Share sale versus asset sale distinction

This is a fundamental distinction in commercial transactions and one that has significant legal, tax, and practical consequences. Here is a clear explanation of the two structures.

Share sale:

In a share sale, the buyer purchases the shares in the company from the existing shareholders. The company itself continues to exist as the same legal entity. Everything that belongs to the company, including its contracts, employees, assets, liabilities, debts, intellectual property, and legal obligations, stays within the company. The buyer simply steps into the shoes of the shareholders and becomes the new owner of that legal entity.

The key consequence is that nothing within the company technically changes hands. The company still owns what it owned before. What changes is who owns the company. This means the buyer inherits everything, including any hidden or unknown liabilities such as historic tax issues, potential claims, environmental liabilities, or contractual disputes that predate the sale.

Asset sale:

In an asset sale, the buyer purchases specific assets from the company rather than buying the company itself. The buyer can pick and choose which assets to acquire. These might include equipment, stock, goodwill, intellectual property, customer lists, trade names, premises, or particular contracts. The company continues to exist after the sale, but it no longer holds the assets that were sold.

The key consequence is that the buyer can generally leave behind liabilities it does not want. The selling company retains its debts and obligations unless the buyer expressly agrees to take them on.

Important differences in practice:

1. Liabilities. In a share sale, the buyer takes on all liabilities, known and unknown. In an asset sale, the buyer generally only takes on what it agrees to. This is why buyers often prefer asset sales and sellers often prefer share sales.

2. Contracts. In a share sale, contracts generally continue because the contracting party (the company) has not changed. In an asset sale, many contracts will need to be assigned or novated to the buyer, and some may contain clauses preventing this or requiring third-party consent.

3. Employees. In a share sale, the employees remain employed by the same company, so their employment simply continues. In an asset sale, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) will usually apply, automatically transferring employees to the buyer on their existing terms. TUPE carries its own compliance obligations and risks.

4. Tax treatment. This is where the two structures diverge considerably. In a share sale, the sellers are disposing of their shares and will typically be subject to capital gains tax, potentially with business asset disposal relief (formerly entrepreneurs' relief) if they qualify. The company itself does not usually suffer a tax charge. In an asset sale, the company is disposing of its assets, which can give rise to corporation tax on any gains. The proceeds then sit in the company and further tax may arise when the shareholders extract those proceeds, for example as a distribution or on a winding up. This potential double layer of taxation is one reason sellers often prefer share sales.

5. Stamp duty. A share sale attracts stamp duty at 0.5 per cent on the purchase price. An asset sale may attract stamp duty land tax if property is included, and VAT may also be relevant depending on the assets being transferred, although the transfer of a business as a going concern (TOGC) rules can sometimes disapply VAT.

6. Due diligence. In a share sale, the buyer needs to carry out thorough due diligence on the whole company because it is inheriting everything. In an asset sale, due diligence can be more targeted because the buyer is only acquiring specific assets.

7. Warranties and indemnities. In a share sale, the buyer will typically require extensive warranties and indemnities from the sellers to protect against unknown liabilities. In an asset sale, warranties tend to be narrower because the buyer has more control over what it is acquiring.

8. Simplicity and speed. An asset sale can be more complex in terms of documentation because each asset may need to be separately transferred, contracts assigned, and third-party consents obtained. A share sale can sometimes be more straightforward because ownership of the company simply passes, though the underlying due diligence may be heavier.

Which structure is used in practice often depends on the relative bargaining positions of the parties, the nature of the business, the tax position of the sellers and buyer, and whether there are particular liabilities or assets that one side wants to include or exclude.

If you are considering a specific transaction, the choice of structure is one of the most important early decisions to get right, and it is worth thinking carefully about the tax, liability, and practical implications of each option before committing to a structure.