One of the first decisions in any acquisition is what is actually being bought. The buyer can acquire the shares in the company that owns the business, or the company can sell the business itself (its assets, contracts and goodwill) to the buyer as a going concern.
Both routes deliver the same business, but the legal and tax consequences are very different. Sellers usually prefer a share sale. Buyers often prefer an asset sale. The final structure is a negotiation, and the price often reflects which side carries the extra risk or tax cost.
The basic difference
In a share sale, the seller is the shareholder and the company stays the same legal person. It keeps its assets, contracts, employees, licences and liabilities, including those nobody knows about yet. Only the owner changes.
In an asset sale (often called a sale of business), the seller is the company itself. The buyer chooses which assets and liabilities to take over, and the seller company keeps everything else. The seller’s shareholders then need to extract the proceeds from the company.
Liabilities: the buyer’s main concern
The strongest argument for an asset sale is liability protection. A buyer of shares inherits the company’s full history: tax exposures, claims from customers and former employees, regulatory non-compliance and contingent liabilities. Warranties, indemnities and due diligence reduce this risk but do not eliminate it.
In an asset sale, the buyer generally takes only the liabilities it agrees to assume. There are important exceptions:
- Employees. Section 197 of the Labour Relations Act 66 of 1995 transfers employees automatically to the buyer when a business is transferred as a going concern, along with the employment contracts and certain accrued obligations (see below).
- Section 34 of the Insolvency Act. If the seller does not give proper notice, the transfer may be set aside if the seller goes insolvent shortly afterwards (see below).
- Liabilities attached to assets. Security over assets (such as a general notarial bond) and some regulatory obligations follow the asset.
Contracts, licences and permits
Share sale: Contracts stay with the company, so there is no need to transfer them. However, many commercial contracts, leases, franchise agreements, banking facilities and licences contain change-of-control clauses. These allow the other party to terminate or require its consent when the company’s ownership changes. These clauses must be identified during due diligence.
Asset sale: Each contract must be transferred to the buyer. In South African law, a party can usually cede (transfer) its rights without the other party’s consent unless the contract prohibits it. Transferring obligations (delegation) requires the other party’s consent. In practice, this means customer and supplier consents are needed for key contracts. Licences, permits and registrations are often personal to the holder and may need to be re-applied for.
Where a business depends on a few key contracts or licences that are hard to transfer, a share sale is often the only practical option.
Employees
Share sale: The employer does not change. Employment contracts continue as before.
Asset sale: If the business is transferred as a going concern, section 197 of the LRA applies automatically. The buyer becomes the employer in place of the seller, on terms and conditions that are, on the whole, no less favourable. Continuity of employment is preserved, and the buyer generally becomes liable for obligations such as accrued leave and unpaid amounts owing to employees, subject to any agreement under section 197(6) and the joint liability rules in section 197(8). Employees cannot be dismissed simply because of the transfer.
Parties cannot contract out of section 197 between themselves. The buyer and seller can, however, agree on how accrued liabilities are apportioned and reflect that in the price.
Section 34 of the Insolvency Act
Section 34 of the Insolvency Act 24 of 1936 protects creditors of a trader who sells their business. Where a business (or its goodwill or any assets of the business) is transferred outside the ordinary course of business, a notice of the intended transfer must be published in the Government Gazette and in an English and an Afrikaans newspaper circulating in the district, at least 30 days and not more than 60 days before the transfer.
If notice is not given and the seller is sequestrated or liquidated within six months of the transfer, the transfer is void against the trustee or liquidator. Also, once notice has been published, the seller’s creditors can demand immediate payment of liquidated debts.
Buyers should insist on section 34 compliance as a condition of the deal, or at least on robust protection if the parties decide not to publish. This step does not apply to a share sale, because the business does not change hands.
Corporate approvals
Share sale: The seller signs as shareholder. The company’s memorandum of incorporation (MOI) and any shareholders’ agreement may contain pre-emptive rights, consent requirements or tag-along and drag-along rights that must be complied with.
Asset sale: If the seller company disposes of all or the greater part of its assets or undertaking, section 112 read with section 115 of the Companies Act 71 of 2008 requires shareholder approval by special resolution. Dissenting shareholders may have appraisal rights under section 164. There are exceptions for intra-group disposals between a holding company and its wholly-owned subsidiary.
Tax
Tax often decides the structure. Expert advice is essential, but the main differences are these.
For the seller
- Share sale: The shareholder pays capital gains tax (CGT) on the gain on the shares. For individuals, only part of the gain is included in taxable income, so the effective rate is lower than for a company. There is one level of tax.
- Asset sale: The company pays tax on capital gains and on recoupments of capital allowances previously claimed on equipment and other assets. The shareholders then extract the after-tax proceeds as a dividend, which is subject to dividends tax (currently 20%) unless an exemption applies. This “double tax” is often the main reason sellers resist an asset sale.
Corporate sellers should also be aware of anti-avoidance rules that treat large exempt dividends declared shortly before a share sale as part of the sale proceeds.
For the buyer
- Share sale: The buyer gets a base cost in the shares equal to the price paid, but the company’s assets keep their existing (often low) tax values. There is no step-up.
- Asset sale: The buyer gets a tax cost in each asset equal to the price allocated to it. That can create higher capital allowances and a lower future gain. The price allocation between assets therefore matters to both sides and should be agreed in the contract.
Transaction taxes
- Securities transfer tax of 0.25% applies to a transfer of shares.
- VAT: A share sale is an exempt financial service. An asset sale is subject to VAT at the standard rate, unless it qualifies as the zero-rated supply of a going concern under section 11(1)(e) of the VAT Act. This requires, among other things, both parties to be VAT vendors and written agreement that the business is sold as a going concern with all the assets needed to carry it on.
- Transfer duty is payable on immovable property in an asset sale, unless the supply is subject to VAT (including at the zero rate). A share sale in a company that owns residential property may still attract transfer duty in some cases.
Group restructuring relief in sections 42 to 47 of the Income Tax Act can defer some of these taxes where assets move within a group before or after the sale.
Hybrid structures
The choice is not always binary. Common hybrids include:
- the seller moving the business into a new, clean subsidiary and then selling the shares in that subsidiary;
- a share sale with specific liabilities or non-core assets removed from the company first; or
- an asset sale of the core business, with the shareholders retaining the old company to deal with legacy matters.
Each hybrid has its own tax consequences, including possible claw-backs of roll-over relief if the new company leaves the group within a set period.
Summary
| Share sale | Asset sale | |
|---|---|---|
| Who sells | Shareholders | The company |
| Liabilities | All stay with the company | Buyer takes what it agrees to (subject to s197 and s34) |
| Contracts | Stay, but watch change-of-control clauses | Must be ceded and delegated, often with consent |
| Employees | No change | Transfer automatically under s197 LRA |
| Section 34 notice | Not needed | Usually needed |
| Seller tax | Usually one level (CGT on shares) | Company tax, then dividends tax on extraction |
| Buyer tax base | No step-up in assets | Step-up to allocated price |
| Transaction tax | Securities transfer tax 0.25% | VAT (or zero-rated going concern), transfer duty on property |
How O’Reilly Law can help
We help buyers and sellers choose the right structure, run due diligence, and negotiate the sale agreement, section 34 process, section 197 arrangements and approvals needed to close. Speak to our business structuring team.
Contact us to discuss your transaction in confidence.
This article is general information and not legal or tax advice. The best structure depends on the specific business and parties. Correct as at October 2026.