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Share Purchase as Opposed to an Asset Purchase

Updated: Feb 10

asset purchases versus share purchases

Asset purchase or share purchase

Share versus asset transfer

Choice of structure (share or asset purchase)


Asset purchase or share purchase


A deal may take the form of either a transfer of shares or a transfer of assets while still achieving the commercial goals.

An acquisition in Singapore can take the form of a purchase of assets, or a purchase of shares of a company.

A business may be acquired by way of share purchase or asset purchase.


Share purchases

Under a share purchase, the buyer takes over ownership of the company carrying on the business (the target company), which comes with all of its assets, obligations and liabilities (whether or not the buyer was aware of them).

In a share purchase, the target company is bought in its entirety through the acquisition of its shares, complete with all assets and liabilities.

In an asset sale, the buyer acquires assets.


A composite structure sometimes adopted involves a pre-transaction reorganisation of the business which might involve the hive-down (or up) of part of a company's business and assets to (or out of) the target company prior to the sale of shares in that company. In that way, the assets the buyer wishes to acquire (or which the seller wishes to retain) can be moved to or from the target company before the company itself is acquired by the buyer.


asset purchases

Under an asset purchase, the buyer acquires the assets it wishes to acquire from the seller and purchases them.


A seller will generally prefer to sell shares rather than assets. A share sale relieves it of all liabilities (known and unknown) associated with the target company. However, for an agreed period following the sale of the shares, the seller will remain liable to the buyer with respect to the target company's business and affairs pursuant to the warranties and indemnities negotiated as part of the transaction (subject to specific agreed limitations on the seller's liability).


By contrast, a buyer may prefer to avoid any risk of acquiring unknown or unquantifiable liabilities by careful selection of the assets it will acquire.


The commercial objectives and tax implications will determine which method is chosen.


The choice is influenced by factors such as the treatment of the gains as revenue or capital (there is no capital gains tax in Singapore), the likely recapture of capital allowances by the seller (in the case of purchase of assets), the possibility of availing of the Section 13Z safe-harbor rules for exemption on share divestment gains (in the case of purchase of ordinary shares) and the amount of stamp duty payable on asset purchases versus share purchases.


As stamp duty is only applicable on certain transfer instruments and the stamp duty rate differs depending on the instrument, the choice of either one or the other can impact whether stamp duty may be applicable and the associated stamp duty costs.


A decision to proceed by way of share purchase rather than asset purchase will be influenced by an assessment of several factors, including:


the nature and quantity of assets employed in the target company’s business


any difficulties associated with acquiring key assets individually (eg where third party consents may be required)


the liabilities of the target company, and


the tax treatment of the alternative structures




The key advantages of a share sale over an asset sale are as follows:


  • Method of transfer. The execution of a simple, one-page share transfer form is sufficient to pass ownership of the company. Conversely, in an asset sale, [each] asset must be transferred. Some assets (such as land) must be formally transferred and usually require third party consent. As all assets and liabilities are acquired in a share purchase, the due diligence process is often more onerous and appropriate contractual protection through warranties and indemnities will generally be negotiated.


  • Contracts. Most contracts (such as customer and supplier contracts) are with the company and so remain binding after the sale, allowing the company to continue its business with little interruption to trade. This means that the buyer must understand the nature and key terms of the company's contracts, as discovered through due diligence. While "change of control" clauses may give a counterparty a contractual right to terminate if the company changes hands (and must therefore be identified), in practice third parties are unlikely to exercise this right unless there are serious concerns about the identity of the buyer.


  • Employees. There is little disruption to employees in a share sale as the employer remains the same so far as the employees are concerned. The terms of employment should be examined by the buyer, particularly for key employees. The buyer might also wish to lock in key employees through contractual provisions. There is no legal requirement to inform or consult either employees or trade unions on a share sale (subject to any overriding provisions of collective or trade union agreements). However, if the business undertaking (or part of it) is being transferred in an asset sale, consultations must take place between the seller, the affected employees and/or the relevant trade unions before the transfer can take effect.


  • Directors. In a share sale, the company's directors are likely to resign, allowing for a clean break from the company and freeing the buyer to appoint its own directors. However, it is important for the buyer to ensure that severance payments are not triggered under service contracts (or alternatively that the directors agree to waive any such entitlements).


  • Tax. In an asset sale, goods and services tax (GST) at 7% can be chargeable on the sale of assets. Share sales are exempt from GST.


  • Post-completion. Following the share transfer, the seller will have severed all ties with the target company, subject to any contractual protections included in the share purchase agreement (SPA). In contrast, in an asset sale the sellers will still own the shell company which will then need to be liquidated. This can be an expensive and time-consuming procedure in Singapore.


The main disadvantages of a share purchase compared to an asset purchase are as follows:


  • Method of transfer. In an asset purchase, the seller is the company itself, selling off assets. The assets and liabilities are not automatically transferred, the buyer selects which assets it wishes to acquire.


  • Security. On an asset purchase, the buyer can generally grant security to lenders over the assets to be acquired.


  • Tax. Stamp duty at a rate of 0.2% is payable on the higher of the consideration paid or the value of shares in a private company in relation to a share sale. In an asset sale, buyer's stamp duty based on a rate of up to 3% is payable in relation to immovable property. Seller's stamp duty may be due on certain disposals of industrial immovable property.

Stamp duty is a form of tax or duty imposed on certain legal and commercial instruments. This generally includes any contract or agreement for the sale or transfer of Singapore immoveable property and share transfer form for the sale or transfer of shares in a Singapore incorporated company. Stamp duty is also levied on electronic records that effect a transfer of interest in immovable property and shares. The stamp duty is generally borne by the transferee (i.e., acquirer), unless otherwise contractually agreed.


The stamp duty rate differs depending on the instrument. For example, in the case of a share transfer, the stamp duty rate is 0.2% on the higher of the purchase consideration and the value of the shares.


Section 13Z safe-harbor rules on share divestment gains


A divesting company (whether incorporated in Singapore or otherwise) may be exempted on gains from divestment of ordinary shares, where immediately preceding the date of divestment, the divesting company had at all times during a continuous period of at least 24 months owned at least 20 percent ordinary shares in the investee company. The exemption is subject to certain exclusions.


Divestment gains that are not exempted under Section 13Z would be subject to normal income tax rules (i.e. the taxability depends on whether the gains are capital or revenue in nature).


Purchase of assets


A purchase of assets may give rise to income tax and stamp duty implications for the seller and buyer. Depending on the tax status of the seller, the disposal gains may be regarded as trading gains subject to income tax. Where the asset is a real property, the amount of stamp duty payable on transfer may be substantial. The buyer is usually liable for the duty. The seller may also be liable to seller’s stamp duty to the extent that industrial properties are disposed of within prescribed period. Where capital allowances have been claimed on the assets, they may be recaptured by and taxable to the seller, depending on the consideration.


Tax attributes


In the case of an asset or business transfer, the unused tax losses and capital allowances remain with the company unless the transfer is a qualifying corporate amalgamation.


Transfer taxes


Stamp duty is payable on documents relating to the sale or transfer of immovable properties and shares in accordance with the Stamp Duties Act.


Sale and purchase of immovable property


Stamp duty payable on documents relating to the sale or transfer of immovable properties is computed based on the higher of the purchase consideration or the market value of the immovable property located in Singapore.


Buyer’s Stamp Duty (BSD) on acquisition of non-residential properties is payable by the buyer at the following rates. [ ] 3 percent.


Industrial properties purchased


Sale and purchase of shares


Stamp duty is payable on documents relating to the transfer of shares in a Singapore company. The rate of duty is 0.2 percent on the higher of the consideration or the value of the shares and is payable by the buyer.


Pre-sale dividend


Under certain circumstances, the seller may prefer to realize part of their investment as a pre-sale dividend because dividends paid by Singapore-resident companies are tax-exempt.


GST


Generally, the disposal of shares is a GST-exempt supply. However, where the transferee is a person who belongs outside Singapore, the supply is zero-rated for GST purposes.


While output GST is not payable in both transactions, there is implication on the claiming of input GST credits. Generally, no input GST is allowed for the making of exempt supplies arising from share disposal unless certain qualifying conditions are met. However, any input GST incurred for making zero-rated supplies including that from shares sold to persons belonging outside Singapore is claimable.


Tax indemnities and warranties and tax clearance


On taking over the target company, the buyer assumes all related liabilities, including contingent liabilities.


Therefore, the buyer usually requires indemnities and warranties in the sale agreement. The extent of the indemnities or warranties is subject to negotiation between the seller and buyer. Where the sums involved are significant, the buyer normally initiates a due diligence exercise, including a review of the target company’s tax affairs to ascertain the tax position of the target company and identify potential tax liabilities.


Comparison of asset and share purchases


Advantages of asset purchases

  • The purchase price of qualifying assets (or a proportion) may be depreciated for tax purposes in the form of capital allowances.

  • Liabilities and business risks of the seller company are not transferred.

  • Possible to acquire only certain parts of a business.

  • Interest is deductible where incurred to fund the acquisition of plant, equipment and other assets that will be used in the trade or business.

Disadvantages of asset purchases

  • Possible clawback of capital allowances claimed by the seller in the form of a balancing charge.

  • Higher stamp duties on the transfer of immovable properties (other than cases involving equity interests in residential PHEs where ACD applies).

  • Benefits of any losses or unused tax attributes remain in the target company.

Advantages of share purchases

  • No balancing charges or clawbacks for the seller.

  • Buyer may be able to use and benefit from tax losses, other unused tax attributes and tax incentives of the company acquired, subject to conditions.

  • Lower stamp duties payable on the transfer of shares, compared with immovable property (other than cases involving equity interests in residential PHEs where ACD applies).

  • Eligible for tax benefits under the M&A scheme, subject to conditions.

  • Divesting company (whether incorporated in Singapore or otherwise) may avail of the safe-harbor rules under Section 13Z of the ITA for exemption on gains from divestment of ordinary shares in an investee company, subject to the relevant conditions.

Disadvantages of share purchases

  • Buyer may acquire historical tax and other liabilities.

  • No deduction or depreciation allowances (capital allowances) are available for the purchase cost of shares.

  • Interest incurred to fund the acquisition of shares could be restricted.



To find out how Bestar's expertise can help you and your company, contact us.


https://home.kpmg/xx/en/home/insights/2021/04/singapore-taxation-of-cross-border-mergers-and-acquisitions.html


https://uk.practicallaw.thomsonreuters.com/9-543-1146?transitionType=Default&contextData=(sc.Default)&firstPage=true


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