Benefits and Disadvantages of Share Acquisitions | LegalVision UK (2024)

If you want to acquire another business, you may know that you can structure the transaction either as a share purchase or an asset purchase. As you may expect, each structure has its advantages and disadvantages. This article will summarise the key features of share acquisition and then explain why your business might benefit from a share acquisition rather than asset acquisitions, as well as some disadvantages you might wish to consider.

A share acquisition is one of the two main ways you can structure the purchase of another limited company. As the name suggests, you are effectively purchasing the shares held by the owners of the company you are buying.

For example, let us say you are the sole owner of YouCo Limited. You approach the four owners of WeCo Ltd. You offer to buy their shares for £100,000. This is a share acquisition if they agree to transfer their shares to you.

This is distinct from an asset purchase, where you purchase individual assets the target company owns, such as machinery, intellectual property, and inventory.

Structuring a Share Acquisition

When you structure a business purchase through a share sale, your company will acquire the shares and become the target company’s owner. When this happens, the purchased company is called a subsidiary (or undertaking), and the purchasing company is called the parent company.

Where your company is part of a more significant business with multiple companies, there may be a holding company that owns the shares in all of the companies. In this case, the holding company may purchase the shares from the target company’s shareholders.

There are several benefits to buying a company through a share acquisition.

Continuity of Business

The only thing that changes during a share acquisition is the company’s ownership. Everything else stays the same. This means that share acquisitions provide a seamless transition with less legal paperwork. For instance, you do not have to amend contracts with third parties. Similarly, you will not have to renegotiate employee contracts because the employer remains the same.

You should scrutinise the terms of the sale agreement if the target company has valuable contracts with third parties, such as suppliers and customers. In some cases, these contracts will contain change of control clauses, which allow third parties to terminate the contract if the company is sold. Likewise, there is no guarantee third parties will continue doing business with the target company once it has been sold.

Group Organisation

The new company can slot smoothly in with your other group companies from your business’ perspective. In addition, you do not need to transfer assets to your existing company (though you can do so if you wish).

Likewise, the law ring-fences your target company’s liabilities from the rest of your business through the principle of limited liability. This means that if something goes wrong, such as if a third party later sues the target company, the rest of your business’ assets are safe from any claim.

Taxation

The law surrounding the tax implications of acquiring another business is quite complex. However, suppose you intend to sell any of the assets the target company owns at the point of sale. In that case, you may benefit from a lower tax liability than if you had purchased the assets directly from the target company.

Your business will also benefit from the target company’s continued tax identity. Your business will ultimately benefit if the target company is owed any tax relief, such as trading loss relief. Notably, HM Revenue & Customs does not charge any VAT for share purchases.

In saying that, there are some disadvantages to purchasing a company through a share acquisition.

Assumption of Liability

Any liabilities the target company owes to third parties, such as its debt and contractual obligations, will not disappear once you acquire its shares. While you are not legally responsible for any of these liabilities, the target company must continue to meet its obligations. If it fails to, a third party can sue it. Likewise, if there are any lawsuits or ongoing litigation, this will persist.

Because the target company’s liabilities stay with it, as a buyer, you are responsible for uncovering any matters related to the company that might impact its value or ability to trade. This process is called due diligence. Share acquisitions are a longer and more involved process than asset acquisitions.

Taxation

You will be charged a stamp duty for the purchase of shares, which is usually 0.5% of the purchase price (rounded up to the nearest £5).

If the target company has any tax liabilities, these will continue after the share purchase completes, and you will be indirectly responsible for managing these liabilities.

Key Takeaways

Share acquisitions are one of two main ways a buyer can acquire the benefits of another business. The principal benefit of a share acquisition is that it is relatively straightforward and requires less legal documentation to complete the transaction. The main disadvantage is that the target company’s liabilities follow it after the purchase completes.

If you need help with a business acquisition, our experienced business sales lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today at 0808 196 8584 or visit our membership page.

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