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Company acquisition: Share deal versus asset deal

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last updated on 22 February 2022 | reading time approx. 2 minutes

 

The term “company” is not defined in German law. A company is commonly understood as the totality of assets and rights, tangible and intangible legal interests and goodwill, which serve a specific business purpose. A company as such should be distinguished from a legal entity that legally “carries” that company. The rights, obligations and assets embodying the company are attributed to an owner, i.e. the legal entity (for example, a GmbH [limited liability company] or an AG [joint-stock company]). Thus, there are two options to purchase a company: Purchase of the legal entity by buying its shares (share deal, for example, purchase of shares in a GmbH) or purchase of assets owned by the legal entity by buying all or selected assets (asset deal, for example, purchase of production facilities).  
 

“It depends on the respective legal, tax and entrepreneurial basis as to whether the share deal or asset deal is more attractive”, explains Michael Wiehl, manager of the international M&A practice group at Rödl & Partner. 

 

   

Purchase of the company shares or purchase of individual assets

With a share deal the purchaser acquires the company ("the target") by buying the shares in the target.
 
In the case of the asset deal, he buys the assets and the liabilities of the company along with the associated employment, contractual and legal relationships and has them transferred through singular succession. It is not the shareholder that sells his shares or assets, but the company that sells its company-related assets.
 
Because, with a share deal, the target is sold to the effect that ultimately the owner of the target changes, and the assets and liabilities of the target remain unchanged, the share deal is generally an easier option than an asset deal.
 
By contrast, in the asset deal, individual assets of the company are sold. At the same time, it is necessary to observe the principle of legal certainty: All assets to be sold and all liabilities to be assumed must be sepa­rately and clearly recorded and transferred to the purchaser taking into account the respective provisions. The legal certainty quite often poses a problem during transfers of intangible assets, especially industrial property rights, goodwill and know-how, because it can be difficult to record and describe the intangible assets speci­fically enough for them to be able to be transferred. It should also be noted that the transfer of contracts to the purchaser requires consent of the respective contract partner, which however cannot be obtained prior to signing a purchase contract due to confidentiality. If the respective contract partners do not consent, the contract will not pass on to the purchaser and remains with the company that may no longer be able to fulfil the obligations arising from it due to, among others, the lack of workers. This does not apply to the employment relationships attributable to the business being acquired. These are passed on to the purchaser by law but, in an asset deal, the employees have the right to object to the transfer of their employment relationship.
 

Liability-related differences between the share deal and the asset deal

Due to the fact that, in a share deal, only the owner of the shares in the target is replaced, the share deal has no implications for the liabilities and obligations established within the company. A purchaser buys the com­pany with all its assets and liabilities and thus also with all contingencies attributable to the company. If the target taken over is in an economic crisis or on the brink of insolvency, this can speak against the share deal.
 
The liability situation can be totally different in an asset deal. From a legal point of view, the purchaser can generally pick out the assets he wants to acquire. In particular, he may choose not to assume claims and already established liabilities and other contingencies so that they remain with the selling company. However, there are limits to this, among other things, in that
  • an asset deal may be challenged by an insolvency administrator, if the company has to file for insolvency with regard to the remaining liabilities;
  • the employment relationships are transferred to the purchaser by law and it is therefore often problematic to leave employment relationships wholly or partially with the selling company;
  • the purchaser is liable for tax liabilities of the selling company caused by business operations until the acquisition of the assets in accordance with § 75 of the Fiscal Code of Germany (AO) with the assets taken over;
  • it must be ensured from a tax point of view, in particular on the part of the seller, that the business operation as a whole or at least a part of it is sold.
 

Formal provisions to observe

The transfer of shares in a limited liability company requires notarial certification. The sale of shares is gen­erally not tied to any formal requirements. Nonetheless, there can be situations where the notarial certification of e.g. resolutions will be required. The sale of shares in a partnership is also possible without any formal requirements as long as, in a GmbH & Co.KG [limited partnership with a corporate general partner], the shares in the general partner are not sold at the same time.
 
The sale of assets generally does not involve any formal requirements, unless a land plot is being sold along. In this case, the entire asset deal contract must be notarised. Irrespective of this, it should be once again under­lined that the consent of each individual contract partner must be obtained when contracts are transferred.
 

Tax considerations

The sale of shares in a corporation (in particular GmbH and AG) is subject to different tax rules than an asset deal, whereas the sale of shares in partnerships – apart from special situations – is generally treated for tax purposes in the same manner as an asset deal. It should be noted that the acquisition of a company in the form of an asset deal can be generally more interesting to a purchaser than the acquisition of shares in a corporation and vice versa. Ultimately, however, the tax issues are always a question of the individual case, which should be examined in detail and require an understanding between the parties.
 

When a share deal and when an asset deal?

The acquisition of a company in the form of an asset deal offers certain advantages but involves also dis­ad­vantages compared to a share deal. The principle of legal certainty and, above all, the transfer of existing contracts, for which the consent of each individual contract partner is required, can make the asset deal a complicated and time-consuming process. In contrast, the asset deal offers the great advantage that the purchaser knows exactly what he is buying and that with an asset deal he cuts himself off from the history and risks of the company. This is because in a share deal the purchaser buys a company, with all liabilities and liability risks, even those that are unknown. In an asset deal, on the other hand, the purchaser acquires certain assets, certain liabilities that are automatically transferred by law, but usually not all liabilities. In general and subject to the examination of the individual case, an asset deal can be considered in the following cases:
  • the company is only selling a part of the business and transformation measures are not taken into consideration;
  • the company has risks arisen in the past and the purchaser is not willing to assume the risks, even if they are considered in the purchase price;
  • the company is at risk of insolvency, but it must be ensured that subsequent insolvency does not affect the asset deal and can be challenged by the subsequent insolvency administrator;
  • acquisition out of the already opened insolvency over the assets of the company by the insolvency administrator;
  • the seller of shares cannot provide complete evidence of the chain of title in the shares he wants to sell for the time since the target company was established;
  • due to tax considerations.
 

Due diligence: (Commissioning an expert to) study opportunities and risks

In corporate transactions, it is standard practice for the potential purchaser to conduct due diligence on the company to be acquired or have it conducted by external advisors. The aim of due diligence is usually to check which opportunities and risks are associated with the acquisition of the target, how they affect the transaction structure, the purchase contract and the purchase price. For example, the originally planned transaction struc­ture may be changed as a result of the findings made during due diligence and the acquisition may take the form of an asset deal rather than a share deal, or vice versa.
 
"Due diligence means due care for a good reason", explains M&A expert Wiehl. This is because only a thorough examination of the legal, tax and economic circumstances can enable the purchaser to find the optimal solution for his company acquisition.
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