Sale of Shares vs. Sale of Business in South Africa: Understanding the Differences

When acquiring a business in South Africa, buyers have two options: purchasing the shares of the company or purchasing the business assets. In this article, we'll explore the differences between the sale of shares and the sale of a business in South Africa, including their legal requirements, tax implications, and impact on the buyer's rights and liabilities.

Sale of Shares

When purchasing the shares of a company, the buyer is acquiring ownership of the company itself, including its assets, liabilities, and contractual obligations. The legal requirements for the sale of shares are relatively simple, as it only requires the transfer of ownership of the shares from the seller to the buyer.

A sale of shares is where some or all of the issued shares of a company are sold from one shareholder to another person or entity. In this type of transaction, the owners of the company are changing. A sale of shares should be recorded by a written agreement between the relevant parties and which agreement should make provision for, inter alia, identifying the shares to be sold, the purchase price, confidentiality, restraints, etc.

From a tax perspective, the sale of shares is generally more advantageous for the seller, as it allows them to take advantage of the capital gains tax regime, which has lower tax rates than ordinary income tax. However, the buyer may inherit any outstanding tax liabilities or other legal issues associated with the company.

What is a Share?

A share in a company is a unit of equity ownership in the company and in South Africa, proof of this ownership is evidenced by a share certificate.

Sale of Business

When purchasing a business, the buyer is acquiring the assets of the business, including its goodwill, contracts, equipment, and inventory. The sale of a business is a more complex transaction than the sale of shares, as it involves the transfer of multiple assets and liabilities.

The legal requirements for the sale of a business are more complex, as it requires the transfer of ownership for each individual asset, as well as the assignment of any contracts or leases associated with the business. The buyer may also need to obtain licenses and permits associated with the business, which can be time-consuming and costly.

In order for a sale of a business to qualify as “a sale of a business as a going concern”, the assets sold have to enable the purchaser to continue to operate and run the business post the sale as it ordinarily did before the sale.

A sale of business should be recorded by a written agreement between the relevant parties and which agreement should make provision for, inter alia, identifying the assets being sold, the purchase price, confidentiality, restraints, etc.

From a tax perspective, the sale of a business is generally more advantageous for the buyer, as it allows them to take advantage of tax benefits associated with the depreciation of the assets over time. However, the seller may be subject to higher tax rates on the proceeds of the sale.

How to Choose Between a Sale of Shares vs. a Sale of Business?

The choice between the sale of shares and the sale of a business can have a significant impact on the buyer's rights and liabilities. When purchasing the shares of a company, the buyer inherits all of the company's assets, liabilities, and contractual obligations, including any outstanding tax liabilities, employee claims or legal disputes.

In contrast, when purchasing a business, the buyer only acquires the specific assets and liabilities that are associated with the business, and may have more flexibility in managing these assets and liabilities going forward.

Conclusion

When acquiring a business in South Africa, buyers have two options: purchasing the shares of the company or purchasing the business assets. While both options have their advantages and disadvantages, it is important to consider the legal requirements, tax implications, and impact on the buyer's rights and liabilities before making a decision. By understanding the differences between the sale of shares and the sale of a business, buyers can make an informed decision that is best for their business and financial goals.

Our Corporate Attorneys have extensive experience in advising clients on which corporate transaction structure best suits a clients needs and tailoring such agreements so that our clients are suitably protected.