Share Sale vs Asset Sale: Which Is Right When Selling Your Business?

11 Apr

Introduction

When selling a business, one of the most important decisions owners must make is whether to sell the company's shares or its assets. While both methods can achieve a successful transfer, they carry very different legal and financial implications. Understanding these differences—in particular what is being transferred (and the regulatory requirements involved), employment obligations, impact on capital structure, and tax implications—is essential for both sellers and buyers to avoid future disputes and ensure a smooth transition.

What’s Being Transferred?

In a share sale, the seller transfers ownership of the company itself. The company remains legally the same: it keeps its assets, contracts, liabilities, and company number registered at Companies House. Only the ownership of the shares changes. Buyers often change the company’s name or address after completion, which requires a special resolution under section 77 of the Companies Act 2006. If the buyer is a company, the target will typically become its subsidiary under section 1159 of the Act.

Most contracts, leases, and licenses continue unchanged unless they contain specific clauses that allow termination or renegotiation on a change of control. Regulatory approvals may also be necessary—for instance, under section 102 of the Gambling Act 2005, license holders must notify the Gambling Commission if control changes.

Liabilities and litigation also remain with the company. Buyers and sellers often address these risks through price adjustments, warranties, or indemnities.

In an asset sale, only specific assets and liabilities are transferred. The seller retains control of the corporate entity, which may continue trading or be wound up. Assets such as property, equipment, stock, and intellectual property are individually identified in the sale agreement. Contracts and leases often require assignment or novation, and some liabilities may stay with the seller. Unlike share sales, change-of-control provisions generally do not apply.

In both types of sales, valuations are key. In private transactions, independent valuations are often commissioned, whereas the value of listed companies is set by the market, and acquisitions are regulated by the City Code on Takeovers and Mergers and monitored by the Takeover Panel.

Impact on Shareholders and Capital Structure

A share sale directly affects ownership. Where there are multiple shareholders, all may need to agree unless "drag-along" rights are in place to compel minority shareholders to sell. "Tag-along" rights allow minority shareholders to sell alongside majority sellers. Without these mechanisms, dissenting shareholders could delay or block a sale. Companies are advised to prepare early in their development by including these provisions either in their Articles of Association or in a shareholder agreement.

In an asset sale, the capital structure remains unchanged. Shareholders continue to own the company, although the company’s value may decline if key assets are sold. Shareholder approval may be required for asset sales above a certain threshold, depending on the company's constitution. Sellers must also plan how remaining liabilities will be managed and how sale proceeds will be distributed.

Employee Considerations

In a share sale, employees usually remain with the company under their existing contracts, as the employer remains the same legal entity. The Transfer of Undertakings (Protection of Employment) Regulations (TUPE) do not apply. However, change-of-control clauses in employment contracts or bonus plans may be triggered, resulting in bonuses or new retention packages being negotiated. In some cases, an earn-out structure may be introduced, where sellers (often key employees) receive additional payments based on future performance.

In an asset sale, TUPE typically applies. Employees assigned to the sold assets automatically transfer to the buyer, who must honor existing employment terms. Non-transferring employees may face redundancy or termination, and both parties must inform and consult employees beforehand to avoid penalties.

In both scenarios, employment issues should be addressed early to avoid disruption and ensure compliance with employment law protections.

Tax Implications

Tax considerations vary significantly between structures. In a share sale, sellers generally face capital gains tax on their proceeds.

In an asset sale, tax is more complex. The selling company may be liable for corporation tax on any gain made from the sale of assets, and shareholders could face additional tax if proceeds are subsequently distributed by dividend or liquidation. Buyers, on the other hand, may prefer asset purchases to benefit from asset depreciation or certain liability assumptions.

Given the complexity—especially where cross-border elements are involved—specialist tax advice is crucial for both parties.

Conclusion

Choosing between a share sale and an asset sale has far-reaching consequences for owners, buyers, employees, and other stakeholders. Share sales often offer simplicity for sellers but expose buyers to greater risk. Asset sales allow buyers to "cherry-pick" desirable assets but require more detailed legal and operational planning.

Key factors like shareholder rights, employee transfer obligations, regulatory approvals, and tax outcomes must be carefully considered from the outset. Early involvement of legal, financial, and tax advisors is essential to structure a deal that protects all parties and supports a smooth and effective transition.

This article is intended for information purposes only and provides a general overview of the relevant legal topic. It does not constitute legal advice and should not be relied upon as such. While we strive for accuracy, the law is subject to change, and we cannot guarantee that the information is current or applicable to specific circumstances. Costigan King accepts no liability for any reliance placed on this material. For further details concerning the subject of the article or for specific advice, please contact a member of our team.