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CS Professional · Corporate Restructuring, Valuation and Insolvency · Planning and Strategy

Vindhya Autos Ltd is deciding between an asset purchase (slump sale) of a unit of Sahyadri Components Ltd and a share purchase of Sahyadri as a whole. Vindhya wants to avoid taking over unknown past liabilities of the company, and is happy to pick specific assets. Which structure best suits this objective?

An asset purchase suits this objective. The buyer picks the specific assets and assumes only the liabilities named in the agreement, so unknown past liabilities generally remain with the seller. In a share purchase the target company continues with all its liabilities, which the buyer indirectly bears.

  1. AShare purchase, as the buyer then acquires only selected assets
  2. BShare purchase, as liabilities remain with the old shareholders
  3. CAsset purchase, as the buyer can choose assets and generally leaves past liabilities with the sellerCorrect
  4. DAsset purchase, as the buyer automatically inherits all contingent liabilities of the company

Explanation

In an asset or business purchase the buyer acquires the agreed assets and assumes only the liabilities specified in the agreement, so unknown past liabilities generally stay with the seller. In a share purchase the company continues with all its liabilities, including hidden ones, so the buyer indirectly bears them. The other options misstate this allocation.

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