Briefing Note - Selling a Business and Sales of Shares

Considerations for a Purchaser

When a purchaser acquires a company by the purchase of its share capital, both the assets and liabilities of the company are acquired. Therefore, in a sale of the business is essential to investigate the target company to ascertain exactly what that state of affairs of the company will be at the time of the purchase of the shares. This is done by conducting an investigation of the target, its assets and its liabilities. This will usually be in conjunction with the due diligence enquiries undertaken by the investigating accountants and set out in a report prior to the contract for purchase. The information gathered culminates in a disclosure letter and associated documentation in the sale, together with warranties as to the state of the company at the time of purchase. Control is taken of the company rather than individual assets.

A purchase of shares in this way indirectly takes over the company’s assets at their historic cost; they may inherit a potential deferred tax liability. This usually affects the cost that the purchaser is willing to agree to pay for the shares.

Purchasers' Interests

After an inspection of a company’s properties and its assets, an investigation of the company itself should follow. Such enquiries include:

• appropriate company searches
• inspection of statutory books
• investigation of the title to property and premises verifying the ownership of the target’s own intellectual property rights and if necessary, the nature and terms and conditions of licences to use intellectual property owned by others. Implied terms may be important in this regard.
• verifying the target’s financial position, with reference to overdrafts, charges and provision of guarantees
• enquiring into any material litigation or product liability exposure
• if necessary, engage environmental consultants, surveyors, pension advisors and insurance brokers
• obtaining appropriate warranties and indemnities to ensure the opportunity for recourse by the purchaser against the vendor should the investigated state of affairs not prove to be the case.

Vendors Considerations

A share sale is technically a straightforward transaction, accomplished by the execution of standard share transfers. However, the sale is may be effected by a long share sale agreement, incorporating many warranties and, sometimes, a tax indemnity (or deed of covenant), allowing potential claims to be made by the purchaser against the vendor.

From a vendor’s perspective, the sale of shares will be a disposal for capital gains tax purposes. Outgoing shareholders usually aim to maximise their ‘net of tax’ position and avoid pitfalls arising from anti-avoidance legislation (Income and Corporation Taxes Act 1988 s. 703). Various possibilities to do this include:

• Leaving the UK and attaining non-residence status
• Deferring the charge by taking loan stock or other securities issued by the acquiring company
• Having the target company declare a substantial dividend or buying some of the vendor’s shares prior to the sale.

A share sale is favourable if the vendor plans to discontinue its business as liabilities of the target company will inevitably pass to the purchaser and the risk of a double tax charge is avoided.

If the vendor plans to stay in business, a share sale is normally not recommended since gains realised on the sale of the shares cannot be rolled-over into the purchase of new business assets.