There are many reasons that an asset purchase transaction might “fall through” and not close. Some of these are internal or external. Examples of the former are the Seller’s inability to deliver all the assets or the disclosure during due diligence of something unforeseen and unacceptable to the buyer. Examples of the latter are the failure of the buyer’s financing or the failure to obtain a necessary third-party approval. Further, reasons for any default can be attributed to the buyer, the seller, or to neutral causes such as an Act-of-God destruction of the relevant assets. For these and other reasons, every Asset Purchase Agreement contains provisions related to default.
An Agreement’s default provisions can be simple or complicated depending on what the parties negotiate and how complex the transaction is. The basic issues are:
- Type of damages that can be sought in the event of default — money damages, injunctive relief, specific performance, etc.
- What happens to the earnest money?
- Circumstances under which relief can be sought — party default vs. casualty event, materiality of the breach, etc.
- Which party is entitled to terminate the Agreement, and under what circumstances?
- After termination, which party is entitled to seek relief for the default?
Below is an example of a simple default provision applicable to both parties providing resolution of the earnest deposit question:
“In the event that one party fails to comply with all of the terms and conditions of this Agreement or otherwise defaults, the other party, at its election and upon proper Notice, may terminate this Agreement on or prior to the Closing Date. In the event of Seller’s default and termination by Buyer, Buyer shall be entitled to return of the Ernest Deposit in full. In the event of Buyer’s default and termination by Seller, Seller shall be entitled to retain the Ernest Deposit in full. In the event of default, both parties are entitled to seek any relief allowed by Law or Equity.”
As noted above, default provisions can be as simple or as complicated as the parties negotiate. A default provision can also be entirely one-sided. The seller, for example, might be given the power to seek any relief, but the buyer’s remedies might be limited to keeping the earnest deposit money.
Note that there may be other default provisions “hidden” in other parts of the agreement. For example, there is often a separate provision that provides for what happens in the event that the assets are substantially destroyed by fire or other casualty event. Often, those clauses reference the Seller’s insurance proceeds and grant the Buyer various options such as termination, going forward with the transactions “as is,” etc. In addition, if there is a part of the agreement that relates to confidentiality, non-disclosure ,and/or non-compete covenants, there will be distinct default provisions related to those narrow issues. And the parties may negotiate different terms for the different issues. For example, the parties could agree that no injunctions or other equitable relief would be available for default of the main agreement, but agree to allow injunctive relief related to a covenant not to compete.
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