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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Types of Defaults: Material vs. Non-Material Breach

Not every breach of an asset purchase agreement entitles the non-breaching party to terminate the deal. Most well-drafted APAs distinguish between “material” breaches — those that go to the heart of the transaction — and technical or incidental breaches that do not. A failure to deliver a required notice by the contractually specified time may be a technical breach; a seller’s failure to deliver title to the core assets is almost certainly a material breach.

The definition of “material breach” is itself often a subject of negotiation. Buyers typically want a broad definition that gives them maximum flexibility to walk away from a deal if anything goes wrong. Sellers typically want a narrow definition with a cure period that gives them time to fix problems before the buyer can terminate. A typical compromise includes a cure period — often 15 to 30 days — during which the breaching party has the right to remedy the default before the other party can exercise its termination right.

Earnest Money and Liquidated Damages

The treatment of the earnest money (or deposit) in the event of a default is one of the most commercially significant provisions in any APA. There are three common approaches:

• Seller keeps deposit as liquidated damages — if the buyer defaults, the seller retains the deposit as the sole and exclusive remedy; this approach benefits buyers (who know their maximum downside) but may undercompensate sellers on large transactions
• Buyer forfeits deposit; either party may seek additional damages — the deposit is forfeited but is not the exclusive remedy; the seller can also pursue actual damages exceeding the deposit amount
• Deposit returned to buyer on seller default — if the seller defaults, the buyer gets the deposit back and may also pursue specific performance or actual damages

In transactions involving high-value assets, liquidated damages clauses are generally enforceable if the amount is a reasonable estimate of actual damages at the time the contract was signed. Courts will strike liquidated damages provisions that are so large as to constitute a penalty rather than a genuine pre-estimate of loss.

Specific Performance as a Remedy

In some asset purchase transactions — particularly those involving unique assets like real estate, proprietary technology, or exclusive licenses — the non-breaching party may prefer specific performance over money damages. Specific performance is an equitable remedy that compels the breaching party to actually complete the transaction rather than simply paying damages.

Courts have generally been willing to grant specific performance in APA transactions involving unique assets where money damages would be inadequate. However, specific performance requires the requesting party to demonstrate that: (1) the contract is valid and enforceable; (2) the requesting party has performed or is ready to perform; (3) money damages are inadequate; and (4) the balance of equities favors specific performance. Buyers purchasing unique business assets — such as a sole-source supplier relationship or a proprietary software platform — should negotiate an explicit right to seek specific performance in the default provisions.

Force Majeure and Casualty Events

APAs frequently contain separate provisions addressing “casualty events” — the substantial destruction of the purchased assets by fire, flood, or other unforeseen event before closing. These provisions are distinct from the default provisions and typically give the buyer the option to either: (a) terminate the agreement and receive its deposit back; or (b) proceed to closing at a reduced purchase price reflecting the damage.

Post-COVID, many buyers are also negotiating “material adverse change” (MAC) or “material adverse effect” (MAE) clauses that allow the buyer to walk away if the target business suffers a significant adverse event between signing and closing — such as the loss of a major customer, the commencement of material litigation, or a pandemic-level disruption to the business. These provisions are the subject of significant litigation and require careful drafting.

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If you have questions or need legal advice, contact the experienced attorneys at Revision Legal. Our team handles business contracts matters for businesses and individuals nationwide. Call us at (855) 473-8474 or use the contact form on our website.