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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.

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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.

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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.

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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.

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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.

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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.

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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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Setting Aside Arbitral Awards Is Becoming More Restrictive When It Comes to Asset Purchase Agreements

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Parties who choose arbitration to settle disputes under an APA should note that courts have become increasingly reluctant to interfere with arbitration awards if a fair process has been used to arrive at an arbitration decision. One of the risks involved with the right to choose the arbitrator(s)/decision maker, is the risk that the ‘binding arbitration award’ will not be resolved as the party wishes on the merits.

The APA pursuant to which the purchasers bought the corporation’s production facility and other related machinery, contained an arbitration clause that designated Singapore as the place of arbitration. The OMNA (omnibus agreement) did not have an arbitration clause. A dispute arose because certain taxes had not been paid, and the matter went to arbitration. The losing parties sought to overturn the arbitration award in the courts. The Singapore Court of Appeal indicated that minimal interference in arbitral awards was the core of the Model Law and the Singapore International Arbitration Act. “”From the courts’ perspective, the parties to an arbitration do not have a right to a “correct” decision from the arbitral tribunal that can be vindicated by the courts.

Instead, they only have a right to a decision that is within the ambit of their consent to have their dispute arbitrated, and that is arrived at following a fair process.”” The award was reinstated in part.

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Take away:

  • When agreeing to an arbitration clause in an asset purchase agreement, parties should be aware that courts around the world are becoming more reluctant to disturb an arbitral award made after following fair procedures.

 

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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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