It’s a common question that comes up in practice. Clients are often confused about which legal mechanism will suit their needs when seeking to acquire or sell a business. In some cases, clients will have formed a view that a share purchase is the correct route. When questioned, why they have formed this view it can be surprising to hear the answer: “the other side has suggested this route”. This simplistic understanding, that either mechanism will “do the job” is a fundamentally flawed perspective. Whether a Share Purchase Agreement or an Asset Purchase Agreement should be utilisied in a given scenario is dependent on a number of factors as outlined below.
The Target is acquired with everything attaching to the shares in question. In other words, the buyer will acquire the good and the bad. This includes all assets and liabilities including pending litigation. Therefore, when using a share purchase style of acquisition more detailed due diligence will be required.
The Purchaser can “cherry pick” certain assets and avoid taking on assets not valuable to the running of the business or acquiring liabilities (save for employees and potentially environmental liabilities). This is the primary reason why a Purchaser will choose an asset purchase.
2. Stamp Duty
In general, the transfer of shares in an Irish company will give rise to a charge to Irish stamp duty at 1% on the higher of the consideration paid or the market value of the shares.
In general terms the transfer of assets will give rise to a charge to Irish stamp duty at 6%. However, such stamp duty costs may be mitigated depending on the asset profile of the business transferred.
Exemptions are available on the transfer of certain types of assets, eg, intellectual property; and title to certain assets, eg, loose plant and machinery may transfer by delivery rather than pursuant to the terms of a written document. Where title transfers by delivery no charge to Irish stamp duty should arise.
3. Assignment / Novation of Contracts
Unless the Target’s contracts contain ‘change of control provisions’, counterparty consents are less likely to be required (save in the case of loan agreements, where bank consent is typically required).
Assignment / novation of contracts of the Target will usually require the consent of the counterparty, which is time consuming and potentially costly. This may increase the transaction costs in respect of an asset purchase (although this benefit may be offset by the more costly due diligence process for a share sale).
4. Employees
The legal status of the employees is unaffected since they remain in the employment of the Target. The European Communities (Protection of Employees on the Transfer of Undertakings) Regulations 2003 (“TUPE Regulations”) do not apply. Therefore, the Purchaser has no obligation to inform and consult with employees in respect of the transaction. However, although TUPE does not apply it is worth stating again that the employees of the Target will remain employees of the company with all associated employment rights.
The TUPE Regulations state that there is an automatic transfer of the rights and obligations of the Target in relation to its employees on an asset purchase. Employees are thus entitled to transfer into employment of the Purchaser on same terms and conditions (save for pensions). Both parties to the transfer will be obliged to inform and consult with employees in advance of Completion in relation to the consequences of the transfer for them.
5. Warranties Given by the Seller
Warranties are more onerous in a share purchase, as the Purchaser seeks to protect itself against unknown liabilities.
Warranties are typically less onerous in an asset sale, because the Purchaser only acquires known liabilities.
6. Base Cost of Acquired Assets
Where the Seller and Purchaser are unrelated, the price paid by the Purchaser for the shares should represent the Purchaser’s base cost in the shares. If the shares are purchased there will be no uplift in the base cost of the underlying assets. If the Target subsequently sells the underlying assets, it may be liable for capital gains tax assessed by reference to this base cost.
Where the Seller and Purchaser are unrelated, the price paid by the Purchaser for the assets should represent the Purchaser’s base cost in the assets.
7. Tax Losses
Where the Target has ongoing tax losses, it may be possible to utilise these in future trading. However, the availability of such losses may be limited where there is a significant change in the business of the Target
The historical tax position of the Target will not transfer on an asset sale.
8. Taxation of Proceeds of Sale in Hands of Seller
A Share sale will trigger a single taxable event for the Seller – tax on the chargeable gain arising. Tax on chargeable gains is charged at 30%. The Seller may, however, be able to avail of relief from tax on chargeable gains by virtue of the substantial shareholding exemption. Generally, non-resident shareholders are only liable to Irish capital gains tax on the disposal of shares where the shares derive their value or the greater part of their value from Irish land, Irish minerals or Irish exploration rights.
The proceeds of an asset sale will give rise to:
a charge to tax in respect of the chargeable gain arising to the Target. Tax on chargeable gains is charged at 30%;
on an extraction of the proceeds of sale from the Target by the shareholders CGT / income tax may be payable, depending upon whether the proceeds of sale are distributed on a liquidation of the Target or on payment of a dividend.
9. VAT
Sale of shares is VAT exempt.
The transfer of a business as a going concern should be exempt from VAT as long as the acquiring entity is registered for Irish VAT. In cases where a Purchaser “cherry-picks” assets, the assets acquired might not constitute a “business as a going concern” and, therefore, VAT will be chargeable.
10. Capital Allowances (Tax Depreciation)
Continue with the capital allowances history of the company.
Capital allowances are generally available for plant & machinery over 8 years, buildings over 25 years and intangible property over 15 years. Capital allowances are generally not available on certain assets such as goodwill.
Conclusion
As can be seen from the above, there are many issues to consider when deciding whether to utilise a share purchase agreement or an asset purchase agreement. Where the Seller and the Buyer cannot agree on what mechanism to use that decision is usually made by the party with the most bargaining power. In any event, Sellers and Buyers alike should stop and take appropriate legal and tax advice before agreeing to use one legal mechanism over the other.
If you are considering purchasing or selling a business, please do not hesitate to contact Dean Cunningham at dcunningham@cunninghamsolicitors.ie, for a confidential conversation around what legal mechanism suits your needs best.
The content of this article is provided for information purposes only and does not constitute legal or other advice.
