Share Sale vs Asset Sale in Australia: Key Legal Differences

What Is a Share Sale?

A share sale is the sale of the issued shares in the company that owns and operates the business. The buyer steps into the shoes of the existing shareholders. The company continues unchanged: same ABN, same ACN, same corporate entity, same contracts, same employees, same premises lease, same regulatory licences, same bank accounts, same tax file number, same litigation, and same liabilities — known and unknown.

From the buyer's perspective the share sale is a single transaction at the shareholder level. The buyer acquires 100% (or, in some control transactions, a specified majority) of the shares from the sellers. At settlement the share register is updated, ASIC is notified, the outgoing directors resign, the incoming directors are appointed, the bank mandates are changed and operational control passes — but the company itself does not move.

The legal consequences are wide-ranging. Every contract of employment continues uninterrupted. Every commercial contract remains in force (subject to change-of-control clauses). Every licence and permit stays with the company. Every PPSR security interest registered against the company continues. Every tax position the company has ever adopted — from depreciation schedules to GST characterisations to the treatment of related-party loans — passes to the buyer. Every contingent liability (whether the existing shareholders knew about it or not) travels with the company.

That last point is the heart of the share-sale risk profile: the buyer inherits the corporate history, warts and all. It is also the reason share sales attract a much more extensive due diligence process, a much more extensive warranty and indemnity package, and a higher level of professional cost than a typical asset sale.

What Is an Asset Sale?

An asset sale is the sale by the seller's company of selected assets of the business to the buyer's company (or other chosen entity). The corporate shell stays with the seller. The buyer takes the assets it wants and leaves the rest. After the sale the seller still owns the company, but the company no longer operates the business.

The asset sale agreement specifies, item by item, what is being sold. A typical schedule will include plant and equipment, stock at valuation, work in progress, the customer database, the business name, registered trade marks, domain names, the goodwill, transferring contracts (with consents), the right to use the premises (via lease assignment) and specifically identified intellectual property. Liabilities that the buyer is willing to take on are also separately listed. Everything else — including every undisclosed liability, every historical tax position, every prior employee claim — stays with the seller's company.

From the buyer's perspective the asset sale is a series of individual transfers. Each asset class requires its own transfer mechanism: a bill of sale for plant and equipment; a deed of assignment for IP; a deed of assignment of lease for the premises; a novation or assignment for each material contract; PPSR releases for secured assets; a transfer of business name with ASIC; and the physical handover of stock, records and keys.

That granularity is the source of both the asset sale's advantage (the buyer takes only what it wants) and its principal difficulty (each transfer must be done properly, and consents must be obtained from every counterparty whose contract is being assigned).

The Key Legal Difference

The single most important legal difference between the two structures is the treatment of liabilities:

• On a share sale, every liability of the company — disclosed or undisclosed, contingent or actual, known or unknown — remains with the company and therefore transfers to the buyer with the shares. There is no carve-out. The buyer's only protection is the negotiated warranty and indemnity package and the skill of its due diligence.
• On an asset sale, only the liabilities specifically assumed under the asset sale agreement transfer to the buyer. Everything else stays with the seller's company. The buyer takes the assets free of undisclosed claims (subject to the few statutory exceptions, such as the limited PPSR rules and certain tax follow-on obligations).

This single difference drives the negotiating dynamic of every other section of the contract: warranties, indemnities, caps, baskets, time limits, retentions, escrow arrangements, warranty and indemnity insurance and the conduct of due diligence.

Transfer of Liabilities

On a share sale the buyer should expect to inherit:

• every trade payable and accrued expense in the company;
• every employee entitlement (annual leave, long service leave, personal leave, redundancy exposure);
• every contingent liability under guarantees, indemnities and warranties given by the company;
• every unpaid tax liability (income tax, GST, PAYG, payroll tax, fringe benefits tax, superannuation);
• every potential ATO amendment within the standard amendment period (4 years for most matters, 7 years for fraud or evasion);
• every regulatory exposure for past conduct (work health and safety, environmental, consumer protection, fair trading, Australian Consumer Law);
• every litigation matter and threatened claim, even if not yet commenced; and
• every related-party loan and unpaid present entitlement to a trust beneficiary.

On an asset sale the buyer takes none of those things unless they are specifically agreed in writing. Allocating the few liabilities that ought to transfer (typically the obligations under transferring contracts after completion, accepted employee entitlements where prior service is recognised, and stock or trade-in obligations to customers) is a clean and discrete exercise.

Employees

On a share sale nothing changes legally. The company remains the employer. Contracts of employment continue. Accrued leave stays on the balance sheet. Award and enterprise agreement coverage is unaffected. Long service leave continues to accrue. Notice and redundancy obligations are unchanged. The buyer takes the entire employee group with all the historical entitlements and any contingent claims (such as unpaid superannuation, underpaid wages or unresolved grievances).

On an asset sale employees do not transfer automatically. The seller must terminate each employment at completion. The buyer then makes new offers to those staff it wishes to retain. The mechanics are governed by Part 2-8 of the Fair Work Act 2009 (Cth):

• If the new employer recognises the employee's prior service for accrued annual leave, long service leave and notice purposes, the old employer is not required to pay those entitlements at termination — service is treated as continuous.
• If the new employer does not recognise prior service, the old employer must pay out untaken annual leave and notice (and statutory long service leave where the relevant State legislation requires) at completion. These amounts are normally settled via a purchase-price adjustment.
• Redundancy pay under section 119 is not payable where the buyer makes an acceptable offer on substantially similar terms (with continuity of service). If the buyer refuses to take an employee, or offers materially worse terms that the employee declines, the seller is generally liable for redundancy.
• Modern award and enterprise agreement coverage may transfer to the new employer as a "transferable instrument" under sections 311 to 320 of the Fair Work Act. The Fair Work Commission can make orders varying the operation of a transferring instrument on application by the new employer or the affected employees.

The asset sale agreement should: list each employee; identify those to whom offers will be made; specify whether prior service is recognised; allocate responsibility for redundancy in respect of those who are not offered employment or who decline; provide for consultation under the National Employment Standards and any applicable award or enterprise agreement; and adjust the purchase price for accrued entitlements assumed by the buyer.

Contracts

On a share sale, contracts of the company continue unaffected because the company remains a party. The exception is contracts containing a change-of-control clause — most material commercial contracts (supply agreements, distribution agreements, large customer contracts, facility agreements with banks, software licences) do contain such clauses. Due diligence must identify every change-of-control clause and counterparty consent must be obtained as a condition of completion where the contract is material.

On an asset sale, no contract transfers automatically. Each material contract must be either:

• Assigned — the seller assigns its benefit to the buyer (the burden of obligations can generally only be assigned with the counterparty's consent or through novation); or
• Novated — a tripartite agreement between seller, buyer and counterparty under which the seller is released from its obligations and the buyer is substituted as a party from the date of novation.

Some contracts prohibit assignment outright; others require counterparty consent which is not to be unreasonably withheld; others are silent (which usually permits assignment of benefit but not of burden). The asset sale agreement should list each material contract, state which mechanism applies, allocate the obligation to obtain consent, allow a reasonable period to obtain consents and address what happens if a critical consent is not obtained (typically a termination right or a price adjustment).

Leases

The premises lease is one of the most important contracts in many business transactions.

On a share sale the company remains the tenant and the lease continues — but most leases contain a change-of-control clause treating a transfer of the shares in a corporate tenant as a deemed assignment requiring landlord consent. Personal guarantees given by the original owners may also need to be released, replaced or refreshed by guarantees from the incoming controllers.

On an asset sale the lease must be formally assigned by deed of assignment with the landlord's consent. Under the Retail Leases Act 2003 (Vic) the landlord cannot unreasonably withhold consent and is required to follow a defined process (financial disclosure by the assignee, an assignor's disclosure statement and a statement under section 60). If the process is followed properly the seller is released from future liability under section 62. If the proper statutory process is not followed, the seller may remain on the hook for the buyer's future defaults.

For non-retail leases (covered by the Property Law Act 1958 (Vic) and the general law of contract), the lease terms themselves govern whether consent is required and on what conditions; landlord-consent disputes are common and the asset sale agreement should make settlement conditional on lease assignment being documented.

Licences and Permits

Most regulatory licences and permits are issued to a specific legal entity. On a share sale they continue to attach to the company. On an asset sale they generally do not transfer with the assets — the buyer must apply for new licences in its own name, and the buyer's ability to operate the business at completion depends on those approvals being in place.

Examples that recur in Victorian SME transactions include:

• liquor licences under the Liquor Control Reform Act 1998 (Vic);
• food premises registrations under the Food Act 1984 (Vic);
• tobacco retail licences and gaming approvals;
• trade and professional licences (plumbing, electrical, building, real estate, conveyancing, motor car traders, security);
• environmental approvals issued by the EPA Victoria;
• local government planning permits, health permits and signage permits; and
• industry-specific authorisations (transport, childcare, aged care, NDIS provider registrations).

On an asset sale, completion should be conditional on the buyer obtaining (or having a confirmed pathway to obtain) every licence required to operate the business from completion. A bridging arrangement — under which the seller continues to operate the business as agent of the buyer for a short period until the licence transfers — may be needed where a regulator cannot process the transfer by completion.

Intellectual Property

On a share sale all IP owned by the company continues to be owned by the company. No assignments are needed. Due diligence focuses on confirming the company in fact owns the IP it claims to own (and that IP developed by employees and contractors has been properly assigned to the company).

On an asset sale IP must be formally assigned. The principal mechanics under Australian law are:

• Registered trade marks — assigned by written deed under section 106 of the Trade Marks Act 1995 (Cth), and the assignment recorded on the register at IP Australia.
• Patents and designs — assigned by written instrument and recorded on the register.
• Copyright — assigned by signed writing under section 196 of the Copyright Act 1968 (Cth).
• Domain names — transferred by registrar process (.com.au registrant changes via auDA-accredited registrars under the .au licensing rules).
• Business names — transferred via ASIC's business name register.
• Confidential information and know-how — transferred by physical and electronic delivery and by contractual undertakings to keep it confidential from the seller's other personnel.

A perfecting clause in the asset sale agreement should require the seller to execute any further documents reasonably needed to give effect to the assignments after completion, in case any item of IP has been missed.

PPSR Issues

The Personal Property Securities Register, established under the Personal Property Securities Act 2009 (Cth), records security interests over personal property (everything except land). See our companion guide: PPSR Explained.

On an asset sale the buyer must search the PPSR against the seller and against each specific asset (by serial number where applicable — motor vehicles, boats, aircraft) and against the seller's ABN. Any registered security interest must be released or the buyer takes the asset subject to the secured creditor's interest. A standard condition of completion is the delivery of executed releases (or evidence of release on the register) for every registration relevant to the assets being acquired.

On a share sale the registrations stay in place — the company remains the grantor. Due diligence must verify what is registered, what each registration secures, and whether any asset of the company is in fact encumbered beyond what has been disclosed (the register does not show the underlying agreement; only the registration). New facilities may need to be put in place at completion to refinance existing secured debt.

Tax and GST Overview

The tax outcome usually drives the structural choice more than any other single factor. The headline points:

• Income tax on the seller — on a share sale the individual shareholders dispose of the shares and are assessed on the gain (with 50% CGT discount available where shares are held for more than 12 months by individuals and certain trusts). On an asset sale the company disposes of the assets and is assessed on the gain at the company tax rate, with the after-tax proceeds then needing to be extracted from the company by dividend, capital return or liquidation, each with its own tax consequences for the ultimate shareholders.
• CGT small business concessions (Division 152) — both structures can potentially access the 15-year exemption, the 50% active asset reduction, the retirement exemption and the small business rollover. The qualifying conditions differ (basic threshold, active asset test, controlling individual / significant individual test) and the outcome can be materially different depending on the structure. Coordinated legal and tax advice on the concessions before the contract is signed is the single highest-value piece of work on most SME transactions.
• GST — share sales are input-taxed under Division 40 (no GST). Asset sales are subject to GST at 10% unless the going-concern exemption in section 38-325 applies (see below). Going-concern treatment requires the supply of all things necessary for the continued operation of the enterprise, continued operation by the seller until the day of supply, GST registration by the buyer, and a written agreement that the supply is a going concern.
• Income tax cost base for the buyer — on an asset sale the buyer obtains a fresh cost base (and depreciation base) for each asset acquired, calibrated to the allocated portion of the purchase price. On a share sale the buyer obtains a cost base for the shares only — the underlying assets of the company keep their original tax cost base.
• Loss carry-forward — on a share sale the company's tax losses may continue to be utilised by the company, but only if the company satisfies either the continuity of ownership test or the same business test in Division 165 / 166 of the ITAA 1997. On an asset sale tax losses stay with the seller's company and may or may not have value depending on the seller's other activities.

Stamp Duty / Transfer Duty Overview

Duty is a State and Territory impost. The general position in Victoria is:

• Asset sale — transfer duty under the Duties Act 2000 (Vic) is assessed on the dutiable value of dutiable property: Victorian land, fixtures, goodwill referable to a Victorian business, IP used in Victoria and statutory licences. Plant and equipment and goodwill not referable to Victoria are not generally dutiable in Victoria. Duty rates are set under the Duties Act and depend on the dutiable value.
• Share sale — ordinary share transfer duty was abolished for most Victorian companies, but landholder duty applies where the company is a landholder (Victorian land holdings of $1 million or more in unencumbered value) and the buyer acquires a "significant interest" (50% or more for private companies). Where landholder duty applies, the duty is calculated on the unencumbered value of the Victorian land and goods at the same rates as a transfer of land.
• Other jurisdictions — every other State and the ACT has its own duty regime. New South Wales, Queensland and Western Australia each have their own landholder rules. Where the company holds land or assets in multiple jurisdictions the transaction needs a duty review specific to each jurisdiction. The Northern Territory and South Australia have varied their landholder thresholds over time.

Duty is always calculated by reference to the State of location of the dutiable property — not the State in which the parties or their advisers are located. See our guide: Stamp Duty and Land Transfer Duty in Victoria Explained.

Warranties and Indemnities

Warranties are contractual statements of fact about the company (on a share sale) or about the assets and the business (on an asset sale) on which the buyer relies. A breach of warranty gives rise to a damages claim — generally measured by the difference in value between the company / assets as warranted and as they actually were.

Indemnities are dollar-for-dollar promises to compensate the buyer for specified losses, usually relating to known specific risks identified in due diligence — historical tax positions, environmental issues, identified litigation, particular contract disputes. Indemnities are typically uncapped (or capped at the purchase price) and are sometimes paid on a no-loss-required basis (the buyer is paid the quantified loss without having to demonstrate diminution in value of the company or the assets).

Share sales attract a far more extensive warranty package than asset sales because the buyer takes the whole company. Typical share sale warranties cover:

• title to and capacity to sell the shares;
• corporate matters (incorporation, register entries, no insolvency);
• accounts and tax (true and fair view, tax compliance, no undisclosed liabilities);
• contracts (existence, validity, no breaches, no change-of-control triggers);
• employees (no undisclosed entitlements, no current disputes, superannuation compliance);
• IP (ownership, no infringements, no challenges);
• litigation (no current or threatened claims);
• regulatory compliance (laws, licences, work health and safety, environment);
• property (leases, no notices, no defaults); and
• no material adverse change since the accounts date.

Asset sale warranties are usually narrower — focused on title to the assets, no encumbrances, accuracy of disclosed information, continuation of transferring contracts to completion, and the integrity of customer and supplier relationships.

Both packages are usually limited by:

• an aggregate cap (typically 25% to 100% of price for general warranties; 100% or higher for title and tax);
• a per-claim de minimis;
• a basket threshold (claims must total a minimum before any are payable);
• time limits (typically 18 to 24 months for general warranties; 7 years for tax to match the ATO amendment period; 6 years for environment; indefinite for title);
• matters fairly disclosed in the disclosure letter;
• matters within the buyer's actual knowledge or fairly disclosed in due diligence; and
• amounts already provided for in the completion accounts.

Due Diligence Differences

Due diligence on a share sale is wider and deeper. Because the buyer inherits the entire corporate history, the diligence covers:

• Corporate — incorporation and register entries, share capital history, share issues and buy-backs, dividends declared, related party loans, prior reorganisations, ASIC searches.
• Tax — income tax returns and assessments, GST and PAYG history, payroll tax, fringe benefits tax, superannuation guarantee compliance, R&D claims, prior ATO audits, current objections or appeals, transfer pricing exposure.
• Contracts — every material contract including supply, distribution, customer, lease, finance, software and IP licensing — read in full for change-of-control clauses, assignment restrictions, restraints, exclusivity and termination triggers.
• Employees — contracts of employment, applicable awards and enterprise agreements, accrued entitlements, superannuation fund records, current disputes, work health and safety incidents, workers compensation claims.
• IP and IT — registered IP, ownership and chain of title, IT systems and licensing, cyber security incidents, data and privacy compliance.
• Litigation and disputes — current, threatened and historical.
• Regulatory — licences, permits, compliance with the Australian Consumer Law, competition compliance, industry-specific regulation.
• Environment — site contamination, regulatory notices, environmental approvals, remediation obligations.

Asset sale due diligence is narrower — focused on title to the assets, PPSR registrations, the transferability of key contracts and leases, employee entitlements at completion, IP ownership and the integrity of customer and supplier relationships. Historical tax, historical regulatory and historical litigation matters generally do not pass to the buyer and so do not require the same intensity of review.

Business Continuity

Share sales offer seamless continuity. From the perspective of customers, suppliers, employees, landlords and regulators, the business continues unchanged. The same legal entity is doing business under the same name with the same people in the same premises with the same licences. Disruption is minimal.

Asset sales involve a controlled transition. Customers and suppliers need to be notified, contracts need to be assigned or novated, the bank facility changes hands, the insurance moves across, the licences are reissued, and the employees become employees of a new entity. This can be done well but it requires careful planning and a clear post-settlement project plan. For many service businesses with concentrated customer relationships, this transition risk is the largest single piece of execution risk in the transaction.

Vendor Risk

From the seller's perspective:

• On a share sale, the seller exits cleanly. After completion the company is the buyer's problem. Subject to the warranty and indemnity package and any indemnities given, the seller has no residual involvement in the business. Personal guarantees given by the seller (to landlords, banks and major suppliers) should be released at completion as a condition of sale.
• On an asset sale, the seller is left holding a corporate shell containing residual liabilities (creditors, employee terminations, future tax exposures, lease tail liability where the lease was not assigned, contingent claims). The seller normally needs a post-settlement wind-down plan, including discharge of residual creditors, cancellation of unused registrations and consideration of the company's deregistration or liquidation. The proceeds of sale sit in the company and need to be extracted by dividend, capital return or liquidation distribution — each with its own tax outcome.

Purchaser Risk

From the buyer's perspective:

• On a share sale, the buyer inherits the entire corporate history. Even with excellent due diligence and a strong warranty package, the buyer accepts a degree of residual risk for the matters that were neither disclosed nor identifiable — what we call "unknown unknowns". This risk is managed (not eliminated) by warranties, indemnities, retentions and (on larger deals) warranty and indemnity insurance.
• On an asset sale, the buyer's residual risk is much smaller. The principal risks are: the failure to obtain critical consents (contracts, leases, licences) by completion; the loss of key customers who choose not to follow the business to its new owner; the loss of key employees who do not accept the buyer's offer; and the post-completion integration challenges of moving a business onto new systems, banking and operating procedures.

Family Businesses

Family business sales raise their own structural considerations. The seller is often selling a lifetime's work and the consideration is funding retirement. The buyer is often a child, a key employee, or a competitor known to the family for many years. The transaction is rarely "purely commercial" and the structure often needs to accommodate intergenerational planning, the family trust, the family superannuation fund and the interaction with the rest of the family's estate plan.

Common patterns include:

• vendor financing of part of the price, with the new owner repaying the seller over several years from the cash flow of the business;
• retention by the seller of a passive minority interest for a transition period;
• ongoing consulting or part-time employment by the seller during a handover period;
• earn-outs tied to the post-completion performance of the business;
• restraints of trade calibrated to allow the seller a meaningful retirement while protecting the goodwill the buyer has paid for; and
• careful coordination with the estate plan, testamentary trusts and the buy-sell provisions in any shareholders' agreement covering the family company.

Private Companies

This guide is about private companies — proprietary limited companies regulated under the Corporations Act 2001 (Cth). Public-company transactions are conducted under the Chapter 6 takeover regime, with bidder and target statements, takeover bids, scheme implementation agreements and ASX-listing-rule disclosure. The legal framework is materially different and outside the scope of this article.

Within the private-company space, the share-versus-asset choice is also influenced by the number of shareholders, the existence of a shareholders' agreement with pre-emptive rights or drag-along rights, the existence of a buy-sell agreement between the owners, and the company's funding structure (existing loans, related-party balances, external investors).

Common Mistakes

• Choosing the structure based on which side proposed it first, rather than the analysis;
• ignoring the tax differential between share-sale proceeds in shareholders' hands and asset-sale proceeds trapped in the company;
• failing to identify a non-transferable contract or licence that effectively mandates a share sale;
• under-estimating the disclosure work and warranty exposure that comes with a share sale;
• assuming employee entitlements are an asset-sale issue only (they are not — the company still owes them after a share sale);
• negotiating the structure in the Heads of Agreement before the tax outcome has been modelled;
• accepting going-concern GST treatment without the correct written agreement in the contract;
• failing to allocate the purchase price across asset classes on an asset sale, leading to inconsistent tax and duty positions for buyer and seller;
• failing to obtain landlord consent for a lease assignment in proper form under section 60 of the Retail Leases Act 2003 (Vic);
• failing to release the seller's personal guarantees at completion on a share sale; and
• engaging a commercial lawyer after the Heads of Agreement has been signed instead of before.

Practical Comparison Table

When Legal Advice Is Needed

Engage a commercial lawyer before the Heads of Agreement is signed. The choice of share sale versus asset sale drives every other decision in the transaction and is much harder to change once the commercial terms are out in writing. Parke Lawyers acts for Australian buyers and sellers of small and medium businesses across Melbourne and regional Victoria. We advise on:

• the structural choice and the tax differential under each option;
• the access to and conditions of the CGT small business concessions;
• due diligence scope, conduct and reporting;
• the Heads of Agreement, the binding and non-binding components and the conditions precedent;
• the share sale agreement or asset sale agreement, the warranty package, the disclosure letter and the indemnities;
• employee transition under Part 2-8 of the Fair Work Act;
• lease assignment, contract novation, licence transfer and PPSR releases;
• settlement, post-settlement integration and the post-completion checklist; and
• family business succession including coordination with shareholders' agreements, buy-sell agreements and estate planning.

See our service pages: Commercial & Business Law. Reviewed by Jim Parke, Lawyer & Chartered Accountant.

Frequently Asked Questions