When buying or selling a business, the choice between an asset purchase or share purchase depends on several factors. The structure involves competing considerations including commercial flexibility, liability risk, and tax treatment.
Commercial Flexibility
Asset Acquisition
- Vendor: May be left with unwanted assets and liabilities.
- Purchaser: Can “cherry pick” assets and liabilities but may face complications with third-party consents, license transfers, and contract assignments.
Share Acquisition
- Vendor: More complete sale with no remaining liabilities or unwanted assets.
- Purchaser: Acquires the entire business as is, including all contracts, licenses, and permits, subject to change of control consents.
Liability Risk Exposure
Asset Acquisition
- Vendor: Retains all known and unknown liabilities.
- Purchaser: Generally, acquires assets free of vendor’s liabilities, though potential successor liability exists for certain payroll or environmental claims.
Share Acquisition
- Vendor: Transfers all risks and liabilities to the purchaser.
- Purchaser: Inherits all known and unknown liabilities, requiring comprehensive risk allocation provisions.
Tax Treatment
Asset Acquisition
- Vendor: Realizes taxable income/capital gain on asset sale, and shareholders realize taxable dividend income on proceeds.
- Purchaser: Purchase price becomes cost base for accounting, allowing capital cost allowance deductions.
Share Acquisition
- Vendor: May shelter capital gain under lifetime capital gain exemption, potentially accepting lower purchase price.
- Purchaser: Less advantageous as increased cost base of assets cannot be used for tax optimization.
Conclusion
These considerations highlight the importance of well-drafted risk allocation provisions and comprehensive due diligence. Professional advisors should be engaged from the earliest stages of business sale or acquisition.
For assistance with business transactions, contracts, or other corporate/commercial legal concerns, contact Pavel Malysheuski at Boardwalk Law: [email protected] / 905.863.7428.
