Part 2 – Share Sale
Continuing from last week’s post, this week we will be looking at the pros and cons of a share sale. As a quick reminder, an asset sale allows the buyer to select specific assets and liabilities of the business, while a share sale transfers ownership of the company and all its assets, liabilities, and obligations to the new owner.
Advantages of a Share Sale for the Seller:
- Shareholders have a clean break from the business and are not connected to it after completion.
- It’s simpler for the seller than an asset sale as the company is sold as a ‘going concern’ in its entirety, making it easier to ensure trade continuity and keep the sale confidential.
- Tax reliefs may be available, such as Substantial Shareholding Exemption, Business Asset Disposal Relief, and Share for Share exchange, which can make a share sale more attractive. These reliefs depend on a range of factors such as the seller’s holding in the target company and the type of consideration received.
Disadvantages of a Share Sale for the Seller:
- The target company retains all historical, actual, and contingent liabilities and the sellers are typically required to provide extensive warranties and indemnities as protection for the buyer, and the directors may be required to provide personal guarantees.
- Part of the purchase price may need to be held in trust or a bank guarantee may be required as security for any breach of warranty.
- The buyer may apply a discount to the purchase price to reflect the increased risks.
- If the seller wants to retain certain assets, the deal may require those assets to be extracted from the target company before completion, which may trigger a tax liability.
- Charges may arise on a change of control of the company where there have been prior intra-group transfers of assets.
- It’s important to note that share sales can be more complex than asset sales and may require more legal and administrative work. It’s essential to seek legal advice and understand the risks before proceeding with a share sale.
Advantages of a Share Sale for the Buyer:
- The buyer may be able to profit from the target company’s recognized brand, goodwill and reputation.
- There is no need to formally assign contracts and other property from the target company to the buyer, so there should be no reliance on third party consent.
- Stamp Duty is charged at 0.5% of the consideration paid for the shares, which is more favourable than the taxes levied on interests in land and buildings.
- No VAT is charged on a share sale.
- The buyer can retain the target company’s tax attributes and use them going forward.
Disadvantages of a Share Sale for the Buyer:
- The buyer is exposed to additional risk and should conduct extensive and detailed due diligence to detect any liabilities associated with the target company.
- Even if the selling shareholders provide indemnities for any liabilities incurred by the company, there is a risk that the seller may not have the resources to indemnify the buyer if/when required to do so, unless an amount representing the value of the indemnities/warranties is held in trust as security or a bank guarantee is obtained.
- It’s important to note that share sales can be more complex than asset sales and may require more legal and administrative work. It’s essential to seek legal advice and understand the risks before proceeding with a share sale.
If you require assistance in purchasing the assets or shares of an incorporated business then call us today, on 0121 268 3208 or send us an email at info@onyxsolicitors.com with your query and we will get back to you.
Please note that this blog is not intended to be tax or legal advice. This material has been prepared for informational purposes only and as general guidance. Is not intended to provide, nor should it be relied on for, legal or tax advice. You should consult your own advisors or seek professional independent advice before engaging in any transaction.
