Asset or share sale: Legal factors to consider
NewsPosted by: Dental Design 8th May 2020
Where a dental practice is owned by a private company limited by shares, the seller can choose to transfer the business by selling shares in the company (where the dental practice is its only asset), or by selling assets of the company.
The buyer and seller may have opposing views on which form the acquisition should take. An advantage to one party ultimately means a disadvantage to the other. More often than not, the seller will want to sell their shares thinking that they will be transferring all liability for the company to the buyer. In contrast, a buyer will usually want to purchase the practice from the company with the ability to pick and choose which liabilities they take on. Unfortunately, things aren’t as straight forward as this.
Importantly, where the company owns many assets – including multiple dental practices – a share sale may not be viable if the buyer only wants to purchase one of the businesses. The transaction must then progress as an asset deal, unless the parties are willing to use a hive-down structure. This is discussed later on in this article, but let’s first look at some considerations that must be taken into account when deciding the structure of a sale.
Share sale means a clean break for seller, doesn’t it?
Following the transfer of its shares, a company continues to trade and its ongoing liabilities continue to be enforceable. Because a company sale is a seamless transfer, the buyer will automatically take over all liabilities (hidden or otherwise) of the company. As such, the buyer will want to make sure that they have investigated all aspects of the company thoroughly, leaving no stone unturned.
Moreover, a buyer will require wide protections in the sale agreement to ensure he has recourse should the company be saturated with undisclosed problems. The bulk of these protections are usually dealt with by way of warranties, which are statements given by the seller about the company and its assets. These assurances are time sensitive but still mean that a seller will be tied to the transaction for a period of time following completion. It is naïve for a seller to think that they can sell shares as a way to cut ties with a company and off load their liabilities.
Employees – a transferable asset?
On a share sale, there is no change of employer so TUPE regulations do not apply here – the company is the employer before and after the sale. This means that the sale has no direct effect on any employment contracts. However, as the new owner of the company, the buyer will be affected by any liabilities or obligations of the company in relation to the employees in the future.
In an asset sale, TUPE regulations apply and employees will automatically transfer to become the responsibility of the buyer. The seller no longer has a direct interest in the employees, but will still be tied in under any employment warranties set out in the sale agreement.
Trade continuity
An advantage of acquiring the entire issued share capital of the company is lack of disruption to the everyday running of the practice. From a patient or supplier point of view, very little will appear to have changed. Suppliers will usually be happy to continue with the company as before the transfer.
Where just the assets are being sold, an assignment or novation will be necessary where a buyer wishes to take over any existing commercial contracts. This will require consent of the contractor, who may wish to renegotiate terms such as interest rates. In addition, the buyer may have to work to build up trust with suppliers.
Choice of assets and liabilities
On a company acquisition, all the underlying assets are indirectly acquired by the buyer whether they are wanted or not. From a buyer’s perspective, an asset purchase allows for greater flexibility, as the buyer can choose which assets they wish to buy and which liabilities they want to takeover. The assets and liabilities that are to be transferred must be clearly stated in the sale agreement. This way, the buyer can avoid the risks associated with unknown or unquantifiable liabilities. As already mentioned, some liabilities (e.g. employees) are automatically transferred.
Hive-down – another way forward?
If the dental practice is one of a number of businesses owned by the company – and for various commercial/tax reasons, the parties do not wish to continue with an asset sale – they can agree that the business is hived-down. This is where the company sells some or all of its assets and undertakings to a brand-new company, usually set up as a wholly owned subsidiary of the company. The buyer then acquires the shares of the new company. The main similarity between a hive-down and asset acquisition is that only those assets (and liabilities) which the seller wishes to sell, and which the buyer wishes to buy, will be hived-down.
When considering the structure of a sale, it is important that both specialist legal and financial advice and guidance is sought.
Kerry Brooks of Goodman Grant Solicitors – contact on kab@goodmangrant.co.uk
For more information visit www.goodmangrant.co.uk or contact your nearest office:
London: 0203 114 2133
Leeds: 0113 834 3705
Liverpool: 0151 707 0090
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