Private Law

Business Acquisition

Share Deal

Asset Deal

Konrad Koloseus

2022/2023

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 1. Business Acquisition – Due Diligence
The acquisition of "a business" is usually a significant deal each for any seller as for any buyer.
Therefore both – if they are acting as professional companies – must be sure to be sufficiently
informed about the object of transaction (=the business), about the involved risks, about the
outstanding taxes, existing or to be obtained approvals, outstanding payments to be received or to
be made etc. Therefore, such deals (same is true for real estate transaction, IT-transaction, which all
of them represent transactions different from the usual daily routine business transactions) need to
be sufficiently prepared and structured before the deal is signed and closed.
In order to get sufficient knowledge about the actual situation of the possible object of transaction
(and to avoid “to buy a pig in a poke”) a professional seller and in particular a professional buyer
are usually performing a “Due Diligence Examination” / "Due Diligence Check" (in short: Due
Diligence): “diligently” the object of transaction is checked legally, technically and from a tax
perspective in order to get a realistic and true view.
Therefore a “Legal Due Diligence”, a “Technical Due Diligence” and a “Tax/Financial Due Diligence”
are performed and often agreed on basis of a LETTER OF INTENT (LOI) or specific Due
Diligence Agreement. In such LOI or Due Diligence Agreement not only the contact persons are fixed
but also the experts (lawyers, engineers, tax/financial experts) who shall make the check and prepare
the respective due diligence reports, duration, exclusivity of negotiations yes/no secrecy agreement,
jurisdiction agreement, contact persons agreement etc:

Letter of Intent
A letter of Intent has a similar legal purpose as a Preliminary Contract (Agreement to
conclude a specific contract in future), however it is typical that on basis of a Letter of
Intent it is precisely not possible to claim the conclusion of the main contract. A
Letter of Intent usually regulates the “pre-contractual-relationship” among interested
persons and states express obligations the parties have respect during a contract
negotiation. As already pointed out in previous Hand Outs, such obligations exist in
Civil Legal Systems already “automatically” on basis of Civil Codes (in Common Law
not), but it is always tricky and not easy to identify which exact obligations
“automatically” the parties have to respect (two general rules: active obligation to
instruct the other side about possible obstacles for conclusion of the (main) contract
and for the discharging the (main) contract and a “passive” obligation meaning
to answer correctly to the other side’s questions). Therefore, in particular in
connection with possible main contracts of high value or significant
consequences in business, better to have these obligations expressly clarified and
agreed by the interested parties. Such express agreement is usually called “Letter of
Intent”. In such letter of Intent following obligations are typically agreed:
 Strict duty of secrecy about the fact or about the content of the contract
negotiations (this duty is usually that important in business that as a pre-
condition for singing a Letter of Intent a separate “Non-Disclosure-
Agreement” (NDA) or “Secrecy Agreement” or similar is signed (before any
further talks).
 Negotiation dates and places of negotiations

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  Legal meaning of no reaction to emails/correspondence of the other side
 Express clarification that the Letter of Interest (“LoI”) does not
represent a preliminary agreement and therefore no party may claim on
basis of this LoI the conclusion of the main agreement (“No Preliminary
Agreement”)
 No right to claim compensation from the other side in case the
negotiations are not successful or terminated by the other side even
without no good reason or without stating any reason at all (“No
compensation, no disbursement, no Indemnification”)
 Definition of subject of negotiations, clarification of assumptions of each
side.
 Sometimes: definition which individuals will conduct the negotiations and/or
shall be “(single) points of contact” (“SPOC”)
 Often, but not always and not as a rule: Statement that the negotiations shall
be “exclusive” (unlimited or for a certain period of time), this means that no
“parallel negotiations” with others shall happen during the validity period of
the LoI (“Exclusivity”)

Often a “Data Room” is set up, where all documents are stored and can be checked there (only).
Access to this Data Room is severely controlled and checked (business secrets!). In the 21st century,
the “Data Room” is often structured as an “E-Room” (share point internet based accessible via data
keys changing each day).
On basis of these due diligence reports (prepared by lawyers, tax advisors, technical experts etc) the
management of the buyer (and in of the seller) will decide either to proceed with the deal or to break
up and to stop the negotiations. Due diligence reports usually provide a volume of several hundred
pages (and includes a short "management summary"). In case a management enters into a
significant deal without the necessary due diligence (=negligently, carelessly, not diligently), such
managers may become liable in case of unsuccessful outcomes, (provided such outcomes would have
been avoided if due diligence reports would have given a warning).

2. Business Acquisition – Share Deal

A “business” consists of several rights: maybe ownership over real estate (or lease contract in case of
no ownership) concerning office buildings/sites/premises, IT-rights (copyright, patents, design,
trademarks), employer’s rights (employee-contracts), “good will” (=reputation on the market),
company name, rights concerning, costumer lists (=business relations), existing business related
contracts still to be paid/performed by business partner etc.
"Business" represents always an object (not a subject/not a "person").
The owner of a business may be a natural person (sole entrepreneur), a couple of natural persons
(partnership), a legal person (company: limited liability company etc).

In case the owner of a business is a company, the business owned by that company can be
(“indirectly”) acquired by buying the shares of the company (from the "old" (shareholder(s)).

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By doing so, the owner of the business (=the company=the legal person) remains the same and
continues being the owner of the assets of the company, “just” the shares in the company (=owner)
are transferred (=therefore: SHARE DEAL) and thus “just” the persons of the shareholders are
changing (from the "old" selling shareholders to the "new" buying shareholders). So no correction in
the land register necessary, no IT-rights have to be transferred, the “employer” in the employment
contracts remains the same, just the shareholders of the employer, just the shareholders of
the real estate owner are different persons on basis of the “Share Deal”. The shareholder structure
has changed, not the legal relationship between the company and its business (i.e. its
objects/rights/contracts etc).

Benefit for buyer: Share deal is usually easy to execute (because just shares have to be transferred),
taxes (for instance real estate transaction tax) do NOT have to be paid (because no real estate
transaction!), therefore “cheaper”, all contracts of the company with other parties (for instance
with employees, with business partners) do not have to be amended because the company as
contractual partner remains (only its shareholders are different on basis of the Share Deal).

Disadvantage for buyer: becoming the new shareholder, such new shareholder is now
responsible for all debts and responsibilities of the company also for those he did not knew or was
not aware of at the date of the share deal. He takes over the company as it is, irrespective if the new
shareholder likes that or not. Therefore in Share-Deal-Agreements “indemnity clauses” are agreed
with the seller of the shares (which are hopefully respected later by the seller; indemnity clauses do
not represent absolute guarantees and securities in this respect). But even such indemnity clauses
cannot facilitate or reduce the full liability vis a vis third parties (such as employees, business
partners, the state [tax authorities] etc).

In case a business partner wants to avoid that all of a sudden, the shareholders of the other side
changes, in certain contracts CHANGE OF CONTROL clauses are injected: in case the majority (or any
other percentage) of the shareholders at the time of contract conclusion changes (on basis of a Share
Deal), the other party shall be entitled to terminate the contract: Austrian Company has a contract
with an Italian Company. Change of Control clause injected in this agreement stating in case the
structure of the shareholders of the Austrian Company change, Italian Company shall be entitled to
terminate the contract. Austrian shareholders sell their shares to North Korean shareholders. Italian

3. Business Acquisition – Asset Deal

A business may also be sold (partly or in full) on basis of an “Asset Deal”: The company itself sells its
properties (=its “assets”) on basis of separate transaction deals. The company sells its business by
transferring the respective assets (which may be real estate, contracts with business partners, etc).
Whatever is not transferred, remains with the company).
In case only parts of the business are transferred and taken over, the buyer often picked the finest
parts ("filets") of the business, and after that transfer, the remaining rest (that found no buyer) often
is declared as insolvent.
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So in case of an Asset Deal, for instance the ownership of goods that belong(ed) to the business are
sold and transferred to the buyer. Or specific IT-rights are (in addition or alone) sold and transferred
to the buyer.
Such asset deal is usually expensive and time-consuming (each and every contract must be
transferred and requires the consent of the other party of the affected contract: “Three-party-
agreement”!), often triggers various taxes (for instance real estate acquisition tax).
Benefit for the buyer: The buyer usually can pick out exactly those aspects/goods/rights/objects,
that he actually wants or that he understands in the legal complexity and structure: “hidden debts
and obligations” remain with the seller and are not transferred to the buyer. The buyer can (more
easy) check and overlook the risk of the goods bought and taken over. However, for the protection of
the creditors, in many jurisdiction it is stipulated that in case the significant majority of all assets
are bought by a buyer, then also all connected debts and obligations are transferred to the
buyer (and not left).

Often on basis of Due Diligence Reports it is decided if a business is sold on basis of a Share Deal
(for instance if the investigation shows that no negative surprizes are reasonably to be expected)
or better on basis of an Asset Deal (in case risks cannot be excluded and must be managed).