In general, there are two methods of acquiring a business: a straight purchase (often called a stock purchase) or an asset purchase. One of the main advantages of an asset purchase transaction is the buyer’s ability to avoid taking on or accepting any of the seller’s liabilities. Indeed, obtaining assets needed or useful to your existing business (or to a start-up business) that are free and clear from any attached seller liabilities is often the main goal of structuring a deal as an asset purchase. In common parlance, the buyer’s goal is to avoid “successor liability,” which can happen if creditors and other claimants convince a judge — in some future-filed litigation — to deem the transaction as a straightforward business purchase.
If some future judge is asked to decide about successor liability, a very important factor is whether, in reality, the buyer took control of “substantially all” of the seller’s assets. In turn, this factor is impacted by how the Asset Purchase Agreement (“APA”) is drafted. The APA must, of course, be entitled to an “Asset Purchase Agreement.” More importantly, careful focus must be on how the “assets” are defined and the APA should clearly identify the fact that NOT all of the assets are being transferred to the buyer. The buyer should be purposeful in leaving assets with the seller, and the purchase price should reflect that fact.
Thus, one good drafting strategy is to clearly set out the assets and liabilities in four parts:
- Assets included
- Assets excluded
- Liabilities assumed by the buyer and
- Liabilities retained by the seller
Each of these parts should have some substantial content. It is useful to include various “assets” that the parties know to be nonexistent, such as “office furniture” or “real property.” This all helps to bolster the fact that this transaction IS an asset purchase agreement when/if the transaction is reviewed in some future-filed litigation.
For example, if we think of a hypothetical commerce asset purchase, the APA should have these four sections. The “assets included” might be things like the seller’s website, the domain name, actual inventory located at a certain address, etc. The “assets excluded” section might be quite lengthy, including items like:
- All accounts receivable, cash, and cash equivalents held by the seller as of the Closing Date
- All bank and financial accounts
- All online platform accounts, authorizations, and codes
- Merchant accounts and use authorizations
- All insurance policies, including rights to assert claims thereunder
- Any inventory located at the seller’s office location, if any, including all bulk inventory, existing finished quantities, work in process, raw materials, constituent substances, materials, stores and supplies, trade and sample inventories
- Any office furniture, business equipment, real property, leasehold interests, personal or real property owned by seller’s principals and owners, if any, etc.
- Any of the seller’s know-how, business methods, and trade secrets, if any, owned by the seller or their principals and owners (unless specifically included on Schedule A of assets included in purchase)
- Seller’s corporate books, tax returns, and right or claim to tax refunds, if any
- Seller’s right, title, and interest in and to all Contracts, if any, being transferred to buyer
As can be seen, this hypothetical APA clearly details that the seller is NOT selling all of the assets of the e-commerce business.
A similar level of detail can be drafted for the two liability sections.
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