Introduction
In an M&A transaction, there are two primary ways a buyer may want to structure a deal at the outset:
Purchase of Company (shares – the typical option): In this scenario, the buyer acquires ownership of the company by purchasing its shares from the existing shareholders. This means that the buyer steps into the shoes of the company’s shareholders and indirectly acquires both its assets and liabilities, including potential hidden or contingent liabilities;
Purchase of the Business (Assets): This involves the buyer acquiring specific assets of the company, such as equipment, intellectual property, customer contracts, and other operational assets. Liabilities and other obligations are typically not transferred unless explicitly agreed upon. The seller continues to hold ownership of the company itself, but the operational business is transferred to the buyer.
Why a Buyer may prefer purchasing a Business (Assets)
There are various reasons, sometimes personal but oftentimes economical. However, the typical reasons, in our experience, are:
Selective Liability Exposure: In an asset purchase, the buyer can be selective in acquiring only specific assets and can avoid assuming unwanted liabilities, such as pending lawsuits, tax obligations, or other debts. This reduces the risk of inheriting unforeseen liabilities tied to the seller company;
Clean Slate: Asset purchases provide a “cleaner” acquisition in the sense that the buyer can acquire the operational parts of the business they are interested in without being burdened by the seller company's historical issues or corporate baggage (e.g., legacy contracts, employees, or regulatory obligations);
Flexibility: The buyer has more flexibility in structuring the transaction, allowing them to acquire only what they need (e.g., intellectual property, machines or key employees) while leaving behind the rest, such as non-core assets or liabilities;
Avoiding Minority Shareholders: In a share purchase, the buyer acquires the entire company, which may include minority shareholders who might have certain rights (such as tag-along rights) that complicate the transaction. By purchasing only the assets, the buyer can avoid this issue altogether.
Key legal considerations when opting for a Business (asset) purchase
(A) Transfer of asset ownership
In Malaysia, the transfer of asset ownership can involve several procedures based on the assets being acquired:
Contracts may need to be renegotiated and transferred from the seller to the buyer (novation).
Note: In a novation agreement, it is crucial that execution by ALL parties (original parties and New Party) are made because novation involves the replacement of one contractual party with another, and this change alters the rights and obligations under the original contract. Failure to do so may render the novation incomplete and may leave uncertainties regarding liabilities and obligations.
For vehicles, the buyer must register ownership under their name with the Road Transport Department Malaysia.
Intellectual property rights need to be officially assigned and registered with the Intellectual Property Corporation of Malaysia (MyIPO).
In cases where registration with authorities is unnecessary, the sale and purchase agreement should specify that ownership of plant, equipment, and machinery will be transferred to the buyer through delivery.
(B) Transfer of employees
As opposed to a share sale, the automatic transfer of employees from the seller company does not occur. The buyer company has the discretion to select employees from the target, as they can choose which assets to acquire and which to exclude from the acquisition. These employees remain under the employment of the seller company. If the buyer company does not extend employment offers to these individuals, the seller company is responsible for determining their fate post-acquisition.
If the buyer company in fact plans to hire any employee from the business being acquired, then they must extend an offer within 7 days of the ownership change[1]. The offer should maintain terms and conditions of employment that are at least as favorable as the employee's previous arrangement before the change occurred.
If the buyer fails to make such an offer for continued employment, the responsibility for paying all termination benefits, as stipulated in the Employment (Termination and Lay-Off Benefits) Regulations 1980, will remain with the employee's previous employer i.e. seller company.
The buyer company should also assess whether other administrative procedures are necessary, including notifications to labor and tax authorities, particularly concerning the termination of employment.
Conclusion
The decision between purchasing a business (assets) or a company (shares) hinges on key factors such as liability exposure, flexibility, and the specific goals of the buyer. While an asset purchase provides the buyer with the advantage of selective acquisition and reduced liability risks, it also requires careful attention to legal and administrative procedures for asset transfer and employee retention
[1] Regulation 8 of the Employment (Termination and Lay-off Benefits) Regulations 1980
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