List of Essential Items for a Business Acquisition Contract
In the dynamic world of business, expanding beyond national borders is a strategic move for many companies. This article, penned by a seasoned Mergers and Acquisitions (M&A) lawyer, offers valuable insights into the process of selling assets to foreign entities, with a focus on asset sales from US companies.
The blog post outlines various types of transactions and provides a template for an agreement for asset sales. It emphasises that by purchasing assets rather than stock, buyers can avoid assuming pre-sale liabilities.
Key clauses in purchase and sale agreements, applicable to LLCs, corporations, partnerships, and sole proprietorships in the United States, typically include provisions covering payment structure, seller’s warranties, indemnification, non-compete clauses, offset clauses, and appendices with supporting documents.
Payment Structure
The payment structure specifies the purchase price, payment method, closing date, and any price adjustments based on due diligence or asset valuations. Payments can involve financing, promissory notes, down payments, escrow, and a closing date.
Seller’s Warranties and Representations
Including affirmations about the company’s legal status, ownership of assets, compliance with laws, accuracy of financial statements, absence of undisclosed liabilities, pending litigation, and the seller’s authority to sell, seller’s warranties and representations are crucial in ensuring the buyer's confidence.
Indemnification
Indemnification clauses define the seller’s obligation to compensate the buyer for losses arising from breaches of warranties or undisclosed liabilities. They allocate risk for specific losses or claims occurring before or after closing.
Non-Compete and Restrictive Covenants
Non-Compete, Non-Solicitation, and Non-Circumvention clauses prevent sellers from competing with the buyer after the sale, protecting the buyer's investment and goodwill. These clauses must be reasonable to be enforceable.
Offset Clauses (Purchase Price Adjustments)
Offset clauses provide mechanisms for adjusting the purchase price post-closing based on working capital, debts, or other financial reconciliations, helping align price with the actual condition of business assets or liabilities.
Conditions Precedent
Conditions Precedent lists required approvals, permits, and consents needed for closing, along with any rights of the buyer to waive certain conditions.
Covenants
Covenants are binding promises by parties to act (or refrain from acts) before or after closing, such as operating the business in the ordinary course, maintaining assets, or assisting with tax filings post-closing.
Confidentiality
Confidentiality clauses obligate parties to keep transaction details and sensitive business information confidential for a specified period, often 18 months to two years.
Dispute Resolution
Dispute Resolution specifies methods for resolving disputes arising from the agreement, commonly including arbitration or mediation clauses.
Appendices and Schedules
Appendices and Schedules include detailed lists of assets, liabilities, contracts, employee information, permits, intellectual property, and other relevant documents that support representations and warranties.
In summary, comprehensive purchase and sale agreements in the U.S. business context standardly incorporate these key clauses to allocate risks, define obligations, protect parties’ interests, and facilitate smooth transitions in ownership. Expert legal counsel is essential to tailor these clauses to the specific transaction and jurisdiction to ensure enforceability and completeness.
Foreign and domestic businesses often use acquisition vehicles to enter the US market. Understanding the three most common acquisition vehicles for US businesses – stock purchase, asset purchase, and statutory merger – is crucial in navigating the M&A landscape. In M&A transactions, it is important to address tax considerations in agreements. The agreement for asset sales from a US company to a foreign entity may include schedules of inventory, all indebtedness and liabilities, and a business sale price payment schedule.
In the article, it is suggested that foreign entities may prefer asset sales from US companies due to the possibility of avoiding pre-sale liabilities. Consequently, the payment structure is crucial in specifying the purchase price, payment method, closing date, and any adjustments.
When it comes to seller’s warranties and representations, they should affirm the company’s legal status, ownership of assets, compliance with laws, accuracy of financial statements, absence of undisclosed liabilities, pending litigation, and the seller’s authority to sell, as they are essential in ensuring buyer's confidence.
