SHOULD
YOU BUY THE ASSETS OR A BUSINESS ?
There
are many important economic, legal and tax consequences which flow
from how a business acquisition is structured. When purchasing a
small to medium sized business, there two general ways to structure
the acquisition. The first is a share purchase and the other is
an asset purchase. Here are some of the more important differences
between them.
What
are you Purchasing?
In an asset purchase, you are acquiring specific assets belonging
to the corporation, therefore title to the assets changes from the
corporation to the purchaser. The purchased assets could compromise
all of the assets and undertaking of the business, or they may consist
of select assets.
Here, there is flexibility as to which assets may be acquired and
which liabilities of the business may be assumed. A purchaser could
choose to purchase only assets and not assume any liabilities of
the business.
However, in a share purchase, a purchaser cannot select which assets
it wishes to purchase and which liabilities it wishes to assume.
It must acquire the entire undertaking of the corporation, since
ownership of the corporation’s shares ultimately result in
indirect ownership all of the corporation’s assets and undertaking,
including liabilities.
What
are the Risks to the Parties?
In an assets purchase transaction, since the purchaser can select
which, if any, liabilities it wishes to assume, there is no uncertainty
to the purchaser as to the nature and extent of those liabilities.
The purchaser assumes only those liabilities specifically agreed
to in the purchase agreement and nothing more. The purchase’s
liability is therefore fixed.
The legal “due diligence” required to be exercised by
the purchaser is not as exhaustive as a share purchase. Such due
diligence is generally confined to conducting various assets searches
against the corporation to determine that there are no liens or
encumbrances against the assets.
Also the numbers of representations and warranties (i.e. promises)
given by the corporation in the purchase agreement is far less extensive
than in share purchase, since the purchaser specially identifies
which liabilities it is assuming and excludes all others by the
terms of the purchase agreement.
However, a share purchase transaction is far riskier to a purchaser.
The purchaser is acquiring the share of the corporation. Since corporations
are considered by law to be legal entities themselves, a purchaser
of shares is also indirectly acquiring all liabilities of the corporation,
actual or contingent, known or unknown. This means that a purchaser
must exercise a much higher degree of due diligence when buying
shares of a corporation, and must obtain far more extensive representations
and warranties from the owners of the corporation’s shares
to safeguard against possible claims which may be made against the
corporation in the future.
How
are Employees Affected?
As employment laws evolve, the distinction between an assets purchase
transaction becomes less significant insofar as it affects the employees.
In share purchase transaction, the status of the employees does
not change, since they remain employed by the corporation before
and after the sale of the shares. They preserve their seniority,
salary, benefits and other advantages which they enjoyed prior to
the sale.
In an assets purchase transaction, although employees are technically
“terminated” by the corporation and, to the extent agreed
to between the corporation and the seller, “hired” by
the purchaser, many jurisdictions now have laws in place that preserve
the seniority, salary, benefits and other advantages of employment,
such the purchaser is deemed to be a “successor” to
the corporation and essentially takes over the position of the corporation
vis-à-vis the employees.
How
are the Third Parties Affected?
All important contracts and agreements between the corporation and
its suppliers, customers and other parties, including banks and
land lords, must be legally transferred to the purchaser, failing
which they are not effective against the purchaser, nor can they
be enforced by the purchaser.
In a share transaction, since ownership of the corporate assets
is not changing, legal title to these contracts and agreements does
not have to change. However, most important contracts and agreements
contain restrictions against transferability without the third party’s
consent, including “change of control” provisions, which
provide that a change of control in the ownership of the corporation
is treated the same as a transfer of the rights in the contract.
Failure to obtain consent of the third party to the transfer of
the contract could lead to a breach under the term of the agreement.
Purchasers should also be mindful of “bulk sales” legislation
in certain jurisdictions (In Ontario it is the Bulk Sales Act) which
limit or restrict the right of a corporation to sell a significant
portion of its assets without adequately providing for payment of
all creditors of the corporation.
Are
there any Tax Issues which must be Consider?
The simple answer to this question is yes. The tax consequences
of the structure you choose can be very important to the decision
as to whether to proceed by way of the asset purchase or share purchase.
The nature of these differences is outside the scope of this Article,
therefore it will not be discussed here. Again, one should consult
with a professional adviser regarding the tax issues.
As you can see, the question as to how to structure a purchase can
be a complicated one in a medium size business, with many issues
to be considered, weighed and balanced against one another. The
ultimate decision as to which structure to select will ultimately
be based upon which of the considerations weigh most heavily on
the parties to the transaction.
Provided
by Ben Hanuka, LL.B.
|
