Whenever two parties are discussing the sale or purchase of a business, this is usually the first point of contention – so why does it make a difference, and which should you buy?

Shares

When you purchase the shares of a company, you are buying all of the historical baggage that goes with it, which means that those liabilities of the company that are not time-barred under the Statute of Limitations will follow the shares that you buy.

The limitation periods for claims that can be brought against a company can often be quite long, for example:

• Contract Claims – claims for breach of contract can be brought up to 6 years from the date of breach, or up to 12 years if the contract was executed as a deed;

• Negligence Claims – up to 6 years;

• Personal Injury Claims – up to 3 years; and

• Tax Claims – brace yourself – HMRC can challenge previous tax returns for up to 7 years, or 21 years where they suspect fraud.

Assets

As an alternative to buying a company, you can simply purchase the assets and trade of a company, which allows you to pick and choose which assets you want to take, and which liabilities you leave behind (although, by law, liabilities relating to employees transfer to the Buyer automatically and cannot be excluded). So why doesn’t everyone buy assets?

There may be a number of reasons, but the following are most common:

• The Seller refuses to do an asset only deal – as far as the Seller is concerned, if he sells the assets and trade of a business, he will still have a shell company on his hands which now has no assets other than cash (which will have to be extracted from the shell company by way of dividend) and potentially a heap of unwanted liabilities (which may impact on the amount of cash that can be extracted); each company is different, and sometimes the shell company left behind after an asset sale can be very simple to wind up, but it really is the Seller’s choice as to whether it will be an asset or share sale;

• Contracts – if the company has key contracts with suppliers or customers which the Buyer wants to retain, these would have to be assigned (transferred) to the Buyer; sometimes key contracts include a prohibition on assignment without the consent of the other party, meaning that a negotiation would be required to persuade the other party that the Buyer is a fit and proper entity to do business with them – sometimes that conversation is held before the purchase goes though, sometime it is left till afterwards;

• Continuity – where a target company has a significant number of contracts that require assignment, or IP registrations that will need to be transferred, or property leases to be assigned, or there is simply a desire not to telegraph that there has been a change of ownership, it may be simpler to buy the shares – however, be aware that some supply or customer contracts may contain a “change of control” clause that requires notification of a change of share ownership, and allows the other party to terminate if they are unhappy with the identity of the new owner.

Ultimately, whether you buy assets or shares will depend on the nature of the target business, and what you can negotiate. The way to protect yourself against unpleasant surprises lurking in the target company is to carry out an effective tax and legal due diligence exercise as soon as you have signed Heads of Terms so that any problems can be identified at an early stage. If any significant liabilities are uncovered your options will then be:

• buy the assets instead;

• chip the price;

• seek an indemnity ( a promise to pay) against those liabilities; or

• withdraw from the deal.

Allan Janes LLP have significant experience of M&A transactions at all stages including pre-sale due diligence, fund-raising, contract negotiation and completion. For further details please contact Allan Janes’ corporate partner, Iwan Emanuel, on 01494 893570.