EM Law | Commercial Lawyers in Central London
Asset purchase agreements solicitors
An asset purchase agreement sets out the terms and conditions of the sale and purchase of a business or part of a business. The complexity of an asset purchase agreement will vary depending on the nature and circumstances of the transaction, but it will typically be a lengthy document.
Examples of common assets which are sold in an asset purchase agreement include land, machinery, stock, goodwill and contracts. When an asset sale completes, ownership of the selling company will not change hands; the company selling the assets will continue to exist. If the company has sold the whole of its business, it will now be a ‘shell’ company with no assets except the cash proceeds of the asset sale.
Typical provisions in an asset purchase agreement
Agreement to sell and purchase
This provision is probably the most important operative provision in the asset purchase agreement, yet it tends to be one of the shortest and simplest clauses. The buyer’s main concern is to ensure that proper title to the assets is transferred, with all the rights attaching to them.
The purchase price and how it is to be paid are central to the asset purchase agreement. Consideration will usually be satisfied in cash in full at completion however other forms of consideration could be used. There may be an issue of shares by the buyer or an exchange of assets, however the latter is rarely used in practice. To ensure that the buyer will produce the cash on completion, the seller should insist that the buyer has the necessary funds by exchange of contracts or a legally binding commitment from a bank or other party that they will be provided on completion.
Warranties are statements of fact which the seller makes in relation to specific aspects of the business. The seller warrants that the statements are true and if they are subsequently found to be false, the buyer will have a breach of warranty claim against the seller. Warranties are commonly given about the company’s accounts, its employees, its contracts and any disputes that the company may be involved in. A buyer should always try and seek comprehensive warranties from the seller in an asset purchase agreement.
Indemnities are promises made by the seller to reimburse the buyer for any loss it suffers in connection with contingent liabilities. Indemnities can be used in an asset purchase agreement where specific areas of risk have been identified, often through the disclosure process. Unlike warranty claims, there is no need for the indemnified party to establish loss flowing directly from the circumstances which trigger the indemnity. It would normally be sufficient to establish that the circumstances have given rise to loss.
This provision will set out what issues need to be dealt with at completion. Such issues include the date and place of completion, as well as the buyer’s completion obligations. Completion may occur at the same time as exchange of contracts or may occur days or even weeks later. This is usually the case where a condition precedent needs to be satisfied. Where there is a split exchange and completion, most of the practical steps will take place at exchange so completion should be quick.
Asset sales v Share sales
Just as with a share sale, there are various advantages of structuring a transaction as an asset sale. A buyer may prefer an asset sale because the buyer can decide which assets they want to take and which assets / liabilities they want to leave behind. There may also be certain tax advantages to structuring a deal as an asset sale depending on the nature of the assets the buyer is acquiring. An asset sale can also be advantageous for a seller. A company can, for example, get rid of a loss-making division whilst retaining the more profitable parts of a business.
There are also disadvantages to asset sales. For a buyer, they may not be able to acquire all the assets they desire. Some assets, for example, may not be assignable or their transfer may require the consent of third parties which can be time consuming and onerous. Also, the liabilities of the business normally remain with the seller which may not be desirable.
It is important to understand the commercial, tax and legal risks associated with both types of transactions to select the most suitable type of transaction for your sale.