The differences in the nature between the capital transfer transaction (share deals) and the asset transfer transaction (asset deals) in M&A transaction leads to differences in the outcome of each transaction after completion. For a capital transfer transaction, once completed, the buyer will be a shareholder, equity members or sole owner of the target company. As an equity member, shareholder or sole owner of the target company, the buyer will be responsible for the activities, rights and obligations of the target company to the extent of its shareholding in the target company. Thus, the buyer will be indirectly liable for the capital contribution, financial and tax obligations of the target company. If these obligations are not fully met by sellers (former shareholders, former equity members or the target company) itself, this will be potential risk to the buyer.
For example, in terms of the capital contribution, if the former shareholders or equity members failed to sufficiently contribute charter capital as stated in the enterprise registration certificate or violated the obligation to evaluate the value of assets that were used to contribute to the company, the target company may be sanctioned for administrative violations and the buyer may suffer losses because the actual transferred capital may be worth less than the target capital of the transaction.
Regarding financial aspects, similar to capital aspects, if the target company has financial obligations to other parties (its partners, lenders, banks, employees, etc.) that the buyer cannot find out through the due diligence process, the target company will have to fulfill these financial obligations in the future. This will be the problem of the buyer if the buyer does not take into account these financial obligations in the calculation of the purchase price or the condition precedents of the transaction. In this case, the buyer will definitely suffer certain financial losses.
In terms of taxation liability, this is one of the most complicated aspects that buyers consider very carefully A corporate tax liability is a liability of the target company to the state and, as a result, the consequences of a breach of tax liabilities are often substantial and can severely affect the target company’s ability to continually operate. In addition to the taxes that a company is commonly responsible for such as corporate income tax, personal income tax or value added tax, some businesses that operate in specific activities may be liable with other type of taxes. For example, a company operating in the field of business franchising from abroad to Vietnam may take responsibilities in relation to foreign contractor tax when paying franchise fees to foreign franchisors. In addition, the company must also be responsible for declaring and finalizing personal income tax on behalf of its equity members or shareholders if these members or shareholders made a capital transfer transaction but have not yet fulfilled the tax declaration and tax payment obligation. Failure of target company to fully perform on time these taxation obligations will be the subject of very high administrative sanctions, arrears, interest payments, and directly impact on the business continuity of the target company.
Because of the huge risks mentioned above, for capital transfer transactions, the buyer has to conduct a very broad and careful due diligence on the target company in terms of both legal and financial aspects in order to detect potential risks early and anticipate appropriate solutions.
Unlike a capital transfer transaction, an asset transfer transaction will result in the separation of the target projects or assets (as the object of the transaction) from the legal entity that is owning such projects or assets. Therefore, the capital, financial and tax responsibilities of the company owning the target projects and assets will not be transferred to the buyer. The buyer is also not liable for past obligations of the company that is selling assets. The buyer is only responsible for the obligations associated with the target assets from the time the buyer becomes the owner of those assets. Hence, the scope of due diligence process in an asset transfer transaction is commonly narrower than that of a capital transfer transaction.