Share acquisition v. Asset acquisition

Saptaswara Chakraborty | North Eastern Hill University | 18th June 2020

Introduction

The world of mergers and acquisitions is necessarily occupied with the transfer of ownership. Ownerships occupy a considerable portion of the world of business. Various factors may be responsible for the transfer of title, including the expansion of a business, minimalised profit and many more. While buying or selling of a business, the investor and the sellers can purchase it in two ways either the transaction can be a purchase and sale of assets or it can also be a purchase and sale of common stock. Various reasons may be inferred for the choice that both the buyer of the assets and the seller of the business may adopt. Such an acquisition may be structured either as an asset transaction or a share transaction depending on the requirements of the company. In this article, we shall be analysing the various advantages and the disadvantages of both the acquisitions

Asset acquisition 

In 2017, the Financial Accounting Standards Board issued an accounting standards update redefining and clarifying the definition of a business. Under the revised definition, it was made more likely that acquisition of assets would be treated as an asset acquisition rather than that of a business acquisition. In such an acquisition, the buyout strategy in which the critical assets of the target company are purchased, rather than that its shares. This is particularly popular in the case of bankrupt companies. In the case of such companies, they might possess certain valuable assets which might prove to be beneficial for the company that is acquiring it but the financing situation of such a company makes it unattractive for the buyers. Furthermore, the asset acquisition may be as well as possible if the buyer is interested in acquiring certain assets rather than acquiring the whole lot. While selecting for such an asset, the buyer would look for those or pick specifically those assets that would in further turn out to be beneficial. In this way, the buyer does not waste his money on unnecessary assets, and therefore, there is less risk of the buyer if there is a possibility of unknown or undisclosed liabilities.  Such an acquisition is often desired when the buyer wishes to gain control of such assets owned by a bankrupt company but are not interested in acquiring the entire business operation because of the financial instability that the company might be facing. An important thing that is required to be kept in mind is that such small acquisitions can ensure control over the target company. The process involves typically gaining control of the critical aspects that are necessary for the ongoing operation of the company. 

Pros and cons of an asset acquisition

 having gone through an asset acquisition, it is necessary to understand what are some of the essential advantages and the disadvantages of such an acquisition:

Pros:

• In such an asset acquisition, the buyer has the flexibility to specify upon the assets, including the liabilities it is willing to acquire while leaving the others.
• If the price through which it buys the company exceeds the aggregate tax basis of the assets that it purchases, then the buyer receives a stepped-up price for what it purchases. 
•  By purchasing the assets, rather than the shares, the buyer can avoid the shareholders who would refuse to sell their shares.
• Such a purchase, through an asset acquisition, is less complicated from the lens of law as the parties are not required to comply with the state laws.

Cons:

• Under the acquisition of an asset, the selling company’s assets must be retitled
• Under an asset acquisition, the buyer has to obtain permission from the other parties for the non-assigned contracts.
• Such an acquisition do not qualify for tax-free treatment.
• If a company which does not have a number of shareholders under such a situation share acquisition is much more preferred.

Share acquisition

A share acquisition is a simpler and less complex. In such a case of a share acquisition, the deals and the liabilities are passed onto the purchaser. The assets and liabilities are passed on to the purchaser. The assets and liabilities of such a company remain unchanged. If the company which has been taken over is the one that is under economic crisis, then the purchaser is obliged to take over those matters upon them, and if necessary, it is obliged to file for insolvency proceedings. The attractive feature of such a deal is that it is instead a very lean contract. On such a deal, there is no crisis pending, and therefore the share deal of such is a much better option and therefore in the country of Germany, it is more. Since it is known that while acquiring the company through share acquisition, the acquire also takes upon certain liabilities and risks, therefore special liability regulations are required and also placed in the contract to ensure that the seller is also liable for the share of the assets acquired.

Pros:

• The process of share acquisition is much more common than asset acquisition. There is no retitling of the acquisitions once acquired by the companies, and therefore no permission is required
• There is the presence of tax benefits arising.
• Such a share acquisition is much more common than that of an asset acquisition.

Cons:

• If the company is of a considerable size, then the possibilities are there that the smaller shareholders may not approve of it.
• Even though tax benefit is there, but the step-up benefit is not available.

Conclusion

This article aimed at providing a picture of both the benefits and risks of such a transaction. While selecting for any transaction, the understanding of the company where the purchaser aims at investing must be carefully examined after which the steps can be taken