What is a Pre-Sale Restructure in England?

When buying or selling a business, we commonly talk about the transaction being structured as either a share transaction or an asset transaction. In practice, the buyer and seller may have specific objectives that require the parties’ advisers to structure the transaction in a hybrid form. This hybrid form combines elements of both asset and share transfers. However, this may mean that before the transaction completes, the seller must restructure some or all of the existing business before the buyer takes ownership. This article will explain what is a pre-sale restructure and why certain business transactions may adopt a hybrid structure. 

Asset Transfers vs Share Transfers

Generally, when one business wants to buy part or all of another business, the buyer will either acquire:

• the shares in the target company; or
• certain assets in the business. 

There are several benefits and disadvantages to both kinds of transactions. Generally, buyers prefer asset sales because they can pick the individual assets they want to pay for, such as land, machinery, and intellectual property. This is less preferable for the seller, as they may still have to shoulder certain liabilities even after the assets are sold.

Conversely, sellers prefer share sales because once the shares are transferred, they have little connection to the business contained in the company. Instead, the buyer indirectly assumes the benefit and the liabilities attached to the new company as the new shareholder. 

Limitations on Asset and Share Transactions 

Parties to a business transaction may want to structure the transaction as a hybrid structure due to the:

• negotiating positions; and 
• nature of the business being sold. 

In practice, both factors may play a part in the parties’ decision to use a hybrid structure. Consider the following example. 

Structuring a Pre-Sale Restructuring

Two ways a pre-sale restructure can take place include a:

• hive-down approach; or
• hive-up approach. 

Hive-Down 

A hive-down is where you transfer a business’ assets to a new company. Following the hive-down, you will acquire all the shares in the new company.

Here is a chart representing the transaction in two stages: the hive down and the sale.

Hive-Down

You can think of a hive-down as the inverse of a hive-up. Instead of the target company transferring to NewCo all the assets the buyer wants, it transfers all the assets the buyer does not want to another group company. 

Legal Implications

In both a hive-up and hive-down, the buyer obtains the assets it has chosen, while the seller minimises its tax liabilities. However, these are complex transactions and the law may not recognise the transaction unless the proper steps are taken. Hence, you should instruct a legal and financial adviser before you attempt to execute a business transaction through a hybrid structure.

Key Takeaways 

Not every business transaction will structure itself as a share or asset sale. Depending on the nature of the business the buyer wishes to acquire, the seller may need to restructure the business by transferring assets to pre-existing group companies or creating a new company. This may benefit both the seller and the buyer, especially in tax and the transfer of legal liabilities. 

If you need help with a pre-sale restructure, our experienced business sale 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.

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