If you are looking to purchase or sell a business, a very important consideration is whether to structure the purchase as an asset purchase or a share purchase.
An asset purchase involves the purchase of some or all of the assets owned by the seller and used in carrying on the business. Assets may include fixed assets, land, buildings, machinery, trading stock and intangible assets such as goodwill and intellectual property. Typically this involves entering into a Business Sale Contract between the seller (a company) and the buyer.
In a share sale, the buyer purchases shares in the company, rather than just the assets. Share sales may involve the sale of the shares in a trading entity, related entities and occasionally units of a unit trust.
What is a Share Sale Agreement?
The seller of the shares and the buyer enter into a Share Sale Agreement which sets out the key elements of the agreement. It is imperative that the Share Sale Agreement is as comprehensive as possible. It should state how many shares the seller is selling; the price the buyer is paying for them; warranties from the seller about the company and the shares and when the sale will occur.
The company in which the seller is selling their shares may have a Shareholders Agreement. This agreement regulates relations between shareholders and it might give the remaining shareholders the right of first refusal. This right means that before a sale to a third party can proceed, the shares must be offered to the existing shareholders. It is very important that the process in the Shareholders Agreement or company constitution is followed to ensure all formalities are adhered to in order to correctly transfer the shares.
Is a Share Sale Right for You?
A share purchase can be more complex than a purchase of business assets, because with the shares comes a range of potential liabilities. Where a buyer acquires 100% of the shares in an entity, the buyer takes control of the entity and all of the assets and liabilities.
In deciding whether a share purchase is right for you, consideration should be given to:
Branding and goodwill of the business: Upon a share sale, the business is carried on by the same entity with the buyer stepping into the shoes of the seller. Where the company has recognised brand, goodwill and reputation, it may be preferable to buy the business by way of a share sale to minimise disturbance those assets.
- Employees: With a Share Sale Agreement, the legal identity of the employer remains the same, so employment contracts do not need to be changed.
- Assignment: As contracts with third parties, business names, leases and intellectual property are already in the name of the company, there may not be a need to formally assign many of these contracts and third-party consents may not be required with a share sale. It is still important to review the terms of these agreements, particularly property leases, as often they have ‘Change of Control’ clauses which may have implications for the new purchaser under a share sale.
- Tax consequences: There may be franking credits, tax losses or undisclosed tax liabilities. Remember that the buyer of shares inherits all the “skeletons in the closet” of the company and warranties in the agreement may be of little future value if the seller has disposed of the funds received.
- Transfer duty: Most transfers of shares in Queensland registered companies are exempt from transfer duty. The exception to this is if shares are being acquired in ‘land rich’ companies, being a corporation or listed unit trust that has landholdings in Queensland with an unencumbered value of $2 million or more. This is called landholder duty.
Regardless of whether the transaction is structured as an asset purchase, or a share purchase it is essential to ensure that both a seller and a buyer have undertaken sufficient due diligence to minimise the risk of unpleasant surprises following the sale/purchase.
If you would like more information or to discuss whether a share sale/purchase is right for you, please contact us on 07 5443 9988 or [email protected].
Argon Law is a Sunshine Coast law firm based in Maroochydore. We are commercial and property lawyers and are eager to assist you in any way we can.
Always ensure you seek professional advice for your specific circumstances. The above is not advice and is intended to be general in nature only.
