Vital Processes: Checklist for Asset Purchase Agreement

Asset Purchase Agreements Overview

Buyers and sellers of businesses frequently use a purchase agreement to set the terms for the sale. One of the primary forms a purchase agreement can take is an asset purchase agreement. It is a way for businesses to transfer ownership of assets, going concern the value of the balanced books, goodwill of a business and of course intellectual property, data, digital assets and contracts .
An asset purchase agreement contains:

Identification of the parties involved,
Definition of the assets to be transferred,
Terms of payment such as money, future services, intellectual property or services,
Warranties by the selling company concerning the assets,
Terms concerning the assumption of liabilities,
Post-closing actions to be taken by the seller,
Closing conditions,
Conditions allowing the buyer to walk away without consummating the purchase,
Indemnification provisions,
Non-compete provisions,
Dispute resolution provisions to set procedure and jurisdiction to deal with disputes,
Post-closing reporting and obligations,
Restrictive covenants such as non-use, casting preventing parties from using the names of the companies or using the transferred data.

This is a nonexclusive list of terms perhaps to be found in a general asset purchase agreement.

Key Provisions in an Asset Purchase Agreement

A purchase price is the cornerstone of any asset purchase agreement and should be paid in a form that is suitable to both the seller and purchaser, preferably prior to closing. Payment terms often include cash, assumption of debt, stocks, bonds, or a combination thereof. The purchase price will vary depending on a range of factors, including the value of the business for sale, industry, amount of assets, buyer’s willingness to purchase and seller’s willingness to sell.
The seller should include, in the disclosure schedule to the purchase agreement, a description of his/her view as to what constitutes the "business." If the seller has no idea, the above can be addressed in negotiations. The purchaser may ask for and receive a detailed list of all of the items the purchaser will own as a result of the purchase. The purchaser can also ask the seller questions as to how the business operates and how to best continue running the business once acquired.
The seller and purchaser should come together to ensure that the definitions and provisions are understood by each party. Listing the property in the schedule allows the buyer to confirm that all desired assets are included. As a general rule, pay attention to detail when preparing the purchase and sale agreement and schedule, and describe the assets in broad terms, as the entity selling the assets may not be the same entity holding the assets. Include equipment, machinery, fixtures, inventory, goodwill, and related intellectual property with the assets that are being transferred.
In addition to the purchase price and the businesses’ assets, the seller should also include representations and warranties in an asset purchase agreement. This provides assurances to the buyer about the assets it is acquiring. Most purchasers will insist on substantial representations about the assets to be transferred. To counterbalance, the seller may want to limit representations and warranties only to those items that are intended to result in a purchase price reduction.

Investigation Procedures

In the context of an asset purchase agreement, the seller warrants to the buyer that certain information is true and discloses certain information to the buyer. The buyer must ensure that the information and warranties are complete and accurate as the remedies that will be available to a buyer for a breach of a warranty or for misrepresentations by the seller are limited to the terms of the asset purchase agreement. The buyer should have the seller’s information reviewed and verified by its professionals prior to completing the transaction. The buyer should confirm the following regarding the assets of the seller: That the seller owns the assets, free and clear of any liens or encumbrances and that the seller has the ability to transfer such assets to the buyer. The buyer should ensure that the seller’s rights to the assets are not restricted by any agreements or legal restrictions. The seller is responsible for performing any necessary searches (i.e. personal property, real property) to confirm the status and ownership of the assets being sold. The buyer must also make sure that any seller leases are assignable to the buyer and that the seller can transfer such leases to the buyer. The buyer should review the articles and by-laws of the seller to confirm that the seller has the ability to enter into a purchase agreement and transfer the assets to the buyer. Additionally, the seller must have authority to issue the purchase agreement and complete the sale of assets and the buyer must put the name of the proper corporate official who is signing the agreement and the signatures should be witnessed. The buyer should ensure that the purchase agreement is signed, sealed and delivered in accordance with corporate requirements and that it has been duly authorized by corporate resolution. The buyer should investigate and verify the existence of any contracts between the seller and its suppliers, distributors, advisors, customers, lenders and similar parties. The buyer then has to confirm that the contract does not place any restriction on the ability of the seller to transfer the property and that the contract will not terminate as a result of the sale of the assets. In addition, the seller should disclose any agreements that may be affected by the sale of the assets and warrants that such agreement will not be affected. The buyer must confirm that the seller has complied with all laws and permits and that all actions taken by the seller, its employees, agents and others in regard to the assets comply with applicable laws. The buyer should conduct an environmental assessment of the property regarding the existing condition of the property and any potential environmental liabilities associated with the property. The buyer should confirm that there are no existing outstanding actions, demands, suits, investigations, orders and similar proceedings or threatened against the seller. The buyer should also ensure that the assets of the seller have not been subject to or involve any material proceedings or any claim or notice.

Standard Provisions in an Asset Purchase Agreement

Asset Purchase Agreements typically contain the following important clauses:
Representations and Warranties.
As with any contract, an asset purchase agreement will contain representations and warranties made by the seller to the purchaser. The seller represents that it owns the assets being purchased free and clear of all encumbrances and liens. In addition, the seller will represent that the assets being sold are fit for the purpose for which they are intended and are in good condition and repair. The seller also warrants that it has validly registered the trademarks, patents and rights in intellectual property it owns. If the seller is a corporation then it will represent that it is validly registered and authorized to carry on its business in any jurisdiction where it carries on any business and has obtained all required authorizations. Before signing an asset purchase agreement, a buyer should carefully review the representations and warranties made by the seller. If the representations and warranties are inaccurate, then the seller may be liable for misrepresentation and other monetary damages.
Indemnities.
An indemnity clause will require both the seller and purchaser to indemnify the other party for any losses, costs or damages that arise from over a particular issue. For example, if the purchase price for the assets is payable over time in installments, then the sellers may have to indemnify the purchaser in the event that the assets turn out to be worth less than anticipated over time. Similarly, if the seller represents that the power to execute the asset purchase agreement is vested in the directors of the seller and it is later revealed that there was no proper authorization for the execution of the agreement then the purchaser may have the right of indemnity for any damages it may suffer as a result of the invalidity of the contract.
Covenants.
One of the most commonly used covenants is a non-competition covenant. A non-competition covenant will prevent the seller from setting up a competing business for a specified period of time within a certain geographical area from the location of the business being sold. In the event that the covenant is breached, then the purchaser may seek to have the court enforce the covenant and place an injunction on the seller or may sue for damages resulting from the breach of the covenant.

Legal, Statutory and Regulatory Issues

The legal and regulatory landscape for target assets must be thoroughly understood and taken into account. Depending on what the asset is, various forms of government approval may be needed or if you are acquiring a target company, certain combinations of businesses require prior approval from competition authorities . If an asset is located in real property, the acquisition must generally comply with land regulations; and where the target asset is subject to regulatory oversight, such as telecommunication assets, which may require certain licenses, your transaction will often need to be notified to the regulators and will be subject to their scrutiny and sometimes acceptance. It is not unusual for the parties to have to comply with other requirements, such as labour law requirements if the asset is a business that employs people. Also, any tariffs must be addressed with respect to both international or national situations.

The Significance of Engaging Legal Professionals

The above checklist is designed as a high-level overview of the various key items contained in an asset purchase agreement. However, despite the thorough nature of the checklist, the above provisions will not be exhaustive or appropriate in every single potential transaction. Furthermore, this checklist does not highlight all of the other important issues in any purchase and sale transaction, such as due diligence requirements, purchase price, representations and warranties, indemnities, etc. It is critically important to consult legal and financial advisors to ensure that all legal and financial terms meet the needs of all the parties for the transaction to be a success.

Finalizing the Asset Purchase Agreement

The closing of the asset purchase agreement is the point in time where the buyer pays the purchase price to the seller, receives the assets of the business from the seller, and an assortment of other legal documents are signed to accomplish the sale, with the intent of transferring the business of the seller to the buyer.
In our template asset purchase agreement, closing is defined as occurring at 5 p.m. on the date on which all of the conditions of closing in Section 4.1 of the agreement have been satisfied (buyer’s conditions) and all of the conditions of closing in Section 4.2 of the asset purchase agreement have been satisfied (seller’s conditions), or, if on that date that any conditions of closing have not been satisfied, on such subsequent date as the buyer and seller may mutually agree, so long as the conditions are satisfied and the seller delivers the closing deliverable at or before closing.
Notice that the agreement does not define, or give any guidance for determining, the conditions to closing that must be satisfied.
We will address those in another section of this article.
At the closing, the buyer pays the seller for the business and the seller freight transfers the assets to the buyer.
The buyer and seller also sign legal documents necessary or appropriate to confirm the sale , such as a bill of sale, a deed for real property acquired by the seller, an assignment of contracts, a non-competition agreement with the seller and/or owner(s) of the business, and release of liabilities for any obligations of the seller to the buyer.
If real property is involved, the deed is given by the seller and delivered to the buyer, along with any keys to the business operated on the property.
The purpose of the bill of sale, deed and other documents is to assign or transfer the seller’s interest in the property and rights to the buyer.
Once the bill of sale, deed and other documents are delivered to the buyer, they should be reviewed for correctness, including:
After the documents are reviewed, the buyer should return copies to the seller and lender. The seller should be directed to hold the originals in escrow, pending closing.
Prior to closing, the buyer and seller must establish procedures for exchanging funds and transferring property. If bank wire is used, arrangements must be made with the banks involved.
After closing, the buyer must verify that it has received the assets purchased.