset Disposal Relief (formerly, Entrepreneurs Relief). If eligible, capital gains tax would be reduced to 10%.
- Investment Relief. This benefit does not extend to employees, only those who have held “qualifying shares” (fully paid, ordinary, issued to an individual, not on stock exchange) for 3 years (£10m maximum allowance). In order to be eligible, the shares must have been held by an individual for at least 3 years from April 2016. Capital Gains Tax would be reduced to 10%.
A corporate seller may qualify for:
- Substantial Shareholding Exemption if owned at least 10% of the ordinary share capital of the target for at least 2 month in the 6 years prior to disposal. If eligible, no corporation tax will payable.
Employment issues on a share transaction
TUPE is not needed on a share sale as the “employer” doesn’t change.
Other factors to consider on a share transaction
- Due Diligence – due to the fact that all of the company’s assets are being bought, the due diligence process is often intense, time consuming and can become expensive.
- VAT – VAT is generally not payable.
- Entire target – the buyer must purchase all assets (including any hidden liabilities).
ASSET
The seller and buyer can negotiate on which assets will form part of the transaction, ultimately, assets such as IP, goodwill, brand, key contracts can all be sold in an asset sale and the buyer has the freedom of choosing which assets they want to take.
Tax on an asset transaction
An asset sale poses a risk of double taxation as the consideration money is paid to target and not to individual shareholders. (Corporation Tax and Capital Gains Tax can both become payable).
Employment issues on an asset transaction
Due to the change of “employer” TUPE will apply.
Under Regulation 13 the employees have the right to be informed about the transaction and Regulation 7 protects the employees against dismissal if the dismissal is directly due to the transfer itself or is connected to the transfer.
Compliance with the TUPE process can bring about additional costs to the transaction.
Other factors to consider on an asset transaction
- Consent – there may be a need for consent from third parties to take on individual assets which can cause delay and uncertainly to the transaction.
- VAT – the Asset Purchase Agreement can be drafted in way which will mean VAT is not payable in line with Article 5 of the VAT Special Provision Order. To satisfy the conditions of the Article the assets transferred must be used by the buyer in the same kind of business, there must be no significant break and the buyer must become immediately registered for VAT.
- Transfer – the buyer must buy all assets necessary for business.
- Division of sale – an asset transaction would be the route to adopt if sale of individual assets is to be divided between more than one buying party.
