When a buyer acquires a business in India, one of the first structural decisions is whether to acquire the shares of the target company or to acquire specific assets of that company. The choice has significant implications for tax, regulatory approvals, liability, and the complexity of the transaction. This article explains the key differences and how buyers typically approach the decision.
Share Purchase: What the Buyer Gets
In a share purchase, the buyer acquires ownership of the target company itself by purchasing its shares from the existing shareholders. The company continues to exist as the same legal entity. All of its assets, contracts, employees, licences, and liabilities transfer to the buyer automatically as a consequence of the change in ownership.
This simplicity is one of the main advantages of a share purchase. Contracts do not need to be individually assigned. Licences held by the company continue to be held by the company. Employees remain employed by the same legal entity.
Asset Purchase: Selecting What You Buy
In an asset purchase, the buyer acquires specific assets from the target, rather than the company itself. The buyer can choose which assets to acquire and which liabilities to assume. Assets that the buyer does not want, or liabilities that the buyer does not wish to inherit, remain with the selling company.
This selectivity is the primary advantage of an asset purchase from a buyer's perspective. A buyer who is concerned about the target's legacy liabilities, litigation exposure, or environmental obligations can structure an asset purchase to leave those behind.
The ability to leave unwanted liabilities with the seller is the most significant practical advantage of an asset purchase. However, Indian courts and regulators have in some cases pierced through asset purchase structures to hold buyers responsible for liabilities that were nominally left with the seller, particularly in the employment and tax contexts.
Tax Treatment
The tax treatment of share purchases and asset purchases differs significantly and is often the deciding factor in structuring decisions. In a share purchase, the seller pays capital gains tax on the profit from the sale of shares. Long-term capital gains on the sale of listed shares are taxed at 10% above a threshold. For unlisted shares, long-term capital gains are taxed at 20% with indexation.
In an asset purchase, the seller pays tax on the gains made on the sale of each individual asset. The tax treatment depends on the nature of the asset, its holding period, and whether it is a depreciable asset. The buyer in an asset purchase can claim depreciation on the stepped-up cost of the acquired assets, which is a tax advantage not available in a share purchase.
Stamp duty is also relevant. The transfer of shares attracts stamp duty at 0.015% of the consideration. The transfer of immovable property attracts much higher stamp duty rates, typically between 5% and 8% depending on the state. For businesses with significant real estate, stamp duty costs can be a major factor in the structural decision.
Regulatory and Contractual Considerations
An asset purchase typically requires individual third-party consents for each contract being transferred, unless those contracts expressly permit assignment without consent. In a business with many supplier, customer, or technology contracts, obtaining these consents can be time-consuming and may not always be achievable.
A share purchase avoids the need for individual contract assignments, but triggers change of control provisions in any contracts that contain them. The due diligence process must identify all change of control clauses in material contracts and assess whether they require counterparty consent or give the counterparty the right to terminate.
From a regulatory perspective, certain licences in India are personal to the licensee entity and cannot be transferred even in a share purchase. Where the value of the business is tied to specific regulatory approvals, this needs to be verified carefully before structuring the transaction.
Employee Considerations
In a share purchase, employees remain employed by the same entity and their terms and conditions of employment are not affected. In an asset purchase where the buyer is acquiring a going concern, the provisions of the Industrial Disputes Act regarding transfer of undertaking may apply, and employees may have statutory protections that restrict the buyer's ability to restructure the workforce immediately after acquisition.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. It does not create a lawyer-client relationship. For advice specific to your situation, please consult a qualified legal professional. LawCite Advocates is a law firm registered in India.