Legal Aspects of Buying and Selling

A company is a separate legal person and if a purchaser acquires all its share capital, it acquires a complete entity, 'warts and all' - so to speak with the possibility that it has greater actual or contingent liabilities than envisaged. By purchasing a company the buyer acquires not just a collection of assets and liabilities which is what would happen if a business was purchased but a legal entity or 'person' with attaching rights and liabilities.

The main question that faces a buyer, then is whether to buy the shares of the target or the assets instead (and therefore assume certain liabilities of the target business). A buyer may, in principle, prefer to opt for the purchase of a business as he can pick and choose what to acquire but the seller will usually prefer the clean break which is often more tax efficient as well, offered by a share sale. In general, the buyer will get what he wants free from hidden liabilities if he purchases assets and an added advantage, especially in a case where it is necessary to raise borrowings to fund the acquisition is if the assets are available as security. Where shares are acquired, there may be legal problems about making the assets of the target company available as security because of the restrictions in s151 of the Companies Act on a company providing financial assistance for acquisition of its own shares. Therefore, unless the seller is an a very weak negotiating position, it is likely that he will resist any attempt by a prospective purchaser to structure the deal as an asset rather than a share purchase transaction as it is likely to result in a double exposure to Capital Gains Tax.

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Other areas covered:

Stock exchange requirements

Reverse takeovers

EU Merger Regulation

City code on takeovers