USA: Share deal vs. Asset deal. Transaction Structuring


We repeatedly discover that the transaction structure was not discussed within the terms of the Letter of Intent (“LOI”) and subsequent negotiations can be costly for the buyer. This question does not only apply for the US, but also internationally, because the answer can potentially yield considerable benefits or disadvantages to both buyers and sellers. Below, we discuss the factors influencing the transaction structure from the perspective of the buyer, unless otherwise stated.


Share vs. Asset Deal – General Differences

In a share deal, the shares of a company are transferred to the buyer, while in the case of an asset deal only certain or possibly all assets and liabilities are identified and purchased from the target company by the buyer. In a share deal, the buyer acquires a separate legal entity, while under an asset deal the assets and liabilities acquired can be transferred directly into the purchasing legal entity. However, it is often useful to establish a separate legal entity that takes over the business that was acquired via the asset deal.


Benefits of an asset deal for the buyer

The most obvious advantage of an asset deal is what is popularly known as “cherry picking”. This means that the buyer can usually select the individual assets and liabilities that are to be transferred upon purchase. This can be important in the case of liabilities, especially in case of unknown risks or with companies at risk of insolvency. Examples of these liabilities are pension obligations, warranty risks or to what extent employees are to be transferred. However, a buyer cannot fully protect himself by means of an asset deal (e.g. environmental risks with the acquisition of land).

Often, the most important factor in the decision whether to seek an asset deal as a buyer is the tax impact of the transaction.

In the share deal context, the investment is recorded without tax revaluation, and no deduction with respect to goodwill is recognized for U.S. income tax reporting. In case of an asset deal, all assets and liabilities including intangible assets are revalued in the GAAP and tax balance sheets as part of the Purchase Price Allocation (“PPA”) and the excess of the purchase price consideration over tangible and intangible assets acquired is recorded as goodwill. Intangible assets including goodwill can be amortized over 15 years for tax purposes, an amount that is often significant in a transaction.


Disadvantages of an asset deal for the buyer

Existing contracts are not automatically transferred with an asset deal. Permits, certificates, and similar rights may be linked to the Target legal entity and are consequently not transferred as part of an asset deal. Therefore, long-term contracts which are critical to the success of the company may be a reason to choose a share deal over an asset deal. However, careful consideration should be given whether these contracts contain a change-of-control clause, which requires the consent of the contracting party for the successful transfer of the contract to the buyer in the event of the sale of the business. In that case, the automatic transfer of such a contract is not possible under either a share deal or an asset deal.


Disadvantages of an asset deal for the seller

In the U.S., the question during the negotiations as to whether the seller will suffer a tax disadvantage in an asset deal compared to a share deal depends heavily on the tax identity of the company and the option exercised on how to be taxed.

In a share deal, profit is generally taxed at a lower tax rate compared to the regular tax rate. The tax rates can nominally vary by up to approx. 20%.

In the U.S., a distinction is made between transparent and non-transparent entities, similar to the taxation of a private limited company in Germany (GmbH) (non-transparent, i.e. at company level) and of a partnership (transparent, i.e. at the level of the partner).

If the target is taxed transparently, then there is normally no significant additional tax burden for an asset deal compared to a share deal. This means that, even with an asset deal, the seller will enjoy the lower tax rate (exception: “Recapture of Depreciation” in the case of revaluation of balance sheet assets).
As long as the revaluation of the assets recognized by the target company is not material (meaning that the fundamental driver of increased value lies in previously unrecognized intangible assets, including goodwill), there is usually no significant tax disadvantage for a transparently taxed seller.

If no lower tax rate is applicable in connection with an asset deal, e.g. if Target is a “C Corp” (taxed separately from its owners), then the tax disadvantage of the seller is generally roughly equivalent to the tax benefit of the buyer. However, since the additional tax liability of the seller will likely accrue in the year of sale (absent the application of the income tax instalment sales rules), but the tax benefit of the buyer is spread over up to 15 years, it is frequently not economically justifiable to increase the purchase price via purchase price gross-up so as to induce the seller to agree to an asset deal.


Hybrid transaction structure – special case 338(h)(10) election U.S. Tax

A special U.S. income tax option for structuring is the so-called “338(h)(10) election” in which, under certain conditions, a share deal can be treated as an asset deal for tax purposes. This requires a joint declaration by the buyer and seller to U.S. tax authorities. The buyer must be acquiring at least 80 percent of the shares in the target.

The consequence of this joint declaration is that the GAAP balance sheet follows the application of a share deal (i.e. a subsidiary is transferred, which is booked as an investment in the company balance sheet of the buyer, but eliminated within the final consolidated financial statements of the parent company). However, for income tax reporting, the election reflects an asset deal treatment (i.e. potentially goodwill and the revaluation of assets in the (consolidated) tax balance sheet of the buyer).

If there are non-tax reasons why both parties prefer a share deal and the target’s tax identity allows for the election, the choice of this hybrid transaction structure may be very attractive for both buyer and seller.



It is imperative to check the benefits and disadvantages of transaction structure alternatives prior to the LOI phase. Both legal and tax factors are important when deciding which transaction structure should be pursued by the parties. The rule of thumb is that the seller may prefer a share deal, while the buyer may often prefer an asset deal. In order to negotiate the transaction structure, it is advisable that the buyer understands the seller’s tax situation. In addition to the special case of the “338 election”, there may be other alternative structures available to achieve a tax-basis step-up. The buyer should explore the availability of such structuring options at an early stage. 

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