There are two ways in which a buyer can acquire a target business. It can either buy the shares of the company which owns the business and assets (share purchase) or it can buy the business and assets directly from the company that owns them (business purchase).

In a share purchase, all of the company’s assets, liabilities, rights and obligations transfer to the buyer (including assets, liabilities, rights and obligations which the buyer does not even know about - click here to see article “Due Diligence”). In a business purchase, the buyer theoretically has the ability to “cherry pick” the assets it wants (and this would include the ability to acquire parts only of the business, for example, a particular division) and to leave with the selling company the liabilities it doesn’t wish to take on. It is for these reasons that a seller would normally prefer to sell the shares of the company whilst a buyer would prefer to buy the specific business and assets it is interested in acquiring. Naturally, the respective buyer and seller’s bargaining powers will ultimately dictate whether the shares or the business and assets are acquired/sold.

Whether the shares or the business and assets are to be acquired, it is usually the case that the solicitors acting for the buyer will prepare a sale and purchase agreement. The agreement, in each case, will contain various provisions to achieve the sale and purchase including the timing and method for the payment of the purchase price, the practical arrangements for completion, non-compete provisions and provisions to deal with confidentiality. The agreement will also usually contain a schedule of warranties (click here to see article “Warranties”) and, in the case of a share purchase, a tax indemnity (under which the seller agrees to indemnify the buyer for any unexpected tax liabilities relating to events prior to the sale).

The sale and purchase agreement for a business purchase will also include provisions identifying the specific assets and liabilities to be transferred (and the assets and liabilities not being transferred). In addition, the agreement will contain provisions dealing with how particular assets are to be transferred such as ongoing contracts and any property. Business purchases can be more complex due to the need to transfer each of the separate assets constituting the business. Also, more consents and approvals are often required (such as landlord’s consent or the consent of a key customer or supplier).

For the reasons mentioned above, the sale and purchase agreement for a share purchase does not need to identify any specific assets and liabilities other than the shares in the company being bought and sold.

Lupton Fawcett LLP can assist in terms of advising on the most appropriate type of transaction for a seller or buyer. Where acting for a seller we can review a sale and purchase agreement submitted to you, advise you on the implications of the agreement and negotiate with the buyer’s solicitors to improve your position. Where acting for a buyer we can draft a sale and purchase agreement for you and negotiate the terms of that agreement with the seller’s solicitors.

It should be noted that there are often important tax considerations for both the buyer and the seller and specific tax advice should be sought.

Posted: March 7th, 2008 under Corporate Finance.
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