Key Differences Between an Asset Purchase and a Share Purchase in Business Acquisitions
Introduction:
When buying a business in British Columbia, two primary methods are available: an asset purchase and a share purchase. Each approach comes with its own legal, financial, and tax implications, and understanding these differences is crucial for making an informed decision that aligns with the buyer’s goals. This blog post will explore the key distinctions between asset purchase and share purchase transactions in British Columbia.
Nature of the Transaction: An asset transaction involves the acquisition or divestment of certain or all of a company’s assets, which may include equipment, inventory, real property, contracts, or lease agreements. Some liabilities may still transfer due to successor liability rules, but the seller retains ownership of some of the operating entity. On the other hand, a share purchase involves acquiring shares or ownership interests of the target company, resulting in ownership of the entire business, including assets, liabilities, and obligations. The buyer inherits all existing liabilities and risks associated with the business, even those not immediately apparent.
Liabilities and Risk: With an asset purchase, the buyer has more control over the liabilities they assume, leaving behind unwanted debts with the seller. However, certain liabilities may still transfer due to certain legislation. In a share purchase, the buyer assumes all existing liabilities and risks, including known and unknown ones, like pending lawsuits and tax obligations. If the business being purchased carries substantial potential for unknown liability claims, such as product liability, professional negligence, or environmental hazards, it may strongly indicate the necessity of opting for an asset purchase.
Contracts and Permits: In an asset purchase, the buyer usually negotiates or obtains new contracts, licenses, and permits to continue business operations, as existing agreements do not automatically transfer. On the other hand, in a share purchase, existing contracts and permits typically remain in force since the legal entity remains unchanged, avoiding the need for extensive renegotiations. This can be beneficial as in most cases it allows the buyer to continue business operations without the need for extensive renegotiations or obtaining new approvals.
Tax Implications: The choice between a share acquisition or asset acquisition becomes more complex due to the inherent conflict between the interests of the vendor and purchaser regarding income tax considerations. Typically, buyers prefer asset purchases as it provides a cost base for certain assets which can be depreciated. On the other hand, sellers prefer share purchases as it may result in preferential tax treatment, treating the sale proceeds as capital gains. Resolving this conflict becomes a matter of negotiation.
Due Diligence: Share purchase due diligence is broader and more encompassing, as it involves assessing the entire target company and assuming all its liabilities. On the other hand, asset purchase due diligence is more focused, as it centers on the specific assets to be acquired and allows for more control over the liabilities taken on by the purchaser.
Transfer of Employees: In an asset purchase, employment contracts do not automatically transfer to the buyer. While the asset purchase allows for a selective assembly of the workforce, certain obligations, such as length of service for severance pay, may still transfer. On the other hand, in a share purchase, the purchaser inherits the entire workforce and all severance obligations to employees, significantly impacting future plans for downsizing or integration.
Conveyancing Costs: Transferring shares is simpler than completing an asset transfer. Share transfers involve limited conveyance documents, while asset transfers require an extensive set of documents and potential third-party consents. Asset transfers may also incur significant registration costs and Property Transfer Tax. Share purchases may have to deal with contracts with third parties that contain restrictions on a change in control.
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