Business merger or share merger: which acquisition structure suits a startup or scale-up?

A merger is not always the same thing legally

In everyday language, people often speak of a merger as soon as two companies join forces. Legally, however, various structures can lie behind such a transaction.

In a business merger one company takes over the business of another. In this process, assets and liabilities are transferred. For this reason, this form is also referred to as an asset-liability transaction.

In a share merger the individual components of the business are not transferred; instead, the shares in the company operating the business are acquired. As a result, the assets, debts, and contracts remain, in principle, where they were: with the company whose shares are being acquired.

In addition, there is the statutory merger. In this case, legal entities merge legally according to the applicable statutory regulations. This is a different structure than a business merger or a share merger.

For startups and scale-ups, the difference between a business merger and a share merger is particularly important in practice. The economic outcome may seem similar at first glance, but the legal route to achieving it differs significantly.

What is a business merger?

In a business merger, company A takes over the business of company B. The consideration can consist of cash, shares in the acquiring company, a combination of these, or another financing structure.

The defining legal point is that the business does not transfer as one indivisible package. The various assets and liabilities must be transferred in the manner prescribed for each individual asset or liability.

This makes a business merger relatively labor-intensive.

Assets and liabilities must be examined individually

A business merger leads to acquisition under a particular title. This means that not everything belonging to the business automatically moves to the buyer.

For each component, it must be determined how the transfer should take place. This may, for example, require the cooperation of other parties.

Regarding debts, the position of creditors plays an important role. If a creditor does not cooperate with the transfer of an obligation, the original company may remain liable alongside the acquirer.

Contracts also require separate attention. For a contract transfer, the cooperation of the counterparty is required. Therefore, anyone buying a business cannot simply assume that every agreement will automatically move along with the company.

For a startup or scale-up, this can become an important part of the transaction structure. When the value of the company is strongly linked to existing contractual relationships, it must be clear in advance which contracts can be transferred and for which agreements cooperation is required.

The buyer can select what is acquired

The extra transfer formalities are offset by a significant advantage: in an asset deal, the buyer can, in principle, be selective.

The acquiring company can determine which assets and liabilities it does and does not want to take over. This provides the flexibility to tailor the transaction to the specific part of the business that is actually of interest.

This freedom is not unlimited. When only a few isolated assets are purchased, it is no longer appropriate to speak of an asset deal. It must genuinely involve the acquisition of a business or a relevant part thereof.

For growth companies, this selectivity can be attractive. A buyer does not necessarily have to acquire the entire company if the interest is primarily in a specific business activity. On the other hand, this choice must then be legally executed by actually transferring the relevant assets.

Contracts make asset deals operationally intensive

One of the biggest differences between an asset deal and a share deal lies in the position of the contracting parties.

In an asset deal, the legal entity that is a party to the contract changes. The contract was originally held by the selling company and must subsequently be transferred to the buyer. Contract assignment requires the cooperation of the counterparty.

This can make a transaction dependent on parties who are not themselves at the negotiating table.

For a scale-up with many contractual relationships, it can therefore be wise to map out early in the process which agreements must become part of the transaction. It is not just the purchase agreement itself that is relevant; the feasibility of the transfer also depends on the underlying legal relationships.

In an asset deal, a thorough inventory of the business to be transferred is therefore essential. What exactly is being sold? Which obligations are included? Which counterparties must cooperate? And which parts will remain with the seller?

These are not details for the final stage of the transaction. They go to the heart of the chosen structure.

What happens to employees in an asset deal?

An asset deal can also have consequences for employees.

When there is a transfer of an undertaking, the rights and obligations arising from employment contracts transfer by operation of law to the acquirer. This regulation can also apply when only a part of a business is transferred.

The result is that employees cannot simply be treated as a separate component of the deal. In the event of a business transfer, their employment law position follows its own statutory regime.

A director who is also employed under an employment contract may also fall under this regulation.

For startups and scale-ups, this means that the personnel implications must be considered from the very beginning when structuring an asset deal. A transaction that on paper is primarily viewed as a transfer of assets can simultaneously have a direct impact on the employment relationships within the company.

The works council may play a role in an asset deal

If a company has a works council, the right to provide advice may also become relevant.

The transfer of control and the acquisition of a company are among the decisions for which the works council may have a right to provide advice. In addition, the Merger Code may be relevant to the position of employees.

This is rarely an issue for young startups, but for a growing scale-up, the employee participation component can become increasingly important.

This also has consequences for the timing. Once employee participation rights apply, a transaction cannot be planned solely based on commercial negotiations between the buyer, seller, and shareholders.

Who decides on the sale of the entire company?

The distribution of authority also plays a role within the selling company.

When a private limited company (BV) or public limited company (NV) transfers its entire business, the business activities are effectively terminated. Such a decision goes beyond a normal operational management act. Therefore, decision-making by the general meeting of shareholders is essential for the transfer of the entire business.

For an NV, the position of the general meeting is explicitly regulated by law. This distribution of authority can also be relevant for a BV.

When only a portion of the business is transferred, the assessment may differ. In that case, it is more likely that the board is authorized to make the decision.

This is an important point for founders to consider. Just because the board has day-to-day management of the company does not automatically mean it can independently decide on the sale of the entire business.

A proposed business merger therefore requires not only an analysis of what is being transferred to the buyer, but also of who within the company is authorized to approve the transaction.

What is a share merger?

In a share merger, a different route is chosen. The business itself remains within the same company. What changes is who holds the shares in that company.

The buyer can acquire the shares from the existing shareholders. Another possibility is that the parties involved use a joint holding company that will hold the shares in the companies.

In a share merger, the consideration can also consist of cash, shares, or a combination of different forms of financing.

The fundamental difference from a business merger remains the same: the assets and liabilities of the acquired company do not need to be transferred to the buyer individually.

Why is a share merger often legally simpler?

In a share transfer, the assets and liabilities remain with the same company.

Suppose company B operates the business and company A acquires the shares in B. After the transaction, A owns the shares in B, but B remains the owner of its assets and remains the debtor for its obligations.

Its agreements also, in principle, remain in effect with the same contracting party.

In terms of property law, a share merger is therefore simpler than a business merger. There is no need to transfer all sorts of individual assets from B to A.

Practically speaking, that can make a big difference. The company that houses the business remains in existence and generally continues as part of the buyer's group.

If certain rights or obligations need to be moved to another group company at a later stage, this can then be done gradually.

A share deal does not mean that contracts are never an issue

The fact that contracts remain with the same company in a share merger does not mean that contractual consent is never required.

Agreements may, after all, contain change of control clauses . Such a provision is specifically triggered when the shareholders behind a contracting party change.

A counterparty may have contractually stipulated that consent is required for an acquisition. As a result, a share transfer can still have consequences for existing commercial relationships.

For startups and scale-ups, this is an important due diligence point. Simply establishing that the contracting party remains the same legal entity is not enough. You must also check whether key agreements attach consequences to a change of control.

While a share merger avoids many individual transfer actions, it does not make a contract review unnecessary.

Check the articles of association before transferring shares

In a share merger, the internal structure of the company can also cause complications.

For instance, the articles of association may contain a blocking clause. Special shares or priority shares can also influence the actual control a buyer acquires.

Owning a majority of the shares therefore does not mean that the buyer automatically gains every desired authority in every situation.

This is especially relevant for a startup with different classes of shares or special shareholder rights. The cap table does not always tell the whole story. To determine control, you must also look at the rights attached to different shares and the statutory agreements regarding transfer.

A transaction analysis therefore starts not only with the question of what percentage of shares is being purchased, but also with the question of what rights are attached to those shares.

What happens to employees in a share merger?

The position of employees in a share merger differs significantly from that in a business merger.

In a share transfer, the business formally remains with the same company. The employment contracts therefore also continue with the same employer.

The statutory regulations regarding the transfer of an undertaking, which may be relevant in a business merger, do not apply to a simple share transfer.

This does not mean that employee interests are ignored.

The right of a works council to provide advice can also be relevant in a share transfer. After all, a change in the shareholder structure can simultaneously lead to a change in the control of the company.

For scale-ups with a works council, this therefore deserves separate attention. The legal technique of a share deal does not automatically exclude participation rights.

What if the buyer does not acquire 100 percent of the shares?

A share merger brings another issue to light: not every shareholder is required to sell their shares.

Full ownership of the company is not always necessary to obtain decisive control. As a result, a group of minority shareholders may remain after a transaction.

This can be uncomfortable for both the minority and the new majority shareholder.

The new shareholder will generally want to manage the company as part of a larger whole. Meanwhile, minority shareholders retain their own position and economic interest.

Leaving a small minority in place can also have practical consequences for the buyer. The presence of external shareholders can influence corporate formalities, financial relationships, and future restructurings.

Buy-out from 95 percent

For situations in which almost all shares have been acquired, there is a statutory buy-out scheme.

Any shareholder who holds at least 95 percent of the issued capital can, under certain conditions, demand that the remaining shareholders transfer their shares. For a private limited company (BV), there is an additional requirement that at least 95 percent of the voting rights in the general meeting can be exercised.

The party initiating the buy-out cannot simply choose which minority shareholders are bought out and which are not. The claim is directed against all remaining shareholders collectively.

The Enterprise Chamber of the Amsterdam Court of Appeal handles this procedure. The price of the shares is also determined during these proceedings.

For acquisitions where 100 percent ownership is the ultimate goal, the 95-percent threshold can therefore be strategically important. A large majority stake and full ownership are not legally the same thing.

Business merger or share merger: what is the main difference?

The two structures can economically lead to a similar concentration of business activities, but legally they start from a different premise.

In a business merger the business, or a portion of it, moves from the selling company to the buyer. This requires the transfer of the relevant assets and liabilities. Contractual parties and employees may be directly affected by this.

In a share merger the business remains where it is. The shareholders change. As a result, assets, debts, and agreements generally remain with the same legal entity.

This difference impacts almost every aspect of the transaction.

Those who primarily want to acquire specific business activities and leave other parts behind may benefit from the selectivity of a business merger. Those who want to acquire the company as an existing legal entity may find a share transfer more advantageous.

Neither method is automatically better. The desired economic outcome must be translated into the legal structure that fits it.

Tech companies must also take the Vifo Act into account

For startups and scale-ups in technology, an additional assessment may apply alongside corporate law.

Since June 1, 2023, the Investments, Mergers and Acquisitions Security Test Act (Wet Vifo) has been in effect. This regulation includes a notification requirement and an assessment regime for certain investments and transactions that may affect national security.

The regulation is relevant for, among others, companies in vital sectors, operators of business campuses, and companies active in sensitive technologies.

It considers whether the target company is based in the Netherlands. It is not just the formal registered office that is decisive; the actual management and activities are also relevant.

For tech companies, the regulation can come into play very early on when highly sensitive technology is involved. It is not just full acquisitions that may be relevant; acquiring or increasing significant influence can also lead to a notification requirement.

In this context, thresholds of 10, 20, and 25 percent of the votes in the general meeting, among others, may be important.

This means that even an investment presented commercially as a minority investment may still require legal attention under the Vifo Act.

A Vifo check belongs early in the transaction process

When an investment or acquisition falls within the scope of the Vifo Act, the transaction must be reported to the Office for Assessment of Investments (BTI). Both the acquirer and the target company have a role in this.

The Office for Assessment of Investments evaluates the transaction from the perspective of national security and advises the Minister of Economic Affairs.

Failure to report can have serious consequences. Shareholder rights can be suspended, a transaction can be reversed, and administrative fines of up to 10 percent of annual turnover can be imposed.

For a tech startup, this is therefore not a checklist item to be added just before closing. If the activities might fall within the scope of the regulation, this must be taken into account when determining the transaction structure and planning.

Especially for investments where the investor does not obtain full control, it is risky to assume that investment screening is irrelevant. For highly sensitive technology, even lower percentages can trigger a notification requirement.

Look beyond just the purchase price

In an acquisition, negotiations often focus on valuation, purchase price, and economic terms. Legally, however, the structure is just as important.

The choice between an asset deal or a share deal determines, among other things:

• which assets and liabilities must actually be transferred;
• whether contractual counterparties must cooperate;
• whether change of control provisions are relevant;
• what happens to employment contracts;
• what role a works council may have;
• which shareholder resolutions are required;
• whether minority shareholders are left behind;
• and whether an investment screening, such as the Vifo Act, may come into play.

For founders and investors, it is therefore wise not to finalize the transaction structure only after the commercial deal has been fully negotiated.

A structure that seems simple in broad terms can still become complex due to contractual consents or internal decision-making. Conversely, a carefully chosen structure can prevent many separate transfer actions.

What should startups and scale-ups keep in mind?

At Startup-Recht, we view the choice between an asset-liability transaction and a share transfer primarily as a structuring question. What does the buyer actually need to have in hand after closing, and through which legal route can that be achieved?

In an asset deal, it is essential to clearly define which parts of the business are being transferred. Subsequently, it must be determined for each part what is required for that transfer.

In a share deal, the focus shifts. The company continues to exist, but the shareholders change. As a result, the articles of association, shareholder rights, blocking arrangements, and change of control agreements become important.

With both structures, employees, employee participation, and potential investment screening can also influence feasibility and planning.

The best structure, therefore, does not follow solely from what parties commercially want to buy or sell. Just as important is what needs to change legally to actually achieve that outcome.

Conclusion: choose the right structure first, then build the deal

Both a business merger and a share merger can be used to bring companies together, but they function in fundamentally different ways from a legal perspective.

In a business merger, the company and its assets are transferred. This allows for flexibility in selecting what is included, but it also requires careful handling of transfers, contracts, creditors, and employees.

In a share merger, the company remains within the same legal entity and only the shareholder structure changes. This often makes the transfer of the business simpler from a property law perspective, but it requires specific attention to shareholder rights, statutory restrictions, change-of-control provisions, and any minority shareholders.

For tech startups and scale-ups, there is an additional point of concern: investments and acquisitions may fall under the Vifo Act, sometimes even when only a minority stake is acquired.

Anyone preparing for an acquisition or merger would be wise to determine the legal structure early on. Not just when the purchase agreement is nearly finalized, but at the moment it becomes clear what the parties want to achieve economically. That is precisely when you can choose a route that is legally feasible and aligns with the company that should remain after closing.

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