The sale of businesses through a contract of direct trade of shares

Once the decision to carry out the acquisition or transmission of a business corporation (hereafter a corporation) is made, the dichotomy arises of choosing the most appropriate legal instrument for its execution. Thus, in the usual practice of this type of transaction, it is common to distinguish between the direct acquisition of the shares or participations of the corporation (share deal) and the direct purchase of the assets of the corporation (asset deal).

Below is a closer look at the main characteristics of the acquisition through the direct trade of shares or participations.

Definition of the direct purchase of shares

The trade of shares involves the acquisition of the shares or participations of a corporation, which implies the global transfer of all the assets and liabilities of the corporation in a single operation. Therefore, the parties to the contract will be the partners of the corporation (sellers) and the person(s) acquiring, meanwhile the object of the trade is a single asset: the shares or participations.

Advantages of the business acquisition through the trade of shares

  • It facilitates the transfer of a corporation’s rights and obligations, which can lead to lower transaction costs, by allowing the global acquisition of a set of rights and obligations through the acquisition of a single asset, the shares or participations.

In any case, it is important to bear in mind that the formal contracts signed by the corporation with third parties may be subject to so-called change of control clauses. This would imply that the change in the composition of shareholders might lead to early termination of the contract. Failure to analyse these clauses in the corresponding due diligence process can pose significant risks on the transaction.

  • According to article 1205 of the Spanish Civil Code, a business acquisition through the trade of shares eliminates the need to obtain the consent of the corporation’s creditors. With the acquisition of a corporation’s shares, the corporation retains its position, so it is not necessary to request the consent of the creditors.

Disadvantages of the business acquisition through the trade of shares

The implementation of a trade through the direct acquisition of shares or participations also has certain disadvantages:

  • As mentioned above, the object of the contract is the acquisition of shares or participations, but not the purchase of the business that could have been initially considered. Thus, according to articles 1101 and 1124 of the Spanish Civil Code, the responsibility of the seller would be limited to fulfilment of the contract’s object, the transfer of the shares or participations. The responsibility of the seller relating to the assets and liabilities acquired through the shares will be taken into account as long as the motive (the business acquisition) is expressly incorporated into the cause of the contract (inter alia, the Supreme Court cases of 21th of December in 2009 and 21th of October in 2013). However, the deficiency can be replaced by including into the contract the corresponding statements and guarantees signed directly by the seller in order to facilitate any potential liability related to the business transferred.
  • As mentioned above, the buyer acquires all the assets and assumes all the obligations of the corporation, including all possible hidden liabilities. At this point, it is vital for the buyer to carry out a Due Diligence to identify previously hidden liabilities.

The business transfer through the contract of share trade is one of the instruments that allows the acquisition of a corporation in Spain. A correct evaluation of the action will be key to determine if it is the most appropriate option or, on the contrary, it would be convenient to resort to the trade of assets of the corporation.

This article is not considered as legal advice

Mergers and Acquisitions

Mariscal & Abogados specialises in providing legal advice in mergers and acquisitions in Spain: acquisition of companies, purchase and sale of assets or business units, mergers and other structural modifications of companies. If you have a query, do not hesitate to Contact us.