Share deal versus asset deal

SHARE TRANSFER OR AN ASSET DEAL: PROS AND CONS

The sale of a company is mostly realized by the transfer of the shares ("share deal"). An alternative is the transfer of the business or of purely specific assets... Below we comment some of the points of attention of these two options.

TRANSFER OF SHARES
In case of a share transfer, the buyer acquires all the assets and liabilities of the acquired company ("target company") including all the risks of the target company that are not reflected in its balance sheet. The prospective buyer must therefore do his homework to identify all the material risks inherent to the target company. This investigation often determines the structuring of the transaction (e.g. not a share transfer but an asset deal, a deferred payment of part of the acquisition price, a variable price for the shares, etc.). This due diligence is tailor-made and depends on the type of company (e.g. industrial or service company).
Some items to be investigated besides outside the classic financial investigation by a buyer:

TAX POINTS OF ATTENTION IN A SHARE DEAL

• The Belgian tax authorities can carry out an audit with respects to issues which took place in the last three years or even seven years (in the event of fraud). The financial consequences of a tax review of the tax authorities conducted after a share deal with respect to the mentioned previous financial years are borne by the target company and therefore by the buyer. A tax investigation prior to an acquisition is therefore a must for a buyer.
• An acquisition usually implies a change of control of the target company, as a result of which its losses carried forward for tax purposes in a Belgian company are in principle not retained.
• The tax authorities also introduced an excess cash (cash not needed for the normal operation of the company regulation. This implies that it is strongly advisable that a buyer requests that excess cash will be paid out in the target company before the acquisition (through capital reduction and dividend payments). A well calculated amount of the cash necessary for the proper functioning of the target company is recommended. The Board of Directors of the target company needs to be asked to comment in writing before the transfer.

ENVIRONMENT
In contrast to the sale of land by notarial deed, the Public Waste Agency of Flanders (OVAM) a soil certificate is not required for the "transferred" land in a share deal. After all, the legal owner of the site of the target company, does not change. The buyer must therefore check for himself whether there is any environmental pollution and what the financial consequences are of any corresponding remediation obligation to be borne by the target company.
Checking of the environmental permit of the target is still valid for a sufficient period of time and whether there are pending complaints against this environmental permit is also highly recommended for a buyer. 

INSURANCE POLICIES
In the target company sufficiently insured? An audit of whether the coverage is sufficiently substantial will show whether or not the structural costs of this target company are realistic.
Does the target company comply with all technical standards valid for the countries to which it exports these products? For example: if these products do not meet German DIN standards, these products may not be exported to Germany while sale in Belgium may be problem-free. This can have a significant impact on the commercial opportunities of the target company.

COMMERCIAL
Clients of the target company may have included termination options in their contracts with the target company in case of a change of control.These contracts should therefore be thoroughly checked to avoid negative commercial surprises.LEGAL INVESTIGATION

An examination of ongoing legal proceedings both against and from the target company is an absolute must and can determine whether an acquisition is justified or should be structured differently...A check of the bank loans and the guarantees provided in the corresponding contract can be extremely important. It may be appropriate for a buyer to to renegotiate these securities before the acquisition. 

IMPACT OF THE DUE DILIGENCE IN THE ACQUISITION AGREEMENT
An well-informed buyer must ensure that the due diligence he orders has the right scope. Subsequently, his lawyers must properly incorporate the results into the acquisition agreement. The drafting of the clauses that determine how damage, e.g. determined after a takeover, will be compensated at the expense of the seller is crucial.

A well-informed seller often requests extensive representations and warranties from the buyer, stating that the buyer declares to be fully informed about the condition of the target company. The buyer must ensure that such statements in the acquisition agreement do not inadvertently block him from claiming damages in the event that the buyer discovers unexpected damage after the acquisition.

CONFIDENTIAL INFORMATION
The seller of the shares can be asked to deliver a lot of confidential business information in a due diligence process. This is a delicate exercise and protect himself. For example, a seller can choose to make only certain strategic information (e.g. customer list) available after the moment that a binding offer is signed.
The seller should foresee that the prospective buyer is bound by a confidentiality clause that provides that the prospective buyer must treat the information confidentially and may not distribute it and, in particular, may not use it for purposes other than the due diligence investigation and the intended acquisition.

TRANSFER OF A BUSINESS VIA AN ASSET DEAL

In this case the buyer can choose to acquire only selected assets and liabilities.  There is an important difference from a tax point of view. The acquisition price of shares is not tax deductible, while the acquisition price of a business can be depreciated. Also legal proceedings can be kept outside the scope of an asset deal, etc.
In both a share deal and the acquisition of a business asset, the buyer may be liable for the tax and social security debts incurred by the target company. The buyer can try to conclude agreements with the main government institutions involved before the transfer of assets to avoid surprises.

AN ASSET DEAL IS NO EASIER THAN A SHARE DEAL!Sometimes on the contrary! In an asset deal, an appropriate acquisition agreement must be negotiated for each asset acquired separately..
Our law firm is familiar with all aspects of an acquisition project.
Besides ensuring the complete legal documentation, we assist from the start in aspects such as selecting the most appropriate structuring of the transaction, and when appropriate all financial calculations about the transaction, taxation.

Contact our specialized corporate law team : by phone or e-mail.

Lieve DEHAESE, Jessie DECKMYN, Jirte FORIER and Sofie SWINNEN are our corporate lawyers.

Guido QUANTEN
Expert M&A