A hotel deal may be structured as a share sale, with a buyer acquiring ownership of the company which owns the hotel, by purchasing all of the issued shares of the company. The sellers will be the individual shareholders of the company and the key transaction document will be a share purchase agreement.
However, in practice, hotel deals are typically structured as an asset sale. This involves a buyer instead choosing the specific assets and liabilities of the company that it wishes to purchase. The seller will be the company itself and the key transaction document used to transfer ownership will be a business transfer agreement.
A share sale may initially appear the more attractive and straightforward option. However, legacy tax issues including other potential claims, and tax issues arising from a share sale may make an asset purchase a far more attractive proposition from a buyer's perspective.
Assets and liabilities
A buyer has the ability to choose the specific assets and liabilities of the company that it wishes to acquire in an asset sale. This gives a buyer a degree of flexibility as well as protection from any known or unknown liabilities of the company, which it can opt to leave behind. A buyer should ensure that full details and listings of all assets that it is acquiring are inserted as a schedule to the business transfer agreement. Similarly, the business transfer agreement should list the excluded liabilities which the buyer will not be acquiring. This ensures that the contract reflects the deal as commercially agreed between the buyer and seller. The business transfer agreement should include an apportionment of the value between each of the various assets.
All assets and liabilities of the company pass automatically to a buyer on a share sale. They are not required to be specifically listed in the share purchase agreement. In a share sale, the buyer takes on all liabilities, including unknown liabilities (including potential tax liabilities and penalties). As a result, this generally requires a buyer to carry out a lengthier, more comprehensive and consequently more expensive due diligence process.
Under the TUPE Regulations, the general rule is that employees automatically transfer to a buyer in an asset sale. A buyer is required to ensure that the employees enjoy the same terms and conditions of employment that applied to their previous employment, with the exception of pension entitlements. A 30-day notification and consultation period must be carried out by the seller in advance. This can impact on the timing of completion of the deal. Therefore, engagement with employees should happen at an early stage. The task of issuing TUPE notices and engaging with what can sometimes be a large number of employees may be administratively burdensome on the person appointed with carrying out that task. In light of this, sufficient resources should be dedicated to this key action point by the seller.
In contrast, employees pass automatically to a buyer in a share sale and the TUPE protections mentioned above will not apply to the transfer.
Existing contracts will need to be assigned or novated in an asset sale as the identity of the parties to those contracts will change. This process requires a review of the assignment and notice provisions in existing contracts. In addition, negotiation with third parties in relation to obtaining consent to the novation of the contracts may be required. This can be time-consuming and may require input from legal advisors.
In a share sale, contracts do not need to be assigned or novated. Instead, consent must be obtained for contracts which contain a “change of control” clause. The “change of control” clause may give the other party to the contract the right to terminate the contract on the basis of the change of control or ownership of the seller. Therefore, it is imperative that the sellers engage with the counterparties and satisfy the consent requirements. This process will necessitate a review of the change of control clauses in the existing contracts, which again can be time-consuming and may require input from legal advisors.
The selling company will continue to exist following completion of an asset sale. The shareholders of the seller will need to consider what steps are needed in respect of its corporate existence going forward. The shareholders may, for example, opt to liquidate the company or to change its name.
In a share sale, the buyer becomes the shareholder of the target entity, which continues to exist as it did before the deal and the previous shareholders simply exit.
There will be a real estate element involved in all hotel deals and specialist real estate advice should be sought from your legal advisors.
In part two of Preparing for a Hotel Sale – Share Sale or Asset Sale? we will look at the mechanisms available to buyers and sellers to determine the sale price. We will also set out the various taxation issues that need to be considered.
We recommend that buying and selling parties take time in advance to consider the legal, financial and tax pros and cons involved in structuring a hotel deal as a share sale or asset sale. Specialist advice should be sought from your legal, financial and tax advisors on the implications of both structures, which will assist in making this decision.