Buying a Business – How to Choose Between Buying Shares or Assets?

In a share purchase transaction, the only asset being sold is the shares in the Company.

Typically, a Vendor prefers a share purchase transaction due to the favourable tax treatment, while a Purchaser would prefer the transaction to be structured as a purchase of assets, because it permits the Purchaser to cherry pick and exclude liabilities.

Resolving this tension is largely a matter of relative bargaining power between the Parties. In contrast to an asset purchase transaction, there is no need in a share purchase transaction for long lists of asset classes that are to be included or excluded as the case may be; nor is there any corresponding need for allocation of the purchase price between asset classes. This might suggest that a share purchase agreement will be much shorter and simpler than an asset purchase agreement. However, because the Purchaser will be taking the entire Company and everything that comes with it, it means that they will be standing in the Vendor’s shoes with potential liability for the Company.

The Vendor has no responsibility to identify defects to the Purchaser. It is the Purchaser’s responsibility to investigate the Vendor’s representations and warranties. Therefore, the representations and warranties take on an even higher degree of importance and may require even more extensive due diligence and documentation as they are the Purchaser’s key risk management tool before walking into an unknown situation. Where the Purchaser discovers assets that they really do not want to assume in the transaction, one option is for them to negotiate for the Vendor to sell or otherwise transfer such assets to another corporate entity before the transaction closes.