Commercial Real Estate Portfolios Share Purchase v Asset Purchase

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Commercial Real Estate Portfolios Share Purchase v Asset Purchase

Which is the Transactional Route for You?

We get asked this question all the time by our developer and investor clients. While both methods of acquiring real estate are capable of achieving the same result, the legal effect and tax treatment* of the two structures are quite different. While the tax implications* are quite important when assessing which structure to implement, this note focuses on the legal considerations.

*[THIS DOES NOT REPRESENT TAX ADVICE WHICH WE DO NOT OFFER, AND SPECIFIC ADVICE SHOULD BE TAKEN TO COVER YOUR PERSONAL CIRCUMSTANCES]

OWNERSHIP

In a share sale the buyer acquires the entire issued share capital of the target company (i.e., the company holding the real estate asset). In other words, the buyer acquires ownership of the company.
As the target company is a separate legal entity to the shareholders of the target company, ownership of the underlying assets does not change. The only assets that change hands are the shares in the target which are transferred by the seller to the buyer under a share purchase agreement and stock transfer form.
The ownership of the real estate asset therefore remains unchanged in a share sale. This means there is no property disposal and therefore no stamp duty land tax to pay. By contrast, stamp duty will be payable on the transfer of the shares, however, the tax on shares is far less than the tax payable on a property transfer. To put things into perspective:
On a £10 million share sale stamp duty of 0.5% is applied to the sale price. This works out to be £50,000.
By comparison, the stamp duty land tax payable on a property sale of the same price is £489,500 (assuming a straightforward commercial freehold transfer).

ASSETS AND LIABILITIES

When a buyer acquires the shares in a company, it acquires all of its assets but also all of its liabilities. While this may be commercially beneficial to the seller, it can be a major drawback for the buyer – particularly if there are significant unknown liabilities. Examples of liabilities include:

Debts (such as loans/mortgages)
Interest payable
Bank account overdrafts
Accrued expenses.
Commercial contracts
If there are company employees, any liability arising under employment contracts including salaries.
Taxes payable
Litigation costs and settlements
Many real estate assets are held in special purpose vehicles (companies that are formed for the sole purpose of holding the property) and for these companies the liabilities will typically be minimal. Either way, the due diligence process in a share sale is far more in depth than in an asset transfer as the buyer’s solicitors will need to understand fully the obligations and liabilities of the target company and assess any possible legal issues it faces, in addition to reviewing the title to the property that it holds.

TRANSFER OF UNDERTAKINGS (PROTECTION OF EMPLOYMENT) REGULATIONS 2006

A potentially unattractive feature of an asset sale is that the transaction may be caught by the Transfer of Undertakings (Protection of Employment) Regulations 2006 (‘TUPE’).
TUPE protects the employment rights of any employee of the target business. In an asset sale this may include:
Anyone employed at the property in question (for instance a caretaker); or
Anyone working at or providing services at or to the property.
TUPE imposes obligations on both the buyer and the seller to inform and, in some cases, consult with representatives of affected employees before the transaction takes place. Dismissals that are made because of a TUPE transfer are likely to be automatically unfair and there are financial penalties imposed on the buyer/seller if they fail to comply with their respective obligations under the regulations.

Our experienced Corporate Solicitors are on hand to discuss and answer any related questions you may have.

For enquiries regarding your business law needs contact our corporate team directly by email [email protected], call 0208 209 0166 or visit gadlegal.co.uk.

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Commercial Real Estate Portfolios Share Purchase v Asset Purchase

Which is the Transactional Route for You?

OWNERSHIP

ASSETS AND LIABILITIES

TRANSFER OF UNDERTAKINGS (PROTECTION OF EMPLOYMENT) REGULATIONS 2006

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