Transaction types

Do you know the proposed transaction type?

Refer to the “Information Memorandum” or ask your supervisor. Note: This can change mid-way through your due diligence.

2 types of structures covered

1. Buying a company’s assets (this is commonly called an “Asset Sale”)
2. Buying a company’s shares (this is commonly called a “Share Sale”)

Transaction type: Why is it important?

• The structure can have a significant impact on the outcome of the deal.
• A transaction structured as an asset sale, results in the Buyer only acquiring the Target Company’s assets and not its liabilities. In a share sale, the Buyer is acquiring the Target Company’s assets and liabilities.
• Understanding the structure can help to ensure that the Buyer knows what they are getting into and that the deal is structured in a way that is favorable to them.

Key factors influencing acquisition structure

Not included in this lesson

Refer to our other lessons for these related topics:

• Potential for unknown liabilities
• Tax and duty
• Partial sale
• Consents and approvals
• Financial services licensing
• Debt finance and security arrangements

Asset sale v share sale

Understand the key differences

Buying a company’s assets

The buyer acquires each of the individual assets that make up the target business (including contracts), or a selection of those assets, and any agreed business liabilities

Buying a company’s shares

The buyer acquires all of the shares in the target company that operates the business (and so automatically acquires all of the business assets and liabilities)

Other share sale structures

1. The Buyer acquires only some of the Target Company’s shares (i.e. less than 100% of shares)
2. A purchase of shares in a public company
3. A share purchase between entities other than companies

Refer to our other lessons for these related topics

Method of sale

The seller of a target company will usually determine whether to sell by one of the following methods:

1. Auction sale, where the target company is offered to a number of prospective buyers in a competitive tender process
2. Exclusive sale negotiation with one particular buyer

Understand what type of buyer you’re dealing with

• a financial buyer. A financial buyer is an entity that purchases a company primarily for the purpose of financial gain. Financial buyers typically include private equity firms, venture capitalists, and hedge funds.
• a strategic buyer. A strategic buyer is a company that purchases another company in order to expand its own operations.

Understand the key differences

• Target
• Sale document
• Form of transfer
• Consents and approvals
• Due diligence focus
• Tax and stamp duty

1. Target

Asset purchase

The buyer acquires a number of specific assets owned by the seller, plus any agreed business liabilities.

Share purchase

The buyer acquires all of the shares in the target company owned by the seller, plus all of the target company’s assets, liabilities, rights and obligations (even those the buyer does not know about).

A key commercial difference between the two transaction structures is in the nature of what the buyer acquires.

2. Sale document

Asset purchase

• Asset purchase agreement

Share purchase

• Share purchase agreement

Due diligence is usually completed as an essential preliminary step to negotiating contractual protections (in the form of warranties and indemnities) into the sale document.

3. Form of transfer

Asset purchase

The target assets will need to be accurately described in the asset purchase agreement. In addition, some of the assets may need to be transferred using specific forms of transfer. E.g.:

• Real property is transferred by conveyance or written assignment
• Intellectual property (IP) is transferred using separate forms of transfer or assignment
• Key contracts are assigned or novated to the buyer

Share purchase

The actual transfer of shares from the seller to the buyer is achieved using a share transfer form and the exchange of physical share certificates (if any have been issued).

4. Consents and approvals

Asset purchase

• Approvals regarding any restrictions on transfer of assets.
• Pre-emption rights
• Consents from third parties to any assignment of contracts.
• Regulatory approvals.

Share purchase

• Board or shareholder approvals
• Approvals regarding any restrictions on transfer of shares (including pre-emption rights).
• Consent of third parties to a change of control in the target company.
• Consent of regulatory authorities.

Consents and approvals can impact the timing of a transaction. For example, if the regulator’s consent hasn’t been obtained before the agreement is signed, completion may occur when consent is obtained.

5. Due diligence focus

Asset purchase

Focuses on the particular assets being acquired and not the target company. Look for restrictions in contracts on “assigning” or “transferring” contracts to the Buyer

Share purchase

Focuses on the Target Company as a whole, including all of its assets and liabilities. Look for consents of third parties required to a “change of control” in the Target Company

6. Tax and stamp duty

Asset purchase

• The Buyer is not able to access the tax losses of the business: these losses remain with the seller.
• There are usually higher rates of transfer (stamp) duties payable on an asset purchase than on a share purchase.
• Goods and Services Tax (GST) is not payable provided the business is sold as a going concern.
• The buyer will typically only require limited tax warranties and indemnities, as the seller will retain all liabilities for tax.

Share purchase

• The buyer may be able to access the tax losses of the target company.
• There are usually lower or no stamp duties payable on a share purchase (if the company being acquired does not predominantly own land).
• GST is not payable .
• The buyer will inherit the tax history of the target company, which can leave the buyer exposed to future tax liabilities (including penalties and interest). The buyer of shares in a company will therefore require extensive tax warranties and indemnities.

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Disclaimer

The contents do not constitute legal advice, are not intended to be a substitute for legal advice and should not be relied upon as such. You should seek legal advice or other professional advice in relation to any particular matters you or your organisation may have.

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