To sell a whole pizza or just a slice of it? Selling an enterprise vs selling a company

14 oktobris, 2024 jaunumos

The sale of a company is referred to in various terms – sale of a company, sale of an enterprise, sale of a share, the list doesn’t stop here. In legal context, it’s important to distinguish between a sale of an enterprise and a sale of a company. The two transactions are different in nature, and their specific features are apparent in terms of commercial, tax, employment, and other aspects.

In this article, we will examine the specificities of company and enterprise transfers, focusing, among other things, on the nuances of commercial law, tax law aspects, formal requirements of the contract, transfer of obligations, and the specificities concerning employees. In each of the respective chapters, we highlight the differences between the sale of a company and the sale of an enterprise.

Enterprise vs company – what’s the difference?

The simplest way to explain the terminological difference is through an example. Suppose we have a company, X OÜ, registered in the commercial register, whose sole shareholder is Peter. Company X OÜ is engaged in retail sales in ten different shops, three of which are in Tallinn (Kristiine, Pirita, and Kopli).

Let’s assume that Peter does not want to continue operating shops in Tallinn through X OÜ. To cease operating in Tallinn, X OÜ can sell three enterprises, i.e. shops, with all the related assets, rights, obligations and contracts related to them. As a result of selling the enterprises, Peter will remain the sole shareholder of X OÜ, and X OÜ will retain ownership of the remaining seven stores in Estonia. Peter thereby sells „three slices of a whole pizza“, but maintains ownership of his company and can continue doing business outside of Tallinn.

If Peter wants to sell his life’s work, i.e., all the shops owned by his company, he could consider selling 100% of X OÜ. The sale of the entire share would mean he would cease to be a shareholder of X OÜ, and the buyer would become a 100% shareholder. In this way, Peter sells the „whole pizza“, leaves the company’s ownership and enjoys the fruits of the sale. The content and form of the sales contract will depend heavily on what Peter is selling.

Arranging the sale

Sale of a company

When selling a company, the form of the contract of sale depends on the type of company being sold – whether it’s a private limited company or a public limited company.

In the case of a public limited company, the process is quite simple – a free-form share purchase agreement must be entered into, i.e. at least in a form reproducible in writing (in practice, however, often in written form – on paper and digitally signed). Under the agreement, the seller undertakes to sell and the buyer to purchase the shares in the company which are deemed to have been transferred from the seller to the buyer from the moment the shares are credited to the buyer’s securities account. However, in case of a private limited liability company, the situation is somewhat more complicated, as there are three different ways to transfer a private limited liability company:

⦁ if Nasdaq CSD maintains the list of shareholders, the process is identical to the transfer of shares in a public limited company;
⦁ if the commercial register keeps the list of shareholders, the disposition for the transfer of a share must be notarized. The transfer of the share from the seller to the buyer is deemed to have taken place from the date of entry in the list of shareholders of the commercial register;
⦁ if the share capital of a private limited liability company is at least EUR 10 000, and the shareholders have waived in the articles of association the mandatory (notarial) form requirement for the disposition for the transfer of a share, the transfer of shares may be at least in a form reproducible in writing. In such case, the management board maintains the list of shareholders, and the title to the share is deemed to have been transferred from the seller to the buyer per the terms of the share purchase agreement.

Sale of an enterprise

In case of an enterprise sale, the form of the contract is directly related to the type of assets being transferred within the enterprise. For example, if the assets include immovable property located in Estonia, the agreements relating to its sale must be notarised.

Taxation of the transaction

Company

The taxation of the sale of a company depends on various factors, such as the seller’s tax residence. In Estonia, income tax is only paid when distributing dividends. Therefore, in a situation where company Y OÜ sells its 100% shareholding in company Z OÜ, company Y OÜ does not need to pay income tax on the profit acquired from the sale, until company Y OÜ decides to distribute profit to its shareholders in the form of dividends. If Peter sells his 100% shareholding in company X OÜ, he will be liable for natural person income tax – he will have to declare the income and pay income tax on it.

If the company’s seller is a non-resident, then the sale of the company is taxable only in exceptional circumstances. Specifically, if part of a company is sold, the assets of which, at the time of the transfer or during the two years preceding the transfer, consist directly or indirectly of more than 50% of immovable property situated in Estonia and in which the non-resident held at least 10% of shareholding at the time of the transaction. In such case, the non-resident seller must tax the income in Estonia.

Enterprise

The tax treatment of an enterprise sale depends largely on the type of assets that are part of the enterprise being sold and the tax residence of the seller. If an Estonian company sells an enterprise, taxation at the seller’s level only applies if the seller decides to distribute profit in the future.

If the seller of enterprise is a non-resident and the enterprise’s assets include immovable property located in Estonia, the proceeds from the sale of such immovable property will normally be subject to income tax in Estonia.

Transfer of liabilities

Company

The sale generally does not affect the company’s rights and obligations. Therefore, all rights
and obligations will continue to exist in the same form and extent as before.

Enterprise

When an enterprise is transferred as a result of a transaction, all its obligations are transferred with it, whether the buyer was aware of them or not.

The seller and the buyer are jointly and severally liable to creditors for liabilities incurred before the transfer of the enterprise that have fallen due until the transfer or will fall due within five years after the transfer. It is assumed that the buyer of the enterprise is the obliged person in the relationship with the seller.

Transfer of employees

Company

The sale of the company does not affect the contractual relationship of the employees. Employment contracts will remain in force unchanged.

Enterprise

The sale of the enterprise also includes the transfer of employment agreements, including accrued holidays, overtime, etc. The transfer of employment agreements does not require the employees’ consent, and the termination of employment agreements due to the transfer of the enterprise is prohibited.

At least one month before the transfer of the enterprise, the seller and the buyer of the enterprise must provide the employees’ trustee / shop steward or, in their absence, the employees with a notice in a form reproducible in writing containing information on the proposed transfer (planned date of the transfer, reasons for the transfer, legal, economic and social consequences of the transfer for the employees and the measures planned with regard to the employees).

If the seller or purchaser of an enterprise intends to make changes affecting employees as a result of the transfer of the enterprise, they must consult the trustee or, in their absence, the employees to agree on the planned measures. The trustee or the employees, when consulting, shall have the right to meet with representatives of the seller of the enterprise and the buyer, including members of the management, and to make proposals concerning the measures envisaged for the employees in a form reproducible in writing, no later than 15 days after the abovementioned submission of the notice, unless a longer period is agreed. The seller of the enterprise and the purchaser shall be obliged to state the reasons for not taking the proposals into account.

Selling a company vs selling an enterprise – pros and cons from the seller’s perspective

Selling a company vs selling an enterprise – pros and cons from the buyer’s perspective

Summary

The sale of a company and an enterprise are essentially different transactions, and it is imperative to distinguish between them from a legal, tax and employment law perspective. The sale of a company involves the sale of the whole legal entity, the „whole pizza“, while the sale of an enterprise is like the sale of a „couple slices of pizza“. What and how to sell is a business decision and depends on the specifics of each transaction and the objectives of the parties. To decide in favor of one or the other, it is useful to familiarize yourself with this article or contact a legal advisor who will help you make a choice.

Ants Karu is a partner and head of corporate and transactions at WIDEN.

Martin Nikolayev is an associate in the corporate and transactions practice of WIDEN.