After estimating the convenience of carrying out the acquisition of a commercial company (from now on referred to as company), one must consider the dichotomy between choosing the most suitable contract. Within the usual approach to this type of transaction, it is common to distinguish between either the direct purchase of the assets of a company (asset deal) or through the direct acquisition of stocks and shares (share deal) which would enable direct control of a company.After estimating the convenience of carrying out the acquisition of a commercial company (from now on referred to as company), one must consider the dichotomy between choosing the most suitable contract. Within the usual approach to this type of transaction, it is common to distinguish between either the direct purchase of the assets of a company (asset deal) or through the direct acquisition of stocks and shares (share deal) which would enable direct control of a company.
Next, the main characteristics of both legal tools will be explained in detail:
The company sale: share deal
A share deal is the acquisition of the stocks and shares of a company, which involves the global transfer of all of the assets and liabilities of the company in one single operation. Through this method, the parties of the contract are the partners of the company (the sellers) and the purchaser of the object of the sale as only one asset: the stocks or shares.
Advantages of a share deal
- It facilitates the transfer of rights and obligations of the company, which can translate into lower transaction costs, by permitting the global transmission of a set of rights and obligations through the transfer of one asset (the stocks or the shares). In any case, the contracts formalized by the company with third parties can be subject to so-called change in control clauses, which means that a change in the shareholder composition can lead to early termination of the contract. The lack of analysis of these clauses through the corresponding process of due diligence can lead to significant transactional risks
- It eliminates the necessity of obtaining consent from the creditors of the company under article 1205 of the Civil Code. In a share deal, the company continues to maintain its position within its credit rights, without requiring consent from the creditors.
Disadvantages of a share deal
- As previously mentioned, the objective of the contract is the acquisition of stocks and shares and not the purchase of the business, as it could have initially been estimated. Thus, the responsibility of the seller under article 1101 and 1124 of the Civil Code is limited to the fulfilment of the contract’s objective: the transfer of stocks and shares. The responsibility of the seller in relation to the assets and liability acquired through the shares will be considered as long as the motive (the acquisition of the company) is specifically included in the sales contract (STSS 21st December 2009, 21st of October 2013, among others). Any deficiency can be corrected through the inclusion of a corresponding declaration in the contract and warrantees signed directly by the seller to facilitate the potential liability claim relating to the transferred business
- As previously mentioned, the buyer acquires all the assets and assumes all of the company’s obligations, including all possible hidden liabilities. At this point, it is vitally important for the buyer to exercise due diligence to identify previous hidden liabilities.
Purchase agreement: asset deal
An asset deal is the direct acquisition of the individual assets owned by a company by means of a purchase agreement held directly between the purchaser and the company.
Advantages of an asset deal
- The seller will be prepared to grant greater safeguards of the acquisition of the assets, since the possible hidden assets are limited, including unpaid tax and social security obligations, and the obligations derived from work contracts under article 44 of the Worker’s Statute
- From the perspective of the buyer, the purchase of assets permits so-called cherry picking; it permits the selection of whatever assets are most interesting to the purchaser.
Disadvantages of an asset deal
Despite the advantages mentioned, a series of disadvantages exist which are important to stress in this type of operation, specifically:
- The acquisition of assets means higher fiscal costs. The purchase of assets is subject to the Transfer Tax, which is around 8% depending on which autonomous community the operation takes place. In the case of a share deal, generally the operation would be exempt from indirect tax under article 312 of the Consolidated Text of the Spanish Securities Market Act. It is important to state that the transfer of autonomous business units is not subject to VAT under article 7.1.a) of the Law of Value Added Tax, paying only the Transfer Tax for only certain elements of the assets which have had a change of ownership after the acquisition
- Higher transactional costs from the need to transfer each asset being acquired individually, as it is necessary to obtain consent and approval from more contractual parties such as public organisations.
Conclusion
As established above, each of the two tools used to achieve the acquisition of a company present a series of advantages and inconveniences that must be evaluated prior to each operation. For these reasons, a correct evaluation of each method will be key for determining the method which results in lower transaction costs.
Javier Cuevas
For further information regarding the asset and the share purchase agreement in Spain,
