Morgan Mac Lawyers are experienced in providing exceptional legal advice to assist in share transfers. Our lawyers can help illuminate the steps you need to take to resolve the dispute. If you are faced with this situation, you should obtain legal advice from Morgan Mac Lawyers to calculate your options. Morgan Mac Lawyers can help you resolve the situation quickly, and professionally.
Sale of Business by Share Transfer or Asset Sale
When you decide to sell your business, if it is owned and operated by a company, an important matter to consider before contacting a broker to help you sell the business is whether you intend to sell the company’s business as a going concern by sale of its assets or whether you sell the business by a transfer of shares in the company to the buyer.
This consideration only applies to the sale of the business that is owned and operated by a company. It does not apply to a business owned and operated by partnership of individuals or a sole proprietor.
A sale of the business as a going concern by sale of assets involves the sale of the plant and equipment, land, building, goodwill, stock, and intellectual property of the business by using a business sale contract.
If you sell the business by a share transfer, it involves the buyer purchasing the shares in the company instead of the assets. By obtaining the shares of the company, the buyer in effect purchases the company and indirectly the business the company owns and operates. The company continues to own its assets and the business it operates but the buyer owns the shares in the company. Such a sale usually involves the person who buys the shares in his or her own name or through another company becoming a director of the company that transfers the shares.
The sale of shares also allows for part of an interest in the business to be sold by transferring some, but not all, shares in the company to the buyer. For example, the buyer may purchase 50% of the shares in the company in order to obtain a 50% interest in the company’s assets including the business it operates. A variation of this sale of a part interest in a business is an arrangement by which the company issues new shares and sells the shares to a buyer who wishes to acquire an interest in the company. This may be appropriate for a transaction in which the buyer wishes to acquire less than a 50% interest in a business operated by a company.
There are advantages and disadvantages of sale of the business as a going concern by asset sale or by share transfer or share allotment.
Let’s firstly look at the asset sale.
Seller Advantages in an Asset Sale
An asset sale allows a seller to exclude from the sale assets that the seller does not wish to transfer.
An asset sale may also allow the seller to retain some rights over intellectual property. The seller may wish to keep the intellectual property and license it to the buyer.
Seller Disadvantages in an Asset Sale
Disadvantages of an asset sale include the following:
- An asset sale may require the approval of third parties such as suppliers to the business or, if the business is premises based, the consent of the landlord to the lease being assigned to the buyer, or a new lease being granted to the buyer.
- The liabilities of the business are usually not transferred to the buyer. The seller has to deal with the liabilities. This may be achieved by allocation of the purchase price or part of the purchase price to the liabilities.
Buyer advantages in an Asset Sale
The advantages to the buyer may include the following:
- The tax benefits of accrued losses that may be carried forward by the Buyer.
- No GST is payable on an asset sale of a business that is a going concern.
- The buyer has the option of seeking to exclude from the sale any assets it does not require.
Buyer Disadvantages of an Asset Sale
The disadvantages to the buyer are that:
- It needs to pay stamp duty.
- Suppliers who are important to the business do not agree to continue a supplier arrangement, or to enter into a new supplier arrangement with the purchaser.
- The landlord of the business premises from where the business operates does not consent to an assignment of the existing lease or offer a new lease to the buyer.
- Some assets such as government licenses and permits may not be assignable to the buyer.
Let us now turn to and look at the share transfer as a means of sale of a business
Seller Share Transfer Advantages
- There is no stamp duty on a share transfer. Although this is a direct benefit to the buyer, it is an indirect benefit to the seller as it reduces the costs of sale and makes the business easier to sell.
- In many cases a transfer of shares will not affect current supplier arrangements. It may also not affect a current lease, although many leases contain a clause that require landlord approval if there is a change in the ownership of a corporate tenant.
Seller Share Transfer Disadvantages
- The company retains its liabilities, and a buyer may not be attracted to a share transfer unless the seller or person standing behind the company such as directors and shareholders provide adequate warranties and indemnities to protect the buyer from these liabilities. Practically, this may result in the buyer insisting on indemnities that are secured by personal guarantees from the directors of the company and the buyer may require the personal guarantees obligations of the directors to be secured over property of the directors, or by a bank guarantee.
- The constitution of the company and/or a shareholders agreement may contain clauses which restrict share transfers to third party buyers. These documents may contain pre-emptive rights that require any share offer for sale to a third party to be first offered to an existing shareholder.
Buyer Share Transfer Advantages
The primary advantages to the buyer are as follows:
- Stamp duty is not payable in most instances on a share sale.
- Leases, supply agreements and intellectual property rights are already in place and there is usually no need for an assignment that requires the approval of third parties. In some instances, the assignment of a lease may require the consent of the landlord on a share sale if there is the clause requiring such consent on a change in ownership of the company.
- If the company has goodwill and brand recognition, these will be transferred with the shares.
Buyer Share Transfer Disadvantages
There are disadvantages to the buyer in a share sale. These disadvantages include:
- The company retains its current and contingent liabilities including any tax liabilities. Indemnities and warranties, even secured by bank guarantees and personal guarantees may not ultimately fully indemnify a buyer from exposure to the company’s liabilities;
- Further not all liabilities of the company may have been disclosed by the seller. Even an extensive due diligence may identify some but not all liabilities.
These matters in general terms are some but not all the matters that a seller and a buyer of a business must consider before deciding on how the business should be sold. Professional advice, including legal advice, should be sought as early as possible to assist in making this decision and to ensure that no key legal or commercial issues are overlooked.