Hotel Acquisitions: share or asset deal for a buyer?

Key Characteristics

• Share purchase: The buyer acquires the shares in the target company from its shareholders, meaning that the buyer acquires ownership of the company as whole, including all its assets, liabilities and obligations (both known and unknown).
• Asset purchase: The buyer acquires ownership of specific assets and rights (and potentially liabilities) of the target company’s business rather than ownership of the company itself.

Pros of a share purchase

• Simplicity: Generally, a share purchase tends to be simpler than an asset purchase as all the target company’s assets are included in one transaction and so there are usually fewer transfer documents. However, a buyer will still need to complete a thorough due diligence process and a warranties and disclosure exercise with the seller in agreeing the terms of the share purchase agreement.
• Continuity: The hotel’s operations continue uninterrupted as all contracts, operating licences and relationships with suppliers and customers remain in place without the need for separate assignations or third-party consents (it’s worth noting that all major contracts need to be reviewed for change of control restrictions or deemed assignation provisions).
• Stamp Duty: Stamp duty on share purchases is charged at 0.5% whereas stamp duty land tax (SDLT) and Land and Buildings Transaction Tax (LBTT) (Scotland’s equivalent to SDLT in England and Wales) is charged at rates of up to 5% on an asset deal.
• Employees: The employment of the hotel staff is unaffected in a share purchase with no TUPE consultation or measures required which can positively affect timings for completion. This often means a simultaneous exchange and completion can be achieved whereas with an asset deal there is usually a split exchange and completion.

Drawbacks of a share purchase

• Assumption of liabilities: A buyer will acquire all the target company’s liabilities, so there isn’t the same opportunity for a buyer to select those which it is more willing to take over. A buyer will also inherit any undisclosed liabilities or issues which might only become apparent after completion.
• Complex due diligence and warranty negotiation: Given that all the target company’s assets, liabilities and operations will be acquired by the buyer, the due diligence exercise will be substantial and share purchase agreements can also be complex and lengthy with the warranty negotiation being extensive.
• Warranty and indemnity (W&I) insurance: If a buyer is to raise any breach of warranty claim against the seller, the ability to recover losses from the seller must be considered. W&I insurance is often considered to mitigate the buyer’s risk; however it can be an expensive product. The parties will need to negotiate who would pay for W&I insurance or if and how those costs would be split between the parties.

Pros of an asset purchase

• Selective acquisition: An asset purchase gives buyers more flexibility as they can cherry pick the specific assets they want to acquire and exclude specific liabilities, which reduces the risk of inheriting unforeseen liabilities.
• Reduced due diligence: A buyer may be faced with less due diligence to carry out as they will only need to consider those assets and liabilities which they are acquiring rather than the target company as a whole. Warranties are usually very limited in an asset purchase, so the warranty negotiation is also lighter than in a share deal, where they are far more time consuming to protect the buyer from potential risks.
• Tax benefits: While this article does not deal with tax considerations in any detail, there can be tax benefits to buyers due to the ability to allocate the purchase price to different assets, which can allow for greater depreciation and amortisation deductions.

Cons of an asset purchase

• Stamp Duty: As above, the rates of SDLT or LBTT are higher on an asset purchase than a share purchase.
• Disruption to business: Disruption can be caused to the ongoing operations of a hotel where not all the assets required to operate it are transferred to the buyer. For example, if key contracts are not assignable, those may need to be renegotiated or alternative suppliers identified, and it could be that guest management or other IT systems aren’t included in the sale with the buyer needing to put new systems in place.
• Complexity: Each asset needs to be individually transferred and such transfers might require third party consents (for example from landlords, suppliers or counterparties for assets subject to lease or hire purchase agreements).
• Employee considerations: Unlike in a share purchase, there will likely be TUPE requirements in an asset purchase, including consultation with the employees and additional requirements around any ‘measures’ proposed by the buyer. The period required for consultation can impact completion timescales.
• Licensing: Any operating licences necessary for the operation of the hotel (for example premises licence) will need to be transferred to the buyer.
• Speed: Given the employee considerations above and the possible need to acquire third party approvals for the transfer of certain assets (including licences and contracts as well as property), completion of asset purchases can potentially take longer than a share purchase.

There is no universal right or wrong answer as to whether a buyer should proceed with a share purchase or asset purchase A seller will obviously have its own interests to consider  and so it’s usually a matter for negotiation between the parties as to how to proceed based on the circumstances. Those negotiations are usually heavily tax driven given the different tax treatments for sellers and buyers between the two approaches.

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