The main differences between the purchase of shares and the purchase of assets revolve around what is acquired, the due diligence processes, the liabilities assumed, tax implications, the simplicity of the transaction, and various strategic considerations. Below is a critical discussion of these differences:
### 1. What is Acquired:
**Purchase of Shares:**
- **Ownership:** This involves acquiring the shares of a company, which effectively means you are buying the entire entity, including its assets and liabilities.
- **Continuity:** The company continues to exist as a corporate entity; only the ownership changes.
**Purchase of Assets:**
- **Ownership:** In this scenario, you are buying specific assets of a company, not the company itself.
- **Discontinuity:** The seller retains the corporate entity and can either remain operational with fewer assets or dissolve the company.
### 2. Liabilities:
**Purchase of Shares:**
- **Inherited Liabilities:** When you purchase shares, you inherit all the company's liabilities, including legal obligations, debts, lawsuits, and contingent liabilities.
**Purchase of Assets:**
- **Selective Liabilities:** Buyers can usually select which liabilities (if any) they want to assume, which vary from the negotiating terms. The default position is that the buyer only assumes liabilities they explicitly agree to take on.
### 3. Due Diligence:
**Purchase of Shares:**
- **Comprehensive Due Diligence:** More extensive due diligence is required because you need to evaluate both assets and liabilities comprehensively to understand the entire corporate entity's health and risks.
**Purchase of Assets:**
- **Focused Due Diligence:** Due diligence is focused primarily on the specific assets being acquired and any associated liabilities that will be assumed.
### 4. Tax Implications:
**Purchase of Shares:**
- **Capital Gains Tax:** Sellers may incur capital gains tax on the sale of shares. For buyers, there may be future tax implications regarding the sale of the company or realized profits.
- **Carrying Forward Tax Attributes:** Buyers may be able to use the tax loss carryforwards and other tax attributes of the acquired company.
**Purchase of Assets:**
- **Depreciation and Amortization:** Buyers can often benefit from a step-up in the tax basis of the acquired assets, which can lead to higher depreciation deductions.
- **Sales Tax:** Asset acquisitions may be subject to sales tax in some jurisdictions.
### 5. Simplicity:
**Purchase of Shares:**
- **Complexity:** These transactions are generally more complex due to the continuation of the corporate entity and the need to address inherited liabilities.
**Purchase of Assets:**
- **Simplicity:** These transactions can be simpler and quicker since the focus is on specific assets rather than the entire corporate structure.
### 6. Strategic Considerations:
**Purchase of Shares:**
- **Market Position and Contracts:** Acquiring shares may be necessary to retain certain strategic advantages, such as market position, customer contracts, or intellectual property, that might be tied to the company's corporate identity.
**Purchase of Assets:**
- **Selective Acquisition:** This approach allows the buyer to acquire only the desirable parts of a business, offering more flexibility to fit strategic goals without being burdened by unwanted segments.
### 7. Employee Transition:
**Purchase of Shares:**
- **Continuity:** Employees remain employed by the same legal entity, which can lead to less disruption, especially concerning employment contracts, benefits, and seniority.
**Purchase of Assets:**
- **New Employment Contracts:** Employees may need to be rehired by the new owner, leading to potential uncertainty and the need to negotiate new employment terms.
### 8. Regulatory and Legal Implications:
**Purchase of Shares:**
- **Shareholder and Regulatory Approvals:** Depending on the jurisdiction and the size of the transaction, shareholder and regulatory approvals may add layers of complexity to the deal.
**Purchase of Assets:**
- **Less Regulatory Oversight:** Generally, acquiring assets may face fewer regulatory hurdles than acquiring shares, but this depends on the nature of the assets and jurisdiction.
In summary, choosing between a purchase of shares and a purchase of assets depends on various factors, including the buyer's strategic objectives, financial considerations, tax implications, liability concerns, and regulatory context. Each method has its advantages and disadvantages, and the decision often hinges on which approach aligns best with the parties' goals and constraints involved in the transaction.
.A merger is a process whereby the assets of two or more companies are combined into one new company. A new company is usually formed, the acquired companies cease to exist as separate entities and the shareholders of the new company are the shareholders of the original companies.
Critically discuss the main difference between Purchase of Shares versus Purchases of Assets.
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