Share saleson 15th July 2019
When acquiring a practice, do you want the assets or the shares? Kerry Brooks explains the difference…
Where a dental practice is owned by a company, the parties can choose to transfer the business by selling the shares in the company (where the dental practice is its only asset) or by selling the assets that comprise the business. The parties may have opposing views on which structure the acquisition should take. An advantage to one party ultimately means a disadvantage to the other. More often than not, the seller will want to sell their shares, but a buyer will want to just acquire the assets.
Where the company owns many practices, a share sale may not be viable where the buyer only wants to purchase one of the businesses. The transaction must progress as an asset deal unless the parties are willing to use a hive-down structure. This is discussed later on but first, we will take a look at some areas of consideration in respect to both share and asset acquisitions from both a buyer’s perspective and a seller’s.
Share sale – a clean break?
Following transfer of the shares, the company continues to trade and its ongoing liabilities continue to be enforceable. A seller will think that they no longer have a connection to the company, but this is not entirely correct. Because a company sale is a seamless transfer, and the buyer will be taking over all liabilities (hidden or otherwise), they will want to make sure that they have investigated all aspects of the company thoroughly, leaving no stone unturned. In addition, to make sure he is doubly protected, the buyer will require wide protections in the sale agreement to ensure there is recourse should the company be saturated with undisclosed problems. This means that the seller will still be tied to the transaction for a period of time following completion.
Employees – a transferable asset?
On a share sale, there is no change of employer so TUPE regulations do not apply here; the company is the employer before and after change of control. This means that the transfer has no direct effect on any employment contracts. The share sale itself will not give rise to any potential claims by the employees and it is the buyer, as the new owner of the company, who will be affected by any liabilities or obligations of the company in relation to the employees in the future.
In an asset sale, TUPE regulations apply and employees automatically transfer to and become the responsibility of the buyer. Consequently, the transfer does not mean immediate termination of employment contracts except in unusual circumstances, as set out in the regulations. The seller no longer has a direct interest in the employees but will be tied in under warranties they gave in the sale agreement.
An advantage of acquiring the entire issued share capital of the company is lack of disruption to trade. From a patient or supplier point of view, very little will appear to have changed. Suppliers will usually be happy to continue with the company as before the transfer. An asset sale will more likely prompt suppliers to review their dealing with new owners.
On an asset purchase, the benefit of existing contracts will not be transferred to the buyer automatically. Assignment or novation will be necessary where a buyer wishes to take over a contract, which will require consent of the contractor, which may wish to renegotiate.
Assets and liabilities
On a company acquisition, all the underlying assets are indirectly acquired by the buyer whether they are wanted or not. An asset purchase allows for greater flexibility from a buyer’s perspective. The buyer can choose which assets it wishes to buy.
In relation to liabilities, buying the business and not the company has major advantages from a buyer’s perspective. The buyer acquires a number of identified assets and liabilities, which should be clearly stated in the sale agreement subject to some exceptions, such as employee (as mentioned above) and environmental matters, which are legislated against. This way, the buyer can avoid the risks associated with unknown or unquantifiable liabilities.
Hive-down – a way forward?
If the dental practice is one of a number of businesses owned by the company, and for various commercial/tax reasons the parties do not wish to continue with an asset sale, they can agree that the business is hived-down. This is the process whereby the company sells some or all of its assets and undertakings to a brand new company, usually set up as a wholly owned subsidiary of the company. The buyer then acquires the shares of the new company. The main similarity between a hive down and asset acquisition is that only those assets (and liabilities) which the seller wishes to sell, and which the buyer wishes to buy, will be hived-down.
Kerry joined Goodman Grant Solicitors as a paralegal in July 2014 having graduated from Liverpool John Moores University, she qualified as a solicitor in 2017. Kerry has a varied job set which includes the due diligence exercise, NHS contract variations, CQC registration and an array of post-completion matters including retentions. Kerry also provides support to the commercial property department reporting on leases and drafting key property documents.