ASSET versus SHARE Purchase Business Transaction
Corporate Buy-out - Selling Shares - Forced to Sell - Buying out Shareholders - Buying into a Company
Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
The distinctions as between an asset purchase and a share purchase business transaction are critical to the acquisition process, from its conceptualization, the proposal, the negotiations and ultimately the results for each of the seller and the purchaser. As such, it is important to understand these distinctions, which need to be explored further in context of the actual business transaction that is being undertaken. Also of significance is looking at both asset purchase and share purchase transactions from the perspectives of each of the purchaser [more on purchaser's perspective] and the seller [more on seller's perspective].
A. What is Transferred?
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Asset Purchase: Specific, selected assets (e.g., equipment, inventory, intellectual property) and specifically assumed liabilities of the target business.
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Share Purchase: The shares of the target company. The entire legal entity, including all its assets and liabilities, is transferred.
B. Legal Entity
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Asset Purchase: The selling company (legal entity) remains intact, holding any non-transferred assets and liabilities.
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Share Purchase: The target company (legal entity) continues to exist, but its ownership changes hands.
C: Liability Assumption
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Asset Purchase: The buyer "cherry-picks" and typically assumes only specific, agreed-upon liabilities (excluding most historical and unknown liabilities). Lower risk for the buyer.
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Share Purchase: The buyer assumes all of the company's liabilities, both known and unknown (including contingent, historical, or undisclosed risks). Higher risk for the buyer.
D. Due Diligence
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Asset Purchase: Focuses mainly on the title and condition of the specific assets and assumed liabilities. Generally less extensive.
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Share Purchase: Must be thorough and comprehensive to uncover all potential known and unknown liabilities of the entire company. Generally more extensive.
E. Contracts/Continuity
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Asset Purchase: Contracts, licenses, and permits do not automatically transfer. Assignment or renegotiation is often required, which can be complex and may require third-party consent.
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Share Purchase: Contracts, licenses, and permits remain with the company and generally continue uninterrupted (unless they contain a "change of control" clause). Better business continuity.
F. Employees
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Asset Purchase: Employees must be formally terminated by the seller and then rehired by the buyer, although the complexity of employment law doesn't necessarily produce the clean break that many might perceive.
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Share Purchase: Employment relationships automatically continue as the legal employer (the company) doesn't change.
G. Tax Implications (General)
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Asset Purchase: Buyer often gets a favorable "step-up" in asset basis for depreciation. Seller may face double taxation (tax on corporate gain, plus tax on distribution to shareholders).
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Share Purchase: Buyer retains the existing tax basis of the assets (no step-up). Seller generally receives more favorable capital gains tax treatment (single level of taxation).
These operative distinctions as between an asset purchase and a share purchase business transaction can be further differentiated on the basis of the objective purpose and results that tend to be sought and realized from each of these transactional approaches:
W. The Target of the Transaction
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Asset Purchase: The transaction is between the buyer and the selling company. The buyer purchases assets directly from the company. The seller's legal entity still exists after the sale.
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Share Purchase: The transaction is between the buyer and the selling shareholders. The buyer purchases the ownership interests (shares) from the shareholders. The company itself remains as a legal entity, but with a new owner.
X. Control Over Liabilities (Risk)
This is often the most critical difference, largely determining which party prefers which structure:
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Asset Purchase: Favored by buyers because they can legally limit the liabilities they acquire, shielding themselves from much of the seller's unknown or historical liabilities.
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Share Purchase: Favored by sellers because it provides a "clean break"; they transfer all liabilities—known and unknown—to the buyer with the company.
Y. Complexity and Administration
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Asset Purchase: Can be administratively complex as every asset and contract must be individually identified, valued, and legally transferred (e.g., re-titling real estate, assigning leases, transferring licenses).
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Share Purchase: Generally simpler to execute, as ownership is transferred by handing over the shares. The underlying assets and contracts don't need to be individually moved, making it ideal for a business where continuity of critical contracts is paramount.
Z. Tax Treatment
Tax consequences are highly jurisdiction-specific, but generally:
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Asset Purchase (Buyer Benefit): The purchase price is allocated to the individual assets, allowing the buyer to "step up" the cost basis of the assets for future depreciation, offering a tax shield.
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Share Purchase (Seller Benefit): The sale of shares is often treated as a capital gain for the selling shareholders, which is typically taxed at a lower, single rate compared to the potential double taxation the company and shareholders might face in an asset sale..
For knowledgeable and experienced legal representation in undertaking business acquisitions, or facilitating the sale of your current business, contact corporate business lawyer Christopher Neufeld at Chris@NeufeldLegal.com or 403-400-4092 / 905-616-8864.
