It is important to know the difference between a sale of business as a going concern, a sale of assets and a sale of shares or member’s interest, before concluding a sale agreement involving your company or close corporation (CC). Does a sale of your company or CC’s business as a going concern only involve selling its main assets through a sale of assets, or is there more to consider? Does selling the business mean you must sell your shares or member’s interest and give majority ownership to the purchaser? Does it involve transferring your employees to the purchaser so that you’re no longer the employer of those employees? You will need to know the answers to these and other questions whenever you become a party to these kind of transactions.
Why is it important to understand these Agreements?
These agreements have adverse implications for the company or CC, the shareholders and members, the assets, the business, and the employees. Each agreement affects what rights and obligations the parties have. It is important to not only understand the differences between all these agreements but to ensure that whenever you do sign them, you protect your rights sufficiently.
How does a Sale of Assets work?
A sale of assets is mainly about selling some of the assets your company or CC owns and uses to run a business. For example, machinery, technology or intellectual property. A sale of assets is relevant when you’re selling some of the assets but not all of them. These assets could be the main assets of the business – the assets that the business relies on to continue functioning, or, it could be some assets that the company no longer needs. The main aim of the transaction is to transfer ownership of the assets from the company or CC to the purchaser. The purchaser of the assets can either be an individual or a legal person such as another company or CC.
What is a Sale of Business?
The sale of a business as a going concern is different from a sale of assets, or a sale of shares or member’s interest. The sale is called “a sale of a business as a going concern” because the business largely continues to run in the hands of the purchaser, as it ordinarily did before the sale. The most significant change is that it has a new owner. This means that your company or CC has decided to sell the trade and will no longer conduct it.
The whole business is sold (including goodwill and stock) and not just some assets.
A good example of this kind of sale is when a fashion designer, who’s been in the business of fashion designing, decides that they no longer wish to carry such business on and finds a purchaser who wishes to purchase such business. In such a case, some of what they will most likely sell or transfer (on behalf of the company or CC) to the purchaser includes:
- their rights to the name they were trading under (goodwill or reputation of the business), meaning they can no longer use it;
- the main assets of the business (or any and all assets used to run the business);
- the business’ employees (along with most of the obligations they had toward those employees), and;
- any rights and obligations they had under a lease that they were a party to for the business, essentially making the purchaser the new tenant under that lease.
How is a Sale of Shares or a Member’s Interest different?
A sale of shares (in the context of a company), or a sale of member’s interest (in the case of a CC), is different to a sale of assets or sale of a business as a going concern, because it is about ownership of the company or CC through shares or a member’s interest. This sale does not directly involve the transfer of the company or CC’s assets or business. The company or CC essentially owns the business and the assets, while a shareholder or member owns a portion or the whole of the company or CC itself.
When a shareholder or member sells their shares or member’s interest, they are transferring their ownership of the company or CC to the purchaser. They are not really transferring the company or CC’s assets or business.
Actions you can take
- Know and protect your rights when selling your assets, business, shares or member’s interest, by asking us to draft plain language sale agreements for you.
- Find out more about how we can help your company or CC comply with company law and other relevant laws, by contacting us.
- Manage the relationship between shareholders by asking us to draft a new shareholders agreement or review your old shareholders agreement. The shareholders can also attend a shareholder workshop.