In Mergers and acquisitions, the transaction of the ownership or control of a business is at stake. However, the parties in a transaction rather than taking ownership of the business, transfer those assets of the company that compromise the necessary part of the business of the selling party.
In situations where the sale is of land, factory, machinery or any kind of capital assets then the transacting parties prefer a Business Transfer Agreement (BTA) through which the transaction gets a legal sanction.
Asset Sale compromises the individual sale of the assets of a business. This generally culminates into cherry-picking of individual assets of a selling entity.
Similar to Asset Sale, in a Slump sale which is another kind of transaction formula that structured in such a way that the whole undertaking is transferred to the Buying party in as-in-where-is basis.
In short, the whole undertaking is transferred for a lump-sump consideration, thus the name Slump Sale.
An Asset Sale is for a sale of an individual asset of the target company and slump sale is the sale of a whole undertaking of the target company.
- What kind of Instrument is used?
- Which Is More Cost-Effective?
- What kind of liabilities can be set by the Parties?
Both Asset sale and Slump Sale are drafted and executed on a Business Transfer Agreement (BTA), mentioning all the details of the transaction, the names of the parties, the stamp duty, the assets which are transferred and the consideration between the parties.
In both kinds of instruments, the individual assets and their valuation have to be mentioned in the agreement. The valuation is conducted by a certified valuer as per the book value of the asset.
In an Asset sale, the individual assets are mentioned in the agreement whereas in a slump sale the assets and liabilities of the target company will be transacted on an as-in-where-is basis in the BTA.
The valuation of each asset is necessary to be quoted in the agreement with a determined value and certified by a registered charted accountant. Thus, BTA is applicable in both the cases and whether in case of an individual asset sale or a slump sale.
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In measuring the cost-effectiveness of both kinds of transaction, it depends upon the kind of assets are transferred between the parties. For this, it is determined on the case of cost the stamp duty paid and the tax liability arising and its exceptions in the transaction.
As per The Indian Stamp Act, 1899 and the Schedule 1A of The Indian Stamp Act, 1899 (Madhya Pradesh Amendment) as per the language in Section 5 and 6 of the Act, the stamp duty will be affirmed as per the fee provided in the schedule of the Act and in slump sale where one or more property is being transferred under a single instrument, the stamp duty will be of the highest out of the property mentioned in the instrument and charged as per the Schedule 1A of the Act.
For example in a slump where the highest asset is a land, then the stamp duty levied will be 8% of the value of the property paid in consideration as per the Schedule 1A of the Act.
In case of asset sale also the provisions under section 5 and section 6 of the Indian Stamps Act, 1899 will be applicable and the stamp duty shall be evaluated upon the asset having the highest value. Such as, where the sale of land and machinery is to take place and land having the highest value will attract the stamp duty upon which it will be calculated as per the Schedule of the Act.
In a Slump sale, the special provision of Section 50B of Income Tax Act,1961 (IT Act) is applied. Under the special provision, a slump sale is considered in a going concern as a capital asset.
The Income-Tax on the capital asset is upon the profit or prize gained on the assent in one year. Also that, under Section 50B if the previous owner or seller held the capital asset for less than 36 months then, the income-tax applicable will be of a short term capital gains tax.
Whereas the long term capital asset is considered when the previous owner or seller has held the capital asset for a period of more than 36 months. In the long term capital gains, the tax will be 20% of the purchase price and in the short term capital gains, the tax will be 30% of the purchase price.
The inert value of the capital asset will be calculated from the assets and liabilities as enumerated in the book value of the company. A depreciation in the assets will also be applicable as per section.32 of the IT Act. The whole assessment and calculation of the taxable liability shall be determined by a registered Chartered accountant. The tax implication will also consist of deductions on the basis of stamp value or registration fees which is paid during the conveyance of the deal.
In case of an asset sale, no special provision is applicable and the seller is bound to pay the taxes as per the tax bracket, the capital gains tax will be levied.
The long term capital gains tax is applied where the seller has held the asset for a prescribed amount of time, otherwise, the short term capital gains tax will be applicable.
The tax will be calculated on the basis of the category of the block of assets it belongs, after depreciation. A block of assets is a class of assets upon which the same percentage of depreciation is applicable. The categories of a block of assets are described as (i) tangible assets such as building, plants, machinery or furniture, and (ii) intangible assets such as know-how, copyrights, and patents.
The seller and the buyer both have to obtain a certain form of obligation before and after the transaction in an asset sale and in slump sale also.
Where the seller is to transfer 20% of the net worth of the company it has to move a special resolution from its shareholders confirming such transaction as provided in Section 180 of the Companies Act, 2013 which is applicable to both in case of the asset sale and slump sale.
As per 180(1)(a) the Board has to take consent through a special resolution to sell, lease or otherwise dispose of the whole of the undertaking of the company or where the company owns more than one undertaking of the whole or substantially the whole of any of such undertaking.
Along with the above provision Section180(3) adds under sub-clause (b) the sale or lease of any property of the company where the ordinary business of the company consists of or comprises such selling or leasing.
Thus, by reading both the provisions a special resolution is needed for a sale of any property of the company which is a part of the ordinary business of the company, so Seller company has to take approvals of its shareholders in this instance for the sale of its assets.
The buyer or acquirer has to make sure that the representation and warranties are placed in the agreement. The Buyer has to make sure that the necessary compliance from different authorities has been complied with, even the authorization of sale through a special resolution by the Seller company.
The Buyer has to perform extensive due diligence in determining the extent of liabilities the seller may incur in case of any default and misrepresentation arising after completion of the transaction. The Buyer has to be vigilant in making such acquisition whether in case of an asset sale or slump sale.
The Buyer shall enumerate in the BTA the grounds on violation of any obligation the process and consequences of termination.
Thus, in both the case the parties have to secure an extent of liabilities against each other and place certain safeguards. In slump sale, the representation and warranties in place will be of a larger extent because of the sale of all assets and liabilities of the target company, whereas, in assets sale, the liabilities will be that of the individual asset in the transaction.
In asset sale and slump require the same instrument but bring out different layout wherein the deal is structured between the parties. The prime difference of sale of individual assets and the sale of a company in a going concern adds difference related to taxation, valuation, stamp duty and liabilities set between the parties in the transaction.
The slump sale may require more extensive analysis and due diligence as compared to asset sale because slump sale places larger transactions between the parties whereas the asset sale the transaction is upon the choice of an asset between the parties.
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