Shares or assets? Difference is crucial

Kylie van Heerden says a share sale effectively involves a complete transfer of everything a company owns, "including the kitchen sink" Photo/George Novak

Company acquisitions are back on the corporate agenda, but Tauranga-based commercial law specialist Kylie van Heerden says many business owners and potential purchasers are unaware of the risks when choosing between asset or share sales.

"The reality is, I think, a number of pros and cons are unknown to the average business owner/purchaser," said Ms van Heerden, who is a partner of Sharp Tudhope Lawyers. "These risks are often not considered and can have significant consequences if you choose the wrong sale structure for your particular objectives."

Recent Bay of Plenty activity has ranged from honey and health company Comvita's $12.3 million acquisition of Timaru's New Zealand Honey Ltd, to Graeme Hart's agreement to sell Carter Holt Harvey's pulp, paper and packaging businesses to Japanese interests for $1.03 billion.

An asset sale involved selling some or all of the assets owned by a company, such as plant and equipment, land and buildings, trading stock, as well as intangible assets such as intellectual property and goodwill.

In a share sale, the purchaser took control of an existing company by buying shares at a stipulated price, acquiring both the assets and liabilities.

"There is a constant conflict faced by vendors and purchasers as to which option should be adopted," said Ms van Heerden. "In an asset sale, the purchaser can pick and choose the assets it wants to buy, and have some certainty around the liabilities to be assumed. Effectively, a share sale involves a complete transfer of everything a company owns, including the kitchen sink."

Toni Palmer, a partner in the Tauranga office of Tabak Business Sales, which specialises in advising on the sale and acquisition of small to medium-sized enterprises, said the asset sale was the most common option for the firm's clients.

"It means any residual liabilities lying within the company not passed on to a new owner," she said. "Share-based sales are most often between related parties who have previous knowledge of the business, or when there is some unique contract or advantage that cannot be transferred out of the company."

Ms van Heerden said while there were pros and cons for each option, a number of risks were often overlooked.

"In a share sale, the new owner can be held responsible for tax liabilities and other past debts which even the vendor was unaware of. And if more than 51 per cent of shares are acquired, there is a risk the company may forfeit tax losses in the year of the sale. It may also risk losing imputation credits if more than 34 per cent of the shares are acquired.

"In an asset sale, key contracts often can't be passed on without express permission from the third party involved. This means special deals or rates that the previous owner had locked in place might not continue once the business changes hands, making it less profitable."