When buying or selling a business, there are generally two primary methods to structure the transaction: a share purchase or an asset purchase. Each approach has its own advantages and disadvantages, depending on the specific circumstances of the parties involved. Understanding the differences between these transaction types is essential for determining which structure best aligns with your objectives.
Share Purchase
A share purchase involves acquiring the shares of a target company rather than its individual assets. In this scenario, the buyer purchases the entire legal entity, which means all assets, liabilities, contracts, and historical obligations are included in the transaction. The corporate entity continues to exist, but the ownership changes hands.
Implications for the Buyer
One of the main advantages for the buyer in a share transaction is business continuity. Existing contracts, licenses, permits, and employee relationships generally remain in place, reducing the need for renegotiation and allowing for a seamless transition. In many cases, the change in ownership can occur without significant disruption to the business operations.
However, this continuity also means that the buyer assumes all of the company’s liabilities, both known and unknown, including potential litigation risks and historical obligations. Thorough due diligence is essential to identify and assess these risks before completing the transaction.
Implications for the Seller
For the seller, a share transaction often provides a cleaner exit from the business. The selling shareholder disposes of their entire ownership interest, transferring the corporate entity and all its liabilities to the new owner. Share sales can also offer tax advantages.
On the other hand, share transactions typically require extensive due diligence by the buyer, which can be intrusive for the seller, as it often involves disclosing significant amounts of sensitive business information.
Asset Purchase
Alternatively, an asset purchase involves acquiring specific assets of a business rather than its shares. The buyer can select which assets and, in some cases, which liabilities to assume, leaving the remainder with the seller.
Implications for the Buyer
The primary benefit for the buyer in an asset purchase is the ability to choose desired assets and avoid unwanted liabilities, thereby reducing exposure to unknown or contingent claims. Asset purchases may also provide tax benefits, such as the ability to allocate purchase price to assets that can be depreciated.
However, Canadian courts have, in certain circumstances, applied the doctrine of “successor liability,” which can result in the buyer being held responsible for certain liabilities they intended to avoid. Employment law considerations also arise, such as whether employees’ prior service with the seller will be recognized for purposes of reasonable notice upon termination.
Implications for the Seller
In an asset purchase, the seller typically retains responsibility for all liabilities not expressly assumed by the buyer. The selling corporation continues to exist and may still face litigation or other claims. If employees are not retained by the buyer, the seller is responsible for terminating their employment and addressing any related obligations.
Conclusion
The differences between asset and share transactions are significant, and the optimal structure depends on the unique circumstances of each deal. Careful consideration of the legal, tax, and operational implications is essential when deciding how to proceed with the purchase or sale of a business.
That is why we recommend seeking legal advice from a qualified corporate lawyer any time you are considering buying or selling a business.
Written by Heather Dixon and Wyatt Shipley