Unit 1 - Preliminary Matters

Question 1

What’s an asset acquisition?

Answer 1

Buyer acquires or gets the underlying assets that needs to carry on the business (assets for the business to function) but the tax does not.
- The ownership of the company is transferred to the buyer, but there is no change in ownership of the business.

Part of the purchase price after the completion of the acquisition will be affected because of the goodwill of the company.

If the Target company has a subsidiary, the buyer will be buying the assets that will be conducting the business of the Target company along with the shares of the subsidiary.

Question 2

What’s a share acquisition?

Answer 2

It’s when shares are sold. Money goes to the SH directly.
It’s when the buyer acquires all or the majority of the shares in the target, the ownership of the company is transferred.

Question 3

What’s the difference between an asset acquisition and a share acquisition?

Answer 3

Share acquisition - all shares are being acquired and the consideration/money goes to the SH directly. But in an asset sale, the target company will be receiving the money (income/profit) via dividends income or liquidation. The company will be selling the assets but the business will continue. But they will also obtain the shares of the Target Company’s subsidiary.

Question 4

What are the Tax issues from the buyer’s POV on Asset Acquisition?

Answer 4

Asset acquisition

• VAT: may be charged at the sale of assets unless there’s been a sufficient amount of assets to make the business to continue.
• Buyer pays Stamp Duty on assets that are liable to other customs and other duties like land and shares. The SDLT may be higher than 0.5% if the shares are part of the assets being acquired at the 0.5% consideration.
• Carry forward of losses are not available.

Question 5

What’s a legal merger?

Answer 5

It’s a combination of assets and liabilities of 2 or more companies in a single legal entity

Question 6

What are the Tax issues from the seller’s POV?

Answer 6

Share Acquisition
- ER if individual shareholder disposing of shares
BUT
- If company is selling their shares, under Corporation Tax purposes, seller can be exempted from CGT charges under substantial SH exemption

Asset Acquisition
- Roll over relief available
BUT
- May be at risk of a two - tier taxation
1. Pay or Charged Corporation tac
If there’s income profit (where the Asset’s purchase price is MORE than the tax written down value)
2. More tax charges for distributing the proceeds of sale/income to the SH.
- Each SH may be subject to CGT

Question 7

What is the Head of Terms or Letter of Intent ?

Answer 7

It’s the main points that the parties have agreed and are happy to proceed with the transaction. It’s an outline of the parties’ intention and a starting point for the negotiation of SPA.

The principal commercial terms of the proposed acquisition may therefore be set out in a ‘heads of agreement’ and this document may also provide for an agreed period of exclusive negotiation.

t’s not intended to be legally binding.

Question 8

What’s the purpose of a Head of Terms agreement?

Answer 8

 Records and clarifies main points of agreement between the parties
 Sets out basis for further negotiations, i.e. how the parties intend to proceed with the transaction
 Focuses the minds of the parties and establishes whether there is a sufficient measure of agreement between them
 Serve as a useful guide for professional advisers involved.

Question 9

What’s the nature or factor of HOT or Letter of Intent?

Answer 9

It’s non-binding because they are not sufficient enough to be enforceable. BUT it is binding in the moral sense.

Question 10

What are the tax issues on the buyer’s POV on a share acquisition?

Answer 10

Share acquisition

• Buyer would need to pay 0.5% SDLT of the purchase price rounded to the nearest £5
• Rollover relief is not applicable so the tax position continues after the acquisition.
• CGT: Buyer will get the assets of the company (especially if they are a capital asset) at a cost at which they were originally bought so there would be an existing delayed tax liability that they would need to pay and this might be more expensive.
• Tax position: Company’s tax position will continue after they acquire the shares. Buyer would want to get tax indemnity.