Stay ahead with key terms and conditions of an asset purchase agreement, including due diligence, assumed liabilities, and covenants.
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An Asset Purchase Agreement (APA) is a legal contract that contains the terms and conditions under which a buyer agrees to purchase specific assets of a company, such as intellectual property rights, equipment, machinery, businesses, and licenses.
Asset purchase agreements are flexible, which makes them unique for each deal, wherein they can be made to purchase the entire business or specific assets from the seller. The primary purpose of any APA is to clearly define which assets are being transferred, how much the buyer will pay for them, and under what conditions the transaction will close.
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Key terms and conditions of an asset purchase agreement
Basic structure of an asset purchase agreement
What are key terms and conditions of an asset purchase agreement?
APA allows the buyer to specify assets it wants while leaving unwanted liabilities behind with the seller. This targeted approach often makes APAs less risky and more flexible for both parties, particularly when the buyer seeks to avoid unknown or contingent obligations of the seller’s business.
We must keep in mind the following key terms and conditions while drafting an APA to ensure that the agreement fits what both the purchaser and the seller need:
- Purchased Assets — The agreement must keep track of the assets the buyer is acquiring, referred to as purchased assets, and which assets will remain with the seller or are excluded from the transaction.
- Representation and Warranties — The building blocks of trust and safeguard against any surprises in an asset purchase agreement. They are usually the detailed factual statements and assurances that each party makes about itself and the assets that are being sold or bought.
- Due Diligence — Usually conducted by the buyer before signing or at least before the closing of an asset purchase agreement to verify the seller’s representations and uncover any hidden risk. This usually involves reviewing financial statements, inspecting physical assets, confirming customer contracts and vendor relationships, and validating intellectual property ownership.
- Assumed Liabilities — Specifies which liabilities the buyer agrees to assume, such as in certain contracts, warranties, and other environmental obligations, and which remain the seller’s responsibility.
- Non-Competition, Non-Solicitation, and Confidentiality — Restrictive covenants that are part of post-closing covenants, which are usually the commitments that the parties agree to fulfill after the transaction closes, ensuring a smooth transition and protecting the value of assets just purchased.
What is the basic structure of an Asset Purchase Agreement?
APA is uniquely drafted as per the requirements of the purchase being undertaken by the parties. However, below is a general structure that an APA consists of.
- Title, Preamble, and Recitals — Identifies the title of the document, including the background of the transaction, the seller’s intention to sell, and the buyer’s intention to purchase the assets of the company.
- Definitions and Interpretations- Clause defines certain important terms such as “Assets,” “Excluded Assets,” “Closing,” and “Purchase Price” to ensure precision throughout the agreement.
- Sale and Purchase of Assets — Details the transfer of the specific assets, which may be tangible or intangible, from the seller to the buyer referring to the schedules of the exhibits that list them. It also confirms the non-assumption of undesired liabilities carving them out as excluded assets.
- Purchase Price and Payment Terms — Entails the total consideration paid for the purchase and the schedule of payments.
- Representations and Warranties- Seller’s representations assured that the seller has a clear title to the assets, that there are no undisclosed liens, that contracts are valid, that the business complies with laws, and that financial statements are accurate.
- Similarly, the buyer’s representation confirms the buyer’s legal authority and the capacity to close the deal, and that buying these assets won’t breach any other agreements.
- Covenants — There are primarily two types of covenants. One is a pre-closing covenant, and the other is a post-closing covenant. They are the promises about what each party must do, or avoid doing, before and after closing.
- Closing conditions — Contains the specifics of the closing date and place, and details of deliverables that both parties must provide.
- Indemnification — The indemnification provisions protect the buyer from losses due to breaches of representations, undisclosed liabilities, or 3rd party claims.
- Dispute Resolution and Governing Law — Specifies how disputes will be resolved, and which jurisdiction’s law will be applicable.
- Miscellaneous — This clause contains provisions for confirming that this document overrides prior negotiations, amendments, how notices for official communication must be delivered, and so on.
Practical tips
An APA covers aspects of corporate, tax, intellectual property, employment, and other regulatory issues. Bring on board experienced mergers and acquisition counsel, tax advisors, IP specialists, and other such professionals as soon as the deal is contemplated.
This ensures that each practical issue, whether it’s related to the purchase price allocation or merger notification, is foreseen and handled by experts. Below are some practical tips.
Review files and flag liabilities
Review the audited financials, tax filings, equipment conditions, real estate releases, and intellectual property registrations while conducting due diligence because good due diligence can flag encumbrances, change of control restrictions, or any environmental liabilities before you agree to purchase or sell.
List tangible and intangible assets
While listing down your assets and liabilities, make sure to use exhibits and detailed schedules to list every piece of tangible and intangible asset that is to be transferred or to be excluded from being transferred.
Check and comply with Hart-Scott-Rodino Act
If the deal meets or exceeds the Hart-Scott-Rodino thresholds for aggregate transaction value and party size tests, you must file pre-merger notifications with the Federal Trade Commission (FTC) and Department of Justice (DOJ) under the Hart-Scott-Rodino Act and wait for the statutory review period before closing.
Entities and individuals who violate the Hart-Scott-Rodino Act face, among other penalties, fines of up to $53,088 per day for each day of noncompliance.
Include context and intent
Clauses must reflect party intentions, define asset and liability treatment, and avoid ambiguity. In Winkler v. V.G. Reed and Sons, the court addressed whether the buyer had assumed the seller’s employment contracts under an Asset Purchase Agreement.
The agreement explicitly stated that the “Buyer shall not assume or be liable for any liability or obligation of Seller arising out of … any and all agreements of employment.” When determining whether a buyer has effectively disclaimed responsibility for a seller’s debts and obligations, courts closely examine the contract language and consider the context on a case-by-case basis to assess the parties’ true intent.
State no assumption of seller’s liabilities
Under New York law, a company that acquires the assets of another is generally not liable for the seller’s past conduct. In the case of Schumacher v. Richards Shear Co., 59 N.Y.2d 239 (1983), the court confirmed this rule but also recognized a few exceptions, such as express assumption of liability, de facto merger, continuation of the seller’s business, or fraud.
To reduce the risk of unintended exposure, the asset purchase agreement should clearly state that the buyer is not assuming any of the seller’s liabilities, including those tied to past acts or omissions.
Resources from Practical Law attorney-editors
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Standard Documents
- Asset Purchase Agreement (Pro-Buyer Long Form)
- Asset Purchase Agreement (Pro-Seller Long Form)
- Asset Purchase Agreement (Pro-Buyer Short Form)
- Asset Purchase Agreement (Pro-Seller Short Form)
