The pandemic pause button has been switched off. M&A activity is running hot and will continue to do so throughout 2022.
If you are looking to buy a business in Australia (solvent or otherwise), it is crucial to first weigh up the pros and cons of your transaction structure. In this article, we consider the differences in flow-on effects arising from an asset purchase and a share purchase ─ and the circumstances in which there are both.
The buy-side and sell-side of a transaction each require very different considerations.
Asset purchases explained
In an asset purchase, a seller will generally want to sell all of the assets of the business so that it can maximise its return and reduce the redundancy cost to it of anything left behind.
As a buyer, however, you can theoretically pick and choose which assets in a company you want to acquire, leaving behind those you don't want. This covers intellectual property, customer lists, business equipment, employees and key contracts.
We say "theoretically" because GST will apply to your transaction if you acquire less than what is necessary to operate the acquired business on a "going concern" basis. Depending on the asset/business value, the GST cost can be a weighty consideration.
Because a buyer acquires assets used in the business, and not the corporate vehicle that owns the business, they do not take on any exposure to future claims in respect of the conduct of the business prior to the sale, the financial performance of the corporate vehicle prior to the sale, or its tax history. Those claims will stay with the old corporate vehicle. Some exceptions apply, such as accrued benefits for employees you take on and trade liabilities that support the trade revenue stream you acquire. However, the "skeletons" stay very much in the seller's closet and don't travel to the buyer.
Share purchases explained
In a share purchase, a buyer acquires all the share capital in the company that runs the business (target company). This means the buyer will step wholly into the shoes of the target company and take on all the "skeletons" of the target. This includes employee claims, breach of contract claims by customers and suppliers, unpaid tax liabilities, and so on.
A simple way to view the two transaction structures is through the lens of home ownership. An asset purchase is buying and moving out the furniture inside a house, whereas a share purchase is buying the land, beams, bricks and other foundational structures of the house, along with the furniture inside the house if offered. At the risk of overplaying the analogy, you will also inherit the rats, cockroaches and potential termites inside the structure of the house!
In both asset and sale purchases, diligence is required on the target company, the business and its assets covering legal, accounting and tax disciplines. Returning to our house analogy, this would be the equivalent of conducting property searches, building inspections and pest reports.
Below are some key items to consider when deciding between a share purchase and asset purchase. This is not an exhaustive list and has been simplified for our purposes. For detailed advice and support regarding your next business purchase in Australia, please contact our Corporate team.
The historical assets and liabilities of the target company will transfer to the buyer on and from completion of the sale. This includes the seller’s historical financial reporting errors and tax non-compliance.
Buyer liability is limited to the quality of the assets purchased and the specific business liabilities that are assumed, such as trade creditors and hire purchase arrangements over equipment (if not paid out) at completion.
Generally, the key contracts in the name of the target company will continue as usual.
However, many contracts have "change in control" provisions that may be triggered by the acquisition because "control" of the target entity changes. In such contracts, the supplier or customer may have a right to terminate its contract with the target company. An obvious example of this is landlord consent, where the target company leases, rather than owns, the property it occupies.
Each contract the target company has entered into for the business has to be specifically assigned to the buyer. Usually, the contract will set out the rules of assignment; the third party often has a right of consent which, if not given, means the buyer will not be able to acquire the contract. This is dealt with by identifying material contracts with this kind of clause and making it a condition of the transaction that the third-party consent is obtained on terms the buyer is happy with. This can leave your transaction at the mercy of third parties (eg. what happens if they don't consent?) and will certainly delay the completion of the transaction while you negotiate with those third parties.
Some government licences and permits are not assignable, in which case the buyer will need to secure its own equivalent licence or permit before taking over the business.
The employees of the target company will continue on their current terms and conditions.
New employment contracts are not required, but for key employees the buyer may want to require that they sign up to new employment contracts to bring their terms more into line with the buyer's expectations. This includes benefits, duties, confidentiality obligations and restraints on their ability to work for competitors, should they leave.
To secure employees who work in the business, the buyer needs to make an offer of new employment to each employee with a commencement date of the date of completion of the acquisition.
As a commercial matter, a buyer will need to agree with the seller on whether they will make an offer to all existing employees of the business or only some of them.
The seller may need to make employees who aren't made an offer redundant following the sale, and the parties will have to agree who is going to bear that liability.
If a buyer makes an offer to an employee and they don't accept it, then they have no right of redundancy against the seller (because they were given a chance to continue in their current job) and no claim against the buyer (because they didn't accept the offer). Accordingly, in most cases the seller will want the buyer to make an offer to all employees in the business.
The buyer's offer to each employee must be on the same or substantially the same terms as the employee's existing employment contracts. Otherwise, there is a risk that a redundancy will be triggered and a seller would expect the buyer to bear the redundancy cost of making a "bad" offer.
It is important to calculate all accrued employee entitlements of the transferring employees (annual leave, long service leave) as the buyer will assume that liability as part of hiring those employees. Usually, such accrued liability is a deduction from the headline purchase price for the transaction.
Ownership of company
Ownership of the target company, and all its legacy issues, will transfer directly to the buyer after all the shares in it are transferred by the seller.
The seller retains ownership of the target company and any of its subsidiaries (and all their historical skeletons).
Ownership of assets
By simply buying the shares in the target company the buyer will, indirectly, own all the assets and assume all liability of the target company.
Other than for third party consents as noted above and removing any securities registered against the assets of the target company, no further action is required to gain control of the assets of the company.
"Business as usual" securities (such as the claim a supplier has over rented equipment) will remain in place following completion of the transaction. Intellectual property is already in the name of the company being purchased, so there is no need to transfer.
The buyer needs to identify every asset of the business and meet the legal requirements of transferring ownership of these assets over to the buyer.
Sometimes this is as simple as agreeing to transfer ownership in the sale documents. This applies to most plant and equipment.
Where third parties have an interest in the assets, buyers may need their prior consent, for example to assign a lease or other material contract or to take over the hire purchase arrangements for equipment used in the business.
For "registered" assets, such as business names, trademarks and domain names, buyers need to understand and then comply with the forms and procedures required by the relevant regulator to register the transfer in their name.
Tax (GST, transfer/stamp duty)
In most states, transfer duty is not applicable on a share sale unless landholder duty applies.
In New South Wales, Western Australia and Queensland, for example, such duty applies where the unencumbered value of real property interests (including leases) held by the target company is $2 million or more. In Victoria the relevant threshold is only $1 million. Holding land via a trust may also be caught.
In many states, transfer duty is payable on an asset sale if the sale includes land or an interest in land, including leases. It is therefore important to carefully structure the way the sale of land component of any business acquisition is documented.
Even if duty is not payable in the key state or territory in which the business operates, buyers may need to apportion and pay stamp duty on that part of the business or its assets that have a relevant nexus to states and territories in which stamp duty is payable.
No GST is payable if the sale is classified as a "going concern". This means the buyer has to acquire "everything that's necessary for the continued operation of the business" after completion of the transaction. When picking and choosing assets, tax advice is required to ensure you are picking enough to avoid having to pay GST on the acquisition.
All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.