When people contemplate buying a business, the first thing that comes to mind is generally whether to buy the shares of the target company or simply to buy the assets of it. This article aims to highlight the differences between a share purchase and an asset purchase and some points to consider before deciding which route to go for.
A share purchase involves the transfer of the ownership of the shares of a company from the seller to the buyer. As a result, the buyer acquires control over the company and all its assets, liabilities, and obligations. In Hong Kong, the transfer of shares is typically subject to stamp duty, which is payable by both the buyer and the seller. On the other hand, an asset purchase involves the transfer of specific assets and liabilities of a company from the seller to the buyer. The buyer can cherry-pick which assets and liabilities to acquire, and the seller retains the ownership of the remaining assets and liabilities. The actual transfer of assets may be subject to various taxes and duties, depending on the nature of the assets.
Below are some key points that a buyer should take note of before deciding whether a share purchase or an asset purchase best suits his needs. In the following paragraphs, we have assumed the purchase of the entire issued shares or assets of a non-listed Hong Kong company.
Assets and Liabilities
In a share purchase, a buyer buys the shares of the target company while the company remains the owner of its assets. In other words, the target company’s assets and liabilities do not change hand. Hence, if the buyer wishes to buy the entire issued shares of the target company, he should hive off any unwanted liabilities (e.g., loans, accounts payable, etc.) before closing a deal. This is usually done by way of requesting the seller to settle all unwanted liabilities or have them assigned to the sellers before closing, generally by inserting a condition precedent to completion in a Sale and Purchase Agreement (the “SPA”). This ensures that the target company will not continue to hold those unwanted liabilities after the buyer takes over it. Nonetheless, the buyer may still be faced with undisclosed liabilities.
In a business purchase, a buyer is free to choose what assets he wants in order to suit his own business needs. By choosing to buy assets of the target company, the buyer typically does not want to assume the existing liabilities of the target company, and all liabilities remain with the target company. However, a buyer should be aware of the provisions of Transfer of Business (Protection of Creditors) Ordinance (Cap. 49 of the Laws of Hong Kong) (the “TOBO”). Pursuant to the TOBO, the transferee may be held liable for all debts, obligations and liabilities of the transferor arising out of the carrying on of the business notwithstanding that the buyer only takes over the assets but not the liabilities of the target company, unless certain requirements are satisfied (as discussed below).
The seller in an asset purchase is the proprietor of the asset in question, which normally is the operating vehicle of the business. Unless the buyer only purchases part of a business and has no knowledge that the assets he purchased form part of the business, the parties should ensure notice is given to the creditors of the seller by publishing a notice of transfer (the “notice”) according to the TOBO. In relation to the notice requirements, a buyer should take note of the followings: –
- First, the notice must be given not more than 4 months, and not less than 1 month, beforethe date of transfer;
- Second, the notice must be complete at the date of transfer. A notice becomes complete 1 month after its last publication, if no proceedings having been instituted by a creditor of the business; and
- Third, the notice must include contents prescribed under section 5 of TOBO and published in the Gazette, in 2 Chinese-language newspapers and 1 English-language newspaper as approved by the Chief Secretary for Administration from time to time.
If any creditor of the seller objects to the proposed sale of the assets or business, they may apply to court during the period referred above for an order to prevent or delay the transfer of the assets/business.
Third Party’s Consent
Unless an agreement previously entered into by the target company contains a ‘change of control’ provision that requires the other contracting party’s prior consent before any proposed change in control of the target company, third party’s consent is usually not required in a share purchase. For example, an exclusive supply agreement may provide that if the ownership of the supplier changes hands, the agreement shall come to an end. The buyer intending to acquire the exclusive supply, which may form a major part of valuation of the target company, should obtain from the manufacturer a waiver of its right to terminate the agreement. The waiver should also form part of the condition precedent to completion in the SPA to safeguard the interests of buyers.
On the contrary, a business purchase is less neat and tidy. All kinds of contracts forming part of the business the intended buyer is interested in shall be transferred, assigned and novated to the buyer by the seller.
Typically, in an asset purchase transaction, the buyer will continue to employ the existing employees of the target company. This is done by way of transferring those employees to the buyer’s employment. However, the buyer should take note of two things, first, there is no automatic transfer of employment under Hong Kong laws, those employees must consent to the transfer. Second, the continuity of the period of employment of those employees whom the buyer chooses to offer to re-employ may be preserved according to the Employment Ordinance (Cap. 57 of the Laws of Hong Kong), and this effectively means that the buyer will take up all the payment liabilities arising out of a continuous contract (e.g., severance payment or long service payment) for the period of employment under the seller’s company. However, if a buyer considers not to employ the existing employees of the seller, i.e., the target company, the buyer should ensure that the seller has settled all payment liabilities arising out of the employment of such existing employees, such as making this a condition precedent to completion of the purchase, to avoid any potential hassle or dispute with the seller’s existing employees after the transaction completed. In a share purchase transaction, employees of the target company remain to be employed by the target company and there is no issue of re-hiring of employees. However, if the buyer does not wish to retain certain employees after closing, the buyer should negotiate with the seller in advance and ensure all the employment matters with existing employees have been taken care of before completion.
The seller in a share purchase is an existing shareholder of the target company. To effect a share transfer, the buyer and the seller shall execute a set of transfer documents (which include instrument of transfer and contract notes). The parties shall submit the original documents to Stamp Office of the Hong Kong Inland Revenue Department for stamp duty adjudication. Before the target company can enter the name of the new shareholders onto its register, the parties shall pay the stamp duty as adjudicated and deliver the stamped transfer documents to the target company. The stamp duty payable is 0.26% of the consideration as stated on the contract notes or the net asset value of the company, whichever is the higher. The buyer in a share purchase transaction may be able to utilize the target company’s tax losses and other tax attributes in the continuing operation of the target company.
Transfer of assets may, on the other hand, subject to various taxes and duties, depending on the nature of the assets purchased.
There is no hard and fast rule on which type of purchase is better, it all depends on the buyer’s preference and business needs. As each deal differs from another, professional advice should be sought at the early stage, and due diligence should be performed to identify risks in the deal. If you have any enquiries about the subject matter of this article, please contact our Mr. Simon Wong for further discussion.
Disclaimer: This article is for general reference only. Nothing herein shall be construed as legal advice. Oldham, Li & Nie and the author shall not be held liable for any loss and/or damage incurred by any person acting as a result of the content of this article.
 Sections 3 and 4 of Cap. 49
 Section 3(2) of Cap. 49
 Section 4(1) of Cap. 49
 Section 4(4) of Cap. 49
 Section 5(3), Cap. 49