The first thing to get right in company sales is to find out whether the purchaser is buying the shares in the company or the assets out of the company. A company is a separate legal entity and it (not the shareholders) owns its assets. The shareholders own shares in the company, which in turn owns the assets. Consequently, if the shares are being sold, the vendors are the shareholders. But if the assets are being sold, the vendor is the company.
Often a purchaser will want to buy the assets from the company, because they are easily identifiable and the purchaser does not have to worry about what else may be inside the company. A vendor, on the other hand, will generally want to sell his or her shares in the company because it is considerably more tax effective for him or her to do so.
Purchaser buys the assets out of the company
If the parties agree to do an asset sale, the vendor will be the company and it will be selling certain nominated assets such as plant, stock and goodwill. It may also be selling its debtors, or the purchaser may agree to collect the debts and pay them to the vendor company as part of the sale price.
Normally in an asset sale the vendor company retains the liabilities and uses the sale proceeds received to pay them off. Once the liabilities are paid off, the remainder of the sale proceeds are retained in the company, or paid out to the shareholders as dividends, or the company is liquidated and the cash paid to the shareholders. These last two alternatives have significant tax implications.
When a purchaser buys the shares in a company, he or she buys the company and everything inside it. Unless specifically excluded in the share purchase agreement (‘SPA’), this includes stock, creditors, liabilities, plant and machinery, employment obligations, lawsuits, claims, real estate, cars, goodwill, IPR (intellectual property rights) and cash.
This means that a company should be groomed for sale before the sales memoran- dum is issued. If there are any problems or issues within the company, such as loans to directors or claims by employees, then generally these should be resolved before issuing the sales memorandum or should be fully disclosed within it. A purchaser will inherit all of those problems and liabilities on buying the company, so he or she needs to know about them before doing the deal and may discount the value placed on the company in order to take account of those problems.
Similarly, there may be surplus cash balances or loans from directors or banks which may need to be distributed or repaid before completion or to be specifically identified in the sales memorandum either to increase or to justify the asking price.
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