Structuring a mergers and acquisitions (M&A) deal requires decisions on many parameters. One important aspect should be thought about and understood by all parties involved from the onset: should the deal concern the shares of a target company or (some of) the assets held by a company?
The question that we’re discussing can be relevant to many (if not all) deal types, including namely acquisitions, mergers and de-mergers and others.
This post will explain what share and asset deals are and why the decision is important. After this, we’ll present you with the main pros and cons of each option for you to be able to take the decision knowingly when the time comes.
Assets and Share Deals in a Nutshell
An “asset deal” involves transferring particular assets and contracts that are the deal’s target from one company or person to another.
For example, acquiring a software business would imply transferring ownership of the source code, computers, furniture, software licences used in the course of business, lease agreements, customer contracts, employment agreements, trademarks, etc.
A “share deal” is a transaction where the parties transfer ownership of the shares of a specific company that owns the business to be transferred.
To continue with the same example, transferring a software business can be done by simply transferring ownership of the company in which it’s incorporated (i.e. the ownership of its shares).
Possible Source of Tensions
M&A deals are often international, and practices vary in different countries. For example, Swiss practice is to widely proceed through share deals, whereas the United States and Canada favour asset deals. This potential culture clash can easily lead to tensions or asymmetric expectations early in the deal process.
We strongly advise you to discuss why each party favours a particular type of deal, using the insights exposed in this post to guide a rational decision. Unearthing the underlying interests will make it easier to structure the deal in the best possible way, to everyone’s satisfaction.
As a rule of thumb, deals tend to follow the cultural inclination of the target’s, and therefore usually seller’s jurisdiction.
Pros and Cons of Share Deals
The pros of a share deal can be summed up as follows:
- It’s simpler and cheaper to execute, given that only one type of asset is being transferred (i.e. the target’s shares, whose transfer is a more straightforward process).
- Everything that is needed for the business is easily and automatically transferred to the purchaser.
- In cases of international M&A, the purchaser acquires an existing company of the target’s country and therefore avoids the hassle of incorporating one. Furthermore, having an existing company gives it credibility (e.g. when discussing with banks to get financing).
- Should the purchaser not want to acquire everything in a particular company, it is possible to carve-out specific assets, contracts or business units before closing the deal.
- In Switzerland, at least, share deals are much more tax-efficient. In particular:
- they allow (Swiss resident) natural person sellers to take advantage of the capital gains’ exoneration;
- they allow Swiss-based companies selling to take advantage of the reduction for participations.
- Third parties (clients, suppliers and employees) will still face the same entity, which makes the transaction more seamless for the business.
The cons of share deals are mainly the following:
- The purchaser acquires the target with its entire history, including potential unknown liabilities and claims.
This makes such transactions riskier on paper. These risks are much more pronounced (or perceived as such at least) in North America, which is the main reason why business people from these cultures are often opposed to share deals.
- More thorough due diligence is often required for the purchaser to assess its risks adequately. However, this – in combination with fair representations and warranties in the contractual documentation – allows purchasers to mitigate their risks.
- Share deals are often not ideally suited to distressed M&A transactions, which broadly include transactions involving a financially distressed target. This is because carving out liabilities and unproductive assets could be problematic under bankruptcy and penal provisions.
Pros and Cons of Asset Deals
The pros of asset deals are mainly the following:
- The purchaser can pick and choose assets and contracts that it wants.
- The target’s history and hidden liabilities are not passed along with the transaction, meaning the purchaser’s risk is usually far lower.
The cons of assets deals are unfortunately more numerous:
- Asset deals are tendentially more technical, tedious and costly to execute.
- Publicity is less controllable as all counterparts of the contracts being transferred need to be informed of the transaction.
- Many contractual counterparts will have a chance to terminate their contracts because of the transaction, leading to uncertainty and risk for both parties.
- Asset deals usually trigger more important tax consequences, mostly for the sellers.
Indeed, and in a nutshell, the realization of hidden reserves and capital gains are taxable as profits in the (Swiss) selling company. The following distribution of those proceeds to the selling company’s shareholders as dividends then triggers income tax with these shareholders (subject, however, to reductions depending on the setup).
- The selling company stays in existence, usually with the business’s name having been sold and held by its historical founders.
As non-competition clauses cannot be of unlimited scope, there is a higher risk in an asset deal that the sellers could one day re-ignite a business under the same name. The main limit to this would be unlawful competition, but even in case of violation, the risk of needing to lead litigation is an important drawback.
It is often believed that a share deal is a pro-seller option and that an asset deal is more of a pro-purchaser option. Therefore, early in a particular M&A project, this discussion often leads to a power play where one party will have the impression of having yielded a concession. The spirit of the whole ensuing negotiation can, unfortunately, be tainted.
We believe that – at least concerning transactions governed by Swiss law – share deals almost always favour all parties because less friction is caused overall, and therefore the deal is more efficient and creates more value for all parties involved.