M&A – Main differences between Share Deals and Asset Deals in India

Share Purchase Agreement (SPA) is an agreement entered into between the buyer and seller(s) of shares of a target company. Typically, in India, the SPA lays down the number of shares that are being sold to the buyer and the price of these shares. It further details the manner in which payment would be made as well as the timeline for the payment. Further, conditions precedent are listed. Conditions precedent are actions that are required to be carried out by the parties before the actual transaction of sale of shares occurs. For the seller, these conditions culminate out of the due diligence carried out by the buyer. The buyer generally does not have any conditions precedent that need to be performed by it, except regulatory approvals where necessary. Then the time frame and the actions (including but not limited to exchange of documents) to close the transaction are provided. Further, an indemnification clause is provided that specifies the liability for losses incurred by a party due to breach of any representation and warranty, covenant or obligation under the agreement. The dispute resolution and governing law is also crucial.

• An Asset Purchase Agreement (not being a business transfer agreement) contemplates purchase of identified assets of an entity, to the exclusion of all other, non-integral assets/liabilities of a selling entity.
• A Business Transfer Agreement (BTA) in India, however, generally contemplates the purchase of all the assets and liabilities that form part of the business undertaking of an entity, as a ‘going concern’, for a lump-sum amount. BTAs are also referred to as ‘slump sale’, and is a popular acquisition structure as it is tax-friendly towards the seller, and does not involve the need to attach separate values to particular assets, as the business is valued as a whole.
• Essentials of the above agreement include details of sale and transfer of specified assets/business undertaking, purchase price, representations and warranties, condition precedent for closing, post-closing obligations, indemnification, governing law and dispute resolution.
  

In general, shares of a private limited company are not freely transferable. Shares can be transferred via private sales, with the approval of the board and subject to the conditions of the charter documents. A proper duly stamped, dated and executed Share Transfer Form by or on behalf of the transferor and the transferee and specifying the name, address and occupation, if any, of the transferee must be delivered to the company by the transferor or the transferee within a period of 60 days from the date of execution, along with the share certificate.

• A due diligence of the asset/title to such asset sought to be purchased may have to be carried out by the buyer, depending on the nature of the asset.
• Stamp duty may be payable upon the instrument(s) of transfer and varies from state to state.
• If ownership of any of the assets like land, vehicles, etc. need to be registered, registrations will need to be sought from the relevant authority of the particular state in which the asset is situated or sought to be utilised.
• The asset itself, or the title documents of the asset, may have to be handed over to the buyer, post-execution of the instrument of transfer, to give effect to the transfer.
  

The transfer of shares may result in a capital gains tax for the seller. Also, stamp duty is payable on the share transfer agreement.

The transfer of assets may result in a capital gains tax for the seller, attracting either short-term or long-term capital gains tax, depending on the holding period for each asset. Goods and services tax may be payable on the transfer of business assets. However, goods and services tax may not be payable on the sale of business assets as part of a slump sale. Also, stamp duty is payable on the transfer agreement.