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Overview of Asset Purchase Agreement

Overview of Asset Purchase Agreement

 

What is this document?

This is an agreement between a vendor/seller and a purchaser which sets out the terms and conditions relating to the purchase and sale of a company’s assets.

 

When would I use this document?

This document can be used when a corporation sells all or some of its assets.

 

Who signs this document?

This document is signed by the vendor/seller and the purchaser. If signing on behalf of a corporation this should be someone who has authority to bind the corporation.

 

More details about this document

An Asset Purchase Agreement can be used to buy/sell all or a portion of the assets of the corporation. The agreement will specify which assets. Often the purchaser will require satisfactory due diligence as a condition to the closing of the transaction.

This agreement differs from a Share Purchase Agreement, which can be used to acquire ownership of the corporation itself. The Asset Purchase Agreement does not transfer ownership of the corporation, but only in the assets specified.

This document will often contain many representations and warranties from both the vendor and the purchaser such as the right to title, right to assign, no encumbrances, corporate authorization and no litigation.

If the transaction is subject to the laws of a jurisdiction with a Bulk Sales Act, parties should consider whether the Bulk Sales Act applies to the transaction. Courts have held that parties to an Asset Purchase Agreement cannot agree to “waive” the provisions of a Bulk Sales Act.

 

What are the core elements of this document?

The core elements of an Asset Purchase Agreement include: List of Assets, Purchase Price, Due Diligence, Indemnity, Limitation of Liability, Vendor and Purchase Representations and Warranties.

Additional clauses may include: Non-competition, Non-solicitation, Taxes, Shipping, Currency, and Inspection.

 

Related Documents

Bill of Sale – A Bill of Sale is a legal document that records that the seller sold specific property on a specific date to the buyer. It is proof that the property was transferred from the seller to the buyer.

Nondisclosure/Confidentiality Agreement – an agreement that protects confidential information.

Intellectual Property Transfer, Assignment and Release – an agreement that transfers the intellectual property from one person to another eg. from a consultant/contractor or employee to the person who ‘hired’ the consultant/contractor or employee.

Receipt of Payment and Release of Obligations – once final payment has been made for the shares the seller can sign this document acknowledging full payment and releasing the purchaser from claims by the seller.

Promissory Note – a written promise to pay used to provide security for payment.

Term Sheet – a document that sets out the basic elements of the transaction or investment.

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Asset Purchase May be Conditional on Satisfactory Inspection Report

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Purchasers and their financers will require satisfactory inspection reports as a condition for closing the transaction. An asset purchase agreement should include clear procedures for inspection, and clear standards for determining whether the inspected assets comply with the terms of the agreement.

22 different convenience stores were sold to a restaurant business in North Dakota, pursuant to an asset purchase agreement. The acquisition was subject to certain regulatory approvals and other customary closing conditions, including the receipt of satisfactory inspection reports related to the stores.

Read the article here.

Take away:

  • The inspection of assets that are the subject of an asset purchase agreement may often determine whether the asset purchase agreement comes to fruition.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Representations May Be Limited by the Schedules to the Asset Purchase Agreement

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Specific exceptions to representations are generally contained in the schedules to the agreement. Vendors can use this drafting mechanism to ensure that their representations are accurate, thus increasing the likelihood that they will receive the full benefit of what they have bargained for. Purchasers need to pay close attention to the schedules to ensure that they are receiving what they expected to purchase, and to determine how to focus their due diligence efforts.

Read the article here.

Take away:

  • Parties must pay close attention to the schedules to determine whether the details of the deal have been accurately recorded.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Has the Particular Liability Been Specifically Assumed, Excluded or Not Mentioned in the Apa?

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Both vendors and purchasers have a strong interest in ensuring that the ownership of all liabilities has been clearly allocated by the APA. The parties should address the question: If the liabilities assumed (or excluded) have been listed, what is to be presumed about the liabilities which have not been listed? Are they to be included (pro-vendor) or excluded (pro-purchaser) from the assets transferred by the APA?

This article explains buyer and seller strategies with respect to liabilities. When drafting an asset purchase agreement, the buyer will likely negotiate for narrow assumed liability and broad excluded liability. That is they will only agree to assume liability in certain circumstances and will exclude liability broadly to include all liabilities other than those expressly assumed by the buyer. The seller on the other hand wants the buyer to assume as many liabilities as possible so broader assumption language favours the seller.

Read the article here.

Take away:

  • Parties should clearly identify which party will be responsible for unlisted liabilities.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Non-Compete in an Asset Purchase Agreement is Enforceable, but It May Not Be in an Employment Agreement

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Some jurisdictions, including California, permit only post-acquisition non-competes, in order to protect a purchaser’s interest in capitalizing on acquired goodwill for a limited period. If parties to an APA anticipate that the vendor may be employed by the purchaser, and the vendor resides in or the contract has a significant connection to a jurisdiction which prohibits or discourages non-competes on the grounds of public policy, the non-compete should be included in the APA.

In Ascension Ins. Holdings, LLC v. Underwood (January 28, 2015), the Delaware Chancery Court declined to enforce a non-compete contained in an employee investment agreement, despite the choice of Delaware as the governing law, where the employee lived and worked in California, and the geographic restriction of the non-compete applied to California. The plaintiff and defendant had entered into an asset purchase agreement for assets in California. This agreement did not contain any restrictions on competition. The parties subsequently entered into an employee investment agreement, which contained a non-compete.

In California, Section 16600 of the Business and Professions Code prohibits noncompetition covenants. Such prohibition is subject to narrow statutory exceptions such as Section 16601, which permits a person who sells the assets and goodwill of a business to be subject to a noncompetition covenant.

 Despite that the contract specified a Delaware choice of law clause, the court declined to enforce the non-compete, because there was evidence that the parties had not discussed a non-compete at the time of the APA, and therefore the rationale for protecting the purchaser’s bargained-for interest in the goodwill of the business did not apply to the situation.

Read the article here.

Take away:

  • When considering an asset purchase followed by an employment contract with the vendor, any non-compete restrictions should be included in the APA so that it is therefore included as part of the sale of business consideration.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Applicable Tax Laws must be Considered When Structuring an Asset Purchase Agreement

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The APA should contain clear provisions allocating responsibility for taxes. Parties should also be familiar with the tax laws applicable to their transaction, particularly if it could be argued that the transaction had no practical economic effects other than the creation of income tax losses.

In Slone v. Comm’r, No. 12-72464 (9th Cir. Jun. 8, 2015), the Ninth Circuit considered tax deficiencies, interest and penalties which were not paid after an asset purchase agreement. The IRS sent notices of liability to the former shareholders of the company arguing that the shareholders were “transferees” (under federal tax law) of a party substantively liable for unpaid taxes under state law. The Ninth Circuit found that the tax court “failed to make a finding on whether the shareholders had a business purpose for entering into the stock purchase transaction other than tax avoidance”… or whether there was some economic substance behind it, and remanded the case back to the tax court.

Read the article here.

Take away:

  • Parties should be familiar with the tax laws applicable to their transaction and the tax provisions in the asset purchase agreement in order to minimize the potential for future allegations of tax avoidance.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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A Non-Compete Clause Must be Unambiguous

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Restrictive covenants must be drafted carefully to give adequate protection to the purchaser, and purchasers should be able to show the connection between the price paid for the goodwill of the business, and the temporal and geographic aspects of the non-compete provision. If the non-compete provisions are renewed or extended, care should be taken to clearly adjust the timeline accordingly.

The parties entered into an asset purchase agreement which contained a non-compete provision that stated they were not to compete or interfere with its business relationships for 5 years after the acquisition or 12 months after their employment ended, whichever was later. The court in holding that the non-competition provision was not enforceable, stated that the terms of the restrictive covenants were ambiguous and created doubt about when the non-compete period ended. The legal rights must be clear and the facts undisputed in order to enforce a restrictive covenant in many jurisdictions.

Read the article here.

Take away:

  • When enforcing a restrictive covenant in relation to non-competition, the courts will look at the clarity of the legal rights and whether the facts are undisputed.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Closing Conditions of an Asset Purchase Agreement May Be Waived

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Purchasers under an APA may waive any of the closing conditions, but should consider carefully before doing so. Eagerness to close a transaction may lead to problems later if due diligence has been inadequate and closing conditions were waived in the interest of expediency.

The SEC filing requirements that accompany Form 8-K include a document which discusses several of the APA closing conditions. These included the delivery of the signatures, certificates, instruments and other deliverables by the Seller, the performance by the Seller of all covenants and conditions set forth in the Asset Purchase Agreement and that the Seller recieve all approvals, consents and waivers that are needed to consummate the Sale. The Asset Purchase Agreement also notes that each of the closing conditions may be waived by the Buyer at or before Closing.

Read the article here.

Take away:

  • Purchasers that enter into an APA agreement should conduct proper due diligence before waiving closing conditions.

 

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.

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Additional Rent Announcements API Approval of Terms Asset Purchase Agreement Background Intellectual Property Board of Directors Business Case Law CASL Clausehound Collaboration Commercial Lease Confidential Information Confidentiality Consulting Agreement Contract Drafting Contract Negotiations Corporation Costs and Expenses CPD Definition of Intellectual Property Dispute Resolution Distribution Agreement Employee Employment Employment Agreement ESOP Events Farming Law Generally Used Clauses Grant of Licence Handling of Confidential Information Indemnity Independent Contractor Independent Legal Advice Informal Discussions Intellectual Property Investor Journey Licence Restrictions Limitation of Liability Long Form Marriage Contract Master Services Agreement NDA Non-competition Not for Profit Articles of Incorporation Notice of Arbitration No Waiver Obligations Ownership of Intellectual Property Ownership of Work Product Parties Partnership Prenuptial Agreements Privacy Policy Product Sales Agreement Purpose Representations and Warranties Restrictive Covenants Safeguarding Requirements Settlement Agreement Shareholder Agreement Software Development Start-up Subscription Agreement Technology Termination Term Sheet Terms of Use Trademark Registration Transfer of Intellectual Property Waivers and Releases Website Terms of Use
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