When one company wishes to acquire another company there are two methods of achieving the goal; a Share Transfer Agreement or an Asset Transfer Agreement. It will be for the buyer and the seller to decide which course of action is appropriate to their own situation.
Share Transfer Agreement
The whole shareholding of the target company becomes an asset of the purchasing company; it becomes a subsidiary company which can continue trading.
The contracts of the target company remain enforceable, and run in the usual course. The employees of the target remain employed on the same terms.
It is necessary to do due diligence to learn as much as possible about the target company before acquiring because the debts and liabilities remain with the company regardless of the shareholding. There may be outstanding legal claims and issues that remain to be solved. The purchaser can limit its exposure by seeking indemnities warranties from the seller; which bind the seller as responsible to reimburse the purchaser for any costs arising from named pre-sale issues.
Asset Transfer Agreement
With an asset transfer agreement, part of the company’s assets may be purchased or the entirety of the assets may be purchased. Assets can be widely defined including buildings, machinery, IT infrastructures, a trading name or intellectual property.
During an asset transfer none of the contracts of the target transfer automatically, and the purchaser would have to seek to develop new relationships with suppliers and clients. The employees do not always transfer, however where they do TUPE regulations will apply. In either event, the buyer and the seller are obliged to consult with the employees at least 30 days before the conclusion of the transfer.
Tax can be a big influence on deciding whether a share transfer or an asset transfer is most appropriate. The buyer will pay stamp duty on shares at 1% and 2% stamp duty on most assets. Businesses should always seek tax advice prior to proceeding with a transfer.
What the buyer is actually seeking to gain from acquiring the target will be a large influencer; if the buyer only wants the IT platform, it might be overkill to acquire the shareholding of a company with a large amount of physical assets.
Liabilities of the target and issues uncovered due diligence may suggest that an asset transfer is the better option. This is of particular concern if there are unknowns or if the seller is unwilling to give fulsome indemnities, warranties or personal guarantees. Conversely, valuable client contracts of the target may tilt the decision in favour of a share transfer; a share transfer may be more straightforward than assigning or novating third-party contracts.
Where the target company has built a good reputation, and goodwill in its brand it may be necessary to purchase the shares unless the target company will be wound down after an asset transfer.
The above is provided for information purposes and is not intended as legal advice. We, at Fitzsimons Redmond, would be happy to guide both buyers and sellers through a share or asset transfer. Please contact us on 01-676 3257.
By Lisa Quinn O’Flaherty
Solicitor at Fitzsimons Redmond