In June’s newsletter Elaine Grose, senior tax manager at Albert Goodman examined the differing tax implications of an asset and a share acquisition. This month Simon Hore, corporate partner at commercial law firm Thrings, considers how the two different approaches to an acquisition will affect the legal process.
A share sale is, in theory, the most straightforward acquisition process as it is simply a change in the shareholder who owns the limited company (or ‘target’) which carries on the care home business.
To the outside world, there would be very little change as the employer remains the same, as does the entity that residents and suppliers contract with. For Care Quality Commission (CQC) purposes, the registered provider remains in position. And assuming the registered manager continues, only a change of nominated individual must be notified to the CQC, which can happen as soon as the sale occurs.
As a buyer, the downside of a share purchase is that you will inherit the target “warts and all”. A thorough due diligence exercise is therefore needed to ensure any potential liabilities or unusual issues are identified prior to completion.
For instance, the target may have ongoing litigation or regulatory claims against it (or circumstances which could lead to one or both of these). Carefully drafted protection in the sale and purchase agreement will give the buyer a potential remedy against the seller to ensure the risk of such issues remains with the selling shareholder(s).
Similarly, it is possible for HMRC to seek the payment of tax by the target even though it relates to a period of trading when the target was owned by the former shareholder. A tax covenant can provide you with recourse against the selling shareholder(s) in such a scenario.
Completion accounts will also be needed as part of a share purchase so that there is an adjustment of the purchase by reference to the exact financial position of the target on the day of completion.
In the case of an asset sale, typically the target business is transferred from one legal entity to another. As a result, there will be practical issues to resolve including the assignment or novation of resident contracts and material supplier contracts, dealing with TUPE (legislation that protects employees’ rights when the business transfers to new owners) and the assignment of property leases, where the freehold of the home is not owned by the seller. The added complication of needing to involve a third party in the form of a landlord can lead to delays if not dealt with early or appropriately.
An asset purchase is also more complicated as the registered provider is changing, meaning the CQC’s prior consent is needed. If the buyer already carries on a care home business and is a registered provider, the approval process can be greatly simplified.
The major benefit of an asset purchase for the buyer is that you can be selective about what assets, and more importantly, what liabilities are transferred to you. This can therefore make the transaction lower risk compared to a share acquisition.