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If you want to acquire another business, you may know that you can structure the transaction either as a share purchase or an asset purchase. As you may expect, each structure has its advantages and disadvantages. This article will summarise the key features of share acquisition and then explain why your business might benefit from a share acquisition rather than asset acquisitions, as well as some disadvantages you might wish to consider.
What is a Share Acquisition?
A share acquisition is one of the two main ways you can structure the purchase of another limited company. As the name suggests, you are effectively purchasing the shares held by the owners of the company you are buying.
This is distinct from an asset purchase, where you purchase individual assets the target company owns, such as machinery, intellectual property, and inventory.
Structuring a Share Acquisition
When you structure a business purchase through a share sale, your company will acquire the shares and become the target company’s owner. When this happens, the purchased company is called a subsidiary (or undertaking), and the purchasing company is called the parent company.
Where your company is part of a more significant business with multiple companies, there may be a holding company that owns the shares in all of the companies. In this case, the holding company may purchase the shares from the target company’s shareholders.
Benefits of Share Acquisitions
There are several benefits to buying a company through a share acquisition.
Continuity of Business
The only thing that changes during a share acquisition is the company’s ownership. Everything else stays the same. This means that share acquisitions provide a seamless transition with less legal paperwork. For instance, you do not have to amend contracts with third parties. Similarly, you will not have to renegotiate employee contracts because the employer remains the same.
Group Organisation
The new company can slot smoothly in with your other group companies from your business’ perspective. In addition, you do not need to transfer assets to your existing company (though you can do so if you wish).
Likewise, the law ring-fences your target company’s liabilities from the rest of your business through the principle of limited liability. This means that if something goes wrong, such as if a third party later sues the target company, the rest of your business’ assets are safe from any claim.
Taxation
The law surrounding the tax implications of acquiring another business is quite complex. However, suppose you intend to sell any of the assets the target company owns at the point of sale. In that case, you may benefit from a lower tax liability than if you had purchased the assets directly from the target company.
Your business will also benefit from the target company’s continued tax identity. Your business will ultimately benefit if the target company is owed any tax relief, such as trading loss relief. Notably, HM Revenue & Customs does not charge any VAT for share purchases.
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Disadvantages of Share Acquisitions
In saying that, there are some disadvantages to purchasing a company through a share acquisition.
Assumption of Liability
Any liabilities the target company owes to third parties, such as its debt and contractual obligations, will not disappear once you acquire its shares. While you are not legally responsible for any of these liabilities, the target company must continue to meet its obligations. If it fails to, a third party can sue it. Likewise, if there are any lawsuits or ongoing litigation, this will persist.
Taxation
You will be charged a stamp duty for the purchase of shares, which is usually 0.5% of the purchase price (rounded up to the nearest £5).
If the target company has any tax liabilities, these will continue after the share purchase completes, and you will be indirectly responsible for managing these liabilities.
Key Takeaways
Share acquisitions are one of two main ways a buyer can acquire the benefits of another business. The principal benefit of a share acquisition is that it is relatively straightforward and requires less legal documentation to complete the transaction. The main disadvantage is that the target company’s liabilities follow it after the purchase completes.
If you need help with a business acquisition, our experienced business sales lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Share acquisitions are more straightforward transactions because the only thing that changes hands is the shares in the target company. This means that there is less legal paperwork involved.
When you acquire a company through share purchase, you take the company as it comes. This means that any debt or contractual obligations follow the company.
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