Part 1.1: Corporate acquisitions - shares vs assets

Question 1

What direct parties are involved in the aqcuisition of shares?

Answer 1

• Vendor = physical person or company = shareholder in target co
• Bid co = company interested in the shares (underlying assets of Target Co)

Question 2

What direct parties are involved in the aqcuisition of assets?

Answer 2

• Target co = company

- Bid co = company interested in the assets of target co

Question 3

The consequences of a transaction to the three parties differ significantly depending upon? (3)

Answer 3

1. Their status
2. The form of acquisitions
3. The jurisdiction(s) (rechtsgebied) they operate in

Question 4

What indirect parties are involved in the transactions? (7)

Answer 4

1. Tax authorities: share or asset deals makes a big difference
2. Anti-trust agencies (especially in the EU and Belgium – European commission) and anti-monopoly agencies: avoid companies get too much power in the market (monopoly)
3. Other governmental bodies
4. Bid Co shareholders: interested how the deal is structured
5. Unions/ employees: New owner might decide to restructure and lay off part of the employees or lower wages.
6. Customers, Creditors
7. Brokers, Suppliers

Question 5

What are the main advantages from the vendor perspective in selling SHARES? (6)

Answer 5

1. Transfer any previous tax liability or other claims (Overdracht van eerder belastingsverplichtingen of andere claims): A lot of the tax liabilities are not shown on the balance sheet → if you buy shares, theoretically, buyer will be responsible for liabilities on the balance sheet but also for the hidden liabilities who will come out in a tax audit. Old shareholders lose their responsibility! (België kan verantwoordelijkheod tot 3 jaar terug gaan en in geval van fraude zelfs 7 jaar)
2. Likelihood of reduced tax on sale (kans op verlaagde belasting op verkoop): On average: when shareholders sell of their shares, they are more favorably taxed in comparison to assets.
3. Transfers existing tax liability on retained earnings (Overdragen van bestaande belastingverplichtingen naar ingehouden winsten):
   o Tax liability or taxation on these retained earnings is the same as on the dividend. Tax due on dividend is called withholding tax (‘roerende voorheffing’). After the sale, withholding tax needs to be paid when the want to use those retained earnings.
   o Vendor transfers tax liability to Bid Co when there are retained earnings
   o New SH will not face the tax liability when the current SH calculate the delta into their sell price.
4. Transfer unrealized Capital Gain Tax (CGT) liability on underlying assets (Overboeking van niet-gerealiseerde vermogenswinstbelasting op onderliggende activa): If you would sell the assets instead of the shares, there can be a capital gain → corporate income tax should be paid
5. Sell all balance sheet liabilities (Verkoop alle balansverplichtingen)
6. Responsibility for employees (and industrial relations) is with new owner

Question 6

What are the main disadvantages from the vendor perspective in selling SHARES? (4)

Answer 6

1. Must dispose of entire business and favorable contracts
2. Requirement to give broad indemnities (vergoeding)
3. Because lower taxation, this will be taken into account in the price: Transfer tax losses or other tax shelters. Tax losses can balance profits; these tax losses will now be for the buyer
4. Transfer intellectual property rights

Question 7

What are the main advantages from the Target co perspective in selling ASSETS? (5)

Answer 7

1. Higher cash receipt likely : Target Co will have to pay corporate income tax on the proceeds of the assets → higher tax cost and while trying to make sure that those extra taxation is paid by the potential buyer, you will sell at a higher price & so create a higher cash receipt.
2. May be able to use entity for other purposes: other activities
3. May sell only part of the business
4. May retain benefit of favorable contracts: The buyer only buys assets, not the relations and contracts that the firm has (eg. Partnership)
5. May retain tax losses and other tax benefits: Profits from selling assets (eg. Patent) will be balanced with losses from the activities in the year.
   o If company changes nature of business/business activity, after selling of the assets, the use of tax losses, the benefits of it, will be challenged by the tax authorities. The further existence of those tax loses will be challenged. eg. bakkery that gets acquired by management consulting firm

Question 8

What are the main disadvantages from the Target co perspective in selling ASSETS? (5)

Answer 8

1. Retain liabilities: Buyer only acquires the assets. (<=> Selling shares)
2. Difficulty in passing profit on sale to shareholders in tax-free manner: Corporate income tax needs to be paid on those proceeds & withholding tax → not the whole gain goes to the shareholder.
3. Realize any unrealized gains/depreciations recapture
   (realiseren van eventuele niet-gerealiseerde winsten/ verliezen): Which can be taxed.
4. Have to deal with employee issues
5. Potential tax liabilities on retained earnings: In case retained earnings are paid out in dividend, tax needs to be paid.

Question 9

What are the main advantages from the Bic co perspective in buying SHARES? (6)

Answer 9

1. Lower capital outlay
2. More likely to be attractive to vendor at a relatively lower price: Capital gains on shares are in Belgium very little taxed.
3. May benefit from tax losses available for carry forward: Not entirely certain of this advantage
4. May gain benefit of existing supply or technology contracts: Buyer gets access to contracts from the vendor (intelligent property)
5. Lower capital duty on net assets acquired (Capital duty = registration duty): If you buy shares: in principle, no registration duties. If target co is a BV or a NV and the main assets are real estate, Belgium tax authorities will take a close look to requalify a sale of shares to a sale of assets (capital duty: 11%)`
6. May be simpler and involves less legal fees: Prof not sure at all that this is the case

Question 10

What are the main disadvantages from the Bic co perspective in buying SHARES? (4)

Answer 10

1. Acquire unrealized capital gains liability on underlying assets.
2. Liable for any claims or previous liabilities of the entity.
3. No write-off of purchase price (looking for ways to overcome): Non taks deductable expense.
4. Acquire tax liability on retained earnings which are ultimately distributed to shareholders

Question 11

What are the main advantages from the Bic co perspective in buying ASSETS? (7)

Answer 11

1. Step up in cost base of assets
   (verhoog de kosten basis van activa): Increasing the cost can be used to decrease tax.
2. Amortize purchase price for tax purposes: Amortization (afschrijven) will create a tax reduction cost
3. In general, no previous liabilities inherited
4. Easier to rationalize business
5. No double duty on assets transfers
6. No acquisition of tax liability on retained earnings
7. May be able to acquire a part of the business

Question 12

What are the main disadvantages from the Bic co perspective in buying ASSETS? (5)

Answer 12

1. Need to re-negotiate supply, employment and technology
2. Higher capital outlay
3. Unattractive to vendor, so purchaser likely to pay premium: Interesting for target co in the case thas tax losses can set of the profit of the asset sold.
4. May attract high capital/transfer duties
5. Creation of acquisition goodwill, which may impact accounting profits