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Think about equity transactions and asset transactions from a risk management perspective on capital, financial and tax aspects of the buyer

The differences in nature between the capital transfer transaction (stock transactions) and the asset transfer transaction (asset transactions) in merger and acquisition transactions lead to differences in the outcome of each transaction after its completion . In the case of a capital transfer transaction, once completed, the acquirer will be a shareholder, partner or sole owner of the target company. As a member of the capital, shareholder or sole proprietor of the target company, the buyer will be responsible for the activities, rights and obligations of the target company to the extent of its participation in the target company. Thus, the acquirer will be indirectly liable for the capital contribution, financial and tax obligations of the target company. If these obligations are not fully fulfilled by the sellers (former shareholders, former partners or target company) themselves, this will constitute a potential risk for the buyer.

For example, in terms of capital contribution, if the former shareholders or associates did not contribute sufficient share capital as indicated in the company’s registration certificate or violated the obligation to assess the value of the assets that were used to bring to the company, the target company may be penalized for administrative offenses and the buyer may suffer losses because the capital actually transferred may be less than the target capital of the transaction.

With regard to the financial aspects, similar to the capital aspects, if the target company has financial obligations towards other parties (its partners, lenders, banks, employees, etc.) that the buyer cannot discover through the due diligence process, the target company will have to fulfill these financial obligations in the future. It will be the buyer’s problem if he does not take into account these financial obligations in the calculation of the purchase price or the conditions precedent of the transaction. In this case, the buyer will certainly suffer certain financial losses.

In terms of tax 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 therefore the consequences of failing to comply with tax obligations are often significant. and may seriously affect the target business’s ability to operate continuously. In addition to the taxes for which a company is generally liable, such as corporate income tax, personal income tax or value added tax, certain companies that carry out specific activities may be subject to tax. other types of taxes. For example, a company operating in the field of business franchising from overseas to Vietnam may incur foreign contractor tax responsibilities when paying franchise fees to overseas franchisors. In addition, the company must also be responsible for the declaration and payment of personal income tax on behalf of its partners or shareholders if these partners or shareholders have carried out a capital transfer operation but do not have not yet fulfilled the obligation to declare and pay tax. Failure by the target company to meet its tax obligations on time will be subject to very heavy administrative sanctions, arrears, interest payments and will have a direct impact on the continuity of the activities of the target company.

Due to the enormous risks mentioned above, for capital transfer transactions, the buyer must carry out a very broad and thorough due diligence on the target company both legally and financially in order to detect potential risks upstream 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 owning these projects or assets. Consequently, the patrimonial, financial and tax responsibilities of the company owning the target projects and assets will not be transferred to the purchaser. The buyer is also not responsible for the past obligations of the company selling assets. The buyer is only liable for the obligations associated with the target assets from the moment the buyer becomes the owner of these assets. Therefore, the scope of the due diligence process in an asset transfer transaction is generally narrower than that of a capital transfer transaction.