Difference between share transfer and asset/liability transaction

In a business acquisition, you can choose between share transfer (share deal) in which the shares of the target company are transferred, or a asset/liability transaction (asset deal) in which specific business units are bought. This choice affects taxes, risks, legal complexity and the final valuation of your transaction.

What is the difference between share transfer and asset/liability transaction?

In a share transfer, you buy the shares of an existing company and thus take over the entire business including all its assets and liabilities. In an asset/liability transaction, you select specific business units and leave unwanted elements with the seller.

Share transfer means that the legal entity remains intact. Contracts, licences and employment agreements continue automatically. The buyer steps into the shoes of the previous owner, so to speak. This makes the transfer legally easier but also carries more risks.

In contrast, an asset/liability transaction requires selective transfer of each component. Contracts need to be transferred or renegotiated, licences applied for and staff possibly taken over via a business transition. This gives more control but also requires more time and legal attention.

The choice depends on your risk appetite, tax position and strategic objectives. In M&A processes, this choice of structure often determines the negotiation dynamics and final deal value.

What are the advantages and disadvantages of share transfer for buyers and sellers?

Share transfer offers easy transfer and business continuity, but the buyer takes over all known and unknown liabilities. For sellers, it is often more attractive fiscally due to lower tax rates on share gains.

Advantages for buyers include fast execution and automatic continuation of all contractual relationships. Customers, suppliers and staff experience minimal disruption. Permits and certifications remain valid. This ensures operational stability immediately after closing.

Disadvantages for buyers lie in the full assumption of risk. Latent liabilities, tax liabilities or legal disputes come with the purchase. Due diligence therefore becomes crucial but can never eliminate all risks. Warranties and indemnities offer limited protection.

For sellers, share transfers usually mean lower tax burden. Private shareholders often pay 26% tax on share gains versus the corporate tax rate in asset deals. DMSs benefit from the pass-through scheme on resettlement in shares of the buyer.

Sellers do bear the risk of claims afterwards. Despite agreed warranty periods, buyers can still claim compensation for hidden defects or misinformation years later.

When do you opt for an asset/liability transaction instead of a share transfer?

An asset/liability transaction is preferable when you want to isolate risks, acquire only parts of the business, or reap tax benefits. An asset deal is also often the better choice in cases of complex ownership structures or unwanted liabilities.

Risk insulation is paramount when the target company has legal disputes, tax issues or environmental liabilities. Selective acquisition leaves these risks with the seller. This is especially relevant in companies with historical environmental contamination, labour disputes or regulatory issues.

Selective acquisition suits strategic buyers who want only specific divisions, brands or geographical markets. Private equity parties often use asset deals to separate core businesses from non-strategic parts. This increases focus and operational efficiency.

Tax optimisation comes into play when the buyer wants to realise depreciation benefits by valuing assets at market value. Losses in the seller can also be exploited by structuring a partial asset deal.

Financing considerations make asset deals attractive when the target company has high debts that are not taken over. The buyer can set up its own financing structures without taking over existing credit facilities.

How do taxes work in share transfer versus asset/liability deals?

On share transfers, the seller pays tax on share profits (26% for individuals, 25.8% corporate tax). Asset deals result in tax on company profits for the seller, but offer the buyer depreciation benefits on the assets purchased.

Transfer tax plays an important role. Share transfers are exempt from transfer tax. Asset deals involving transfer of property, however, are taxed at 10.4%. This can significantly affect the total deal cost.

For sellers, share gains in individuals are taxed at 26% in Box 2. DMSs can make use of pass-through relief if they receive shares in the acquiring party. In asset deals, sales profits are taxed as business profits at corporate tax rates.

Buyers benefit from stepped-up basis in asset deals: purchased assets can be valued at purchase price instead of book value. This generates higher depreciation and tax benefits. Goodwill can be amortised over 10 years.

VAT aspects require attention in asset deals. Business transfers can fall under the VAT exemption when a set of assets is transferred that enables independent business operations. Otherwise, 21% VAT is payable on the assets.

What legal aspects should you consider in both transaction structures?

Share deals require limited contract transfer but extensive due diligence due to full risk assumption. Asset deals require less due diligence but complex transfer processes for contracts, licences and personnel.

Due diligence differs fundamentally between the two structures. Share transfers require due diligence on the entire company: all contracts, obligations, disputes and compliance issues. Asset deals limit due diligence to the parts to be acquired.

Warranties and indemnities are more extensive in share deals because all risks are assumed. Sellers provide warranties on the entire business. Asset deals limit guarantees to the assets transferred and specific liabilities.

Contract transfer is automatic in equity transfers due to continuity of the legal entity. Asset deals require explicit transfer of each contract. Change of control clauses can be triggered, resulting in renegotiation or termination.

Employment law issues are complex in asset deals. Staff must be taken over via business transition (section 7:662 of the Civil Code). Terms of employment are maintained but collective bargaining obligations may change. In share deals, all labour relations remain unchanged.

Regulatory compliance varies by sector. Licences and certifications remain valid in share deals. Asset deals often require new applications or transfer procedures. This can take time and create operational risks.

How does choosing between the two structures affect your company's valuation?

Transaction structure affects valuation due to different risk profiles, tax implications and acquisition liabilities. Asset deals eliminate unknown liabilities but require valuation adjustments for non-acquired elements. Share deals reflect enterprise value minus net debt.

In share transfers, enterprise value is reduced by net debt to arrive at share value. Buyers take over all debt and have to finance or restructure it. This affects the offer price and financing options.

Asset deals eliminate this problem through selective acquisition. The buyer pays only for desired assets and assumes specific liabilities. This can lead to higher valuations as financing risks are eliminated.

Tax benefits in asset deals can increase valuation. Stepped-up basis generates tax savings that can be factored into the purchase price. These benefits are especially valuable in asset-intensive companies with low book values.

Negotiation dynamics differ between the two structures. Share deals are often quicker to complete, giving sellers a stronger position. Asset deals give buyers more control but require longer negotiation periods for more complex documentation.

The choice between share transfer and asset/liability transaction fundamentally determines your M&A strategy. Professional guidance helps to make the right structure choice and optimal negotiating position. For strategic advice on your specific situation, please contact with us.