When purchasing a business, depending on what you are specifically buying and taking over, you will either purchase assets or shares in a business.
What is a share purchase?
A share purchase involves purchasing the shares of the company from the shareholders. On purchasing the shares, as a buyer, you take all of the company’s assets, liabilities, obligations.
In private companies limited by shares, there are transfer restrictions for shares generally outlined in the company’s articles of association or the shareholders’ agreement. For instance, consent may be needed from other shareholders to waive pre-emptive rights. But other than that, in Hong Kong, there are no general legal restrictions on the transfer of shares in an incorporated company. To understand more about the transfer of shares, read Can I transfer the shares of my company?
However, if you are purchasing a company that is into the following sectors then the different rules will apply:
- Insurance
- Banking
- Securities and Futures
- Provident Fund
- Telecommunications
- Broadcasting
What is an asset purchase?
An asset purchase is the transfer of specific assets or employees relating to a specific business function. You are choosing what to purchase in the business, instead of purchasing the whole business.
Thus, you can pick the assets you want from the business, or any liabilities you are willing to take on. This means the process of purchasing has fewer formalities than entering into a share purchase, where all assets are bought.
You should also look to the articles of association (AOA) and shareholders agreement to look for any restrictions on the transfer of assets. The restrictions will usually be requiring approval from shareholders. Furthermore, the AOA should also detail the procedure for transferring the rights, permits and licenses, to continue operation in Hong Kong.
Third-party consent may also be required if there are previous agreements that have to be transferred to you relating to the assets you choose to purchase. This includes agreements with landlords, contracting parties, creditors and anyone who is affected by the transfer and the change in ownership.
What is the main difference between them?
Therefore, the main difference between a share purchase and an asset purchase is that a share purchase is where you purchase the whole company. On the other hand, asset purchase is where you can choose which parts (assets) of the company you want to own and buy.
| Asset Purchase | Share Purchase |
| You have the choice of which liabilities you are willing to take on and of the specific assets you wish to take on | The purchaser cannot pick and choose the best aspects of the business. Thus, all liabilities, debts are taken over by the purchaser |
| Lower overall risk as you can avoid areas of the business that carries more risk factors, leaving the more undesirable assets to the original owner | Arguably, the risks are higher because the purchaser takes on the business as a whole, which may involve a complicated history that is dealt with by the purchaser |
| Existing contracts such as customer contracts relating to the target company has to be specifically novated/assigned to the purchaser | Existing contracts are usually not affected if it is a share purchase. They will not need to be specifically assigned to the new owner |
How do I decide whether to go ahead with a share purchase or an asset purchase?
There are various factors you should consider before deciding whether you want to purchase assets or shares. Besides your main objective of purchasing and the situation of the target company, here are some main factors to consider. But in general, as a new business owner, asset purchases may be more accessible.
- How much of the business do you want to take on
If you want to run a complete business in its entirety, then a share acquisition is more appropriate as you gain all the liabilities, assets and obligations of a company. Whereas if you only want some liabilities and assets, then asset acquisition allows you to choose specific assets to be in charge of.
- Level of Risk
The level of risk can help to determine your decision. If you are ready to take on full responsibility for an entire company, then a share purchase may be appropriate. However, if you are not in a position to take a bigger risk involving more debt and existing liabilities, then you should consider an asset purchase as you can cherry-pick the assets/liabilities that have the least possible risk. This could limit any issues that may arise in the future.
Key Takeaways
- A share purchase involves purchasing the shares of the company from the shareholders. This includes purchasing all the assets and liabilities of the company
- Asset purchase allows you to pick and choose which assets or liabilities you want to purchase and take over. This is different from share purchase because you are not purchasing the whole business