Transfer of business and assignment of shares - differences, advantages and disadvantages.

Trespasse e cessão de quotas - diferenças, vantagens e desvantagens

In the context of buying and selling companies, the legal instruments of business transfer agreements and share assignment agreements represent distinct mechanisms for transferring business rights and responsibilities. Both have their own peculiarities, advantages, and disadvantages, and are essential in business transactions. A correct understanding of these differences is crucial so that the parties involved can make informed decisions and avoid legal complications.

The Transfer Agreement

A business transfer agreement refers to the transfer of a business establishment . This type of contract transfers all the assets that make up the establishment, such as merchandise, machinery, business location, trademarks, among others, to the new buyer. However, the CNPJ ( Brazilian tax ID) and the corporate structure of the company selling the establishment remain unchanged.

Brazilian legislation, especially the Civil Code (articles 1,142 to 1,149), regulates the transfer of a business. This contract requires registration with the Commercial Registry and publication in the official press to be effective against third parties. Furthermore, the seller remains jointly liable for the debts of the business for up to one year after the sale, according to article 1,146 of the Civil Code. The buyer, in turn, assumes the assets and liabilities, provided they are properly accounted for, which makes due diligence fundamental in this process.

Advantages of Transfer of Business:

• Immediate transfer : The buyer can begin operations at the acquired establishment as soon as the transaction is completed and registered.

• Assets preserved : The selling company may continue its business activities, provided that they do not involve the transferred establishment.

• Non-compete clause : The seller may not compete with the buyer for a period of up to five years, unless the parties agree otherwise.

Disadvantages of a Business Transfer:

• Responsibility for debts : The buyer assumes any existing debts, provided they are properly accounted for, which may include tax and labor obligations.

• Registration and publication : The effectiveness of the contract depends on registration and publication, which adds bureaucracy and costs.

• Business continuity risk : If the business is poorly managed by the new owner, there could be a significant loss of intangible value, such as clientele and reputation.

Transfer of Shares

On the other hand, the transfer of shares does not involve the transfer of the establishment, but rather of corporate shares . In other words, there is a change in the structure of the shareholding, with the exit of one partner and the entry of another. The transfer of shares is the most commonly used mechanism in transactions involving the purchase of companies and is regulated by the Civil Code (articles 1003, 1025 and 1057).

The new partner (assignee) assumes the rights and responsibilities of the assignor, including the company's debts, which reinforces the importance of a detailed due diligence . For the assignment to be effective against third parties, it is necessary to register the amendment to the company's articles of association with the Commercial Registry.

Advantages of Transferring Shares:

• Business continuity : The company maintains its identity, tax ID, and contracts unchanged, facilitating the transition of partners without interrupting business activities.

• Lower reputational risk : Because the company's name and clientele are not directly affected, the impact on the company's reputation is reduced.

• Flexibility in transactions : The articles of association can stipulate quorums and preferential rights, providing greater control over the entry of new partners.

Disadvantages of Transferring Shares:

• Joint and several liability : A partner who transfers their shares remains liable for the company's obligations for up to two years after the transfer, according to article 1,003, sole paragraph, of the Civil Code.

• Potential corporate conflicts : The entry of new partners can generate disagreements between old and new participants, requiring clarity in corporate agreements.

• Requirement for consent : The transfer of shares to third parties may be blocked if more than 25% of the share capital objects, as provided for in article 1,057 of the Civil Code.

Key Differences

While a business transfer deals with the sale of a business establishment (physical and intangible assets, without altering the corporate structure), the transfer of shares involves altering the corporate structure without directly changing the company's assets.

• In a business transfer , the seller continues to exist as a legal entity, but without the business establishment that was sold.

• In the transfer of shares , the company retains the same CNPJ (Brazilian tax ID), establishments, and contracts, changing only the shareholding structure.

What is the best option?

The choice between a business transfer and a share transfer depends on the specific characteristics of the transaction. If the objective is to acquire the company's assets to continue the same business activity , a business transfer may be the best choice. However, if the intention is to acquire the company in its entirety , with all its assets and liabilities, a share transfer is generally more appropriate.

Both mechanisms require attention to auditing, thorough analysis of the responsibilities involved, and the support of professionals specializing in business law to ensure that the transaction occurs without harm to the parties involved.