The article is written by Abhishek Dubey, a 2nd-year law student from Chanderprabhu Jain College of Higher Studies and School of Law. This article discusses the details about the essentials of an Asset Purchase Agreement and also the common mistakes made by people in Asset Purchase Agreements.  

Introduction

The Asset Purchase Agreement is an agreement between the seller and the purchaser of assets. In an Asset Purchase Agreement, the individual value of assets is assigned and the seller transfers the assets to the purchaser.

The assets transferred in an asset purchase agreement include: 

• Plant and machinery.
• Goodwill.
• Stock.
• Premises etc.

Advantages of the asset purchase agreement

• It gives the buyer a choice to purchase the particular asset which he wants to buy.
• It gives a choice to the seller to decide the fair market value of assets.

Disadvantages of the asset purchase agreement

• The tax imposed on the seller is high and so the seller may insist on receiving a higher price.
• If the assets are sold, the employment agreements with key employees may have to be renegotiated.

Essentials of an Asset purchase agreement

Sale and transfer of specified assets

The seller agrees to sell, assign, convey and transfer the specified assets. The transfer of assets should be free from liens and liabilities to the purchaser. If the purchaser agrees to buy on those terms, all duties, obligations, and liabilities attached to the assets shall be borne by the purchaser under the contract. As specified in the contract, title and risk shall be transferred to the purchaser. The seller shall also transfer the royalty fee and all intellectual property attached to the asset. This will be specified in the license agreement.

Purchase price

The purchase price payable for the assets shall be a lump-sum amount and it shall be paid by a bank draft or by telegraphic transfer. The way of transfer of price has to be notified by the seller to the purchaser prior to five days of closing of the agreement. In this agreement, the purchase price may be deducted and set off. Apart from the purchase price, no other price is to be paid by the purchaser like conveyance charges, taxes etc. And the purchase price shall not be subjected to an escalation. The purchaser shall be responsible for any tax payable after the transfer of assets and if there is any existing liability attached to the assets, then it should also be transferred beforehand.

Representation and Warranties

The seller represents that the statements contained in the agreement are true and shall remain true to the closing date. The buyer also represents that the statements contained in this agreement are true.

Condition Precedent

The obligation of the purchaser shall be subject to the schedule contained in the asset purchase agreement. The content of the schedule can be negotiated as per the requirement of the parties.

Conduct before the closing of the agreement

During the period of transaction from date of agreement upto the date of closing of agreement, the seller shall carry out its business in the same manner as earlier, pay its debts and taxes when due, pay or perform the other obligation when due.

Closing

The closing of the agreement shall be made in accordance with the terms of the agreement. Prior to closing, the seller shall give all notices and documents of an asset to the purchaser. The closing condition may be waived off by purchaser and eagerness to close may lead to a problem if due diligence has been performed inadequately. Closing of the agreement includes the delivery of the certificate and other deliverable instruments by the seller to the purchaser.  

Post-closing obligations

On and after the closing of the agreement, the seller shall be obliged to promptly deliver any notice, payment, and information to the purchaser in relation to the business he receives.

The seller agrees that on and after closing of the agreement, it shall not cause its affiliate, associate, whole-time director directly or indirectly engaging in any of the following activities:

• The business of the purchaser.
• The use or disclosure of client or intellectual property database and any other confidentiality of information.
• The solicitation of any customer or supplier to terminate or otherwise modify their relationship with the business.

The purchaser also agrees that on and after closing, it shall not cause its affiliate,associates, whole-time director to directly or indirectly to engage in any of the following activities such as:

• The Business of the seller. 
• The use or disclosure of client or intellectual property database and any other confidentiality of information.  

Conditions subsequent

Within 30 days before termination of the agreement, the seller shall apply for and receive the consent of the party on terms favourable to the seller. If the seller has not taken the consent of another party, then all the liabilities arising in relation to the contract in future shall be transferred to the seller, by default and the seller shall discharge his obligations for the same. Regional provident fund of employees shall be transferred to the purchaser and the same shall be informed by the seller to regional provident fund commissioner. 

Indemnification

Seller agrees to indemnify the purchaser on instances such as losses, penalties, suits, etc. 

Procedure for indemnification is as follows:

• The indemnified party shall give notice to the indemnifying party specifying details and amount of assets in good faith.
• The indemnified party and indemnifying party shall consult with each other and if there are any changes required, the same shall be made in a mutually acceptable manner and in good faith.
• With respect to the claim between the parties, the indemnifying party shall notify the indemnified party about the claims in assets after the transfer within 15 days and the indemnified party shall give notice and documents related to that claim to indemnifying party.
• If the indemnified party disputes the claim, the indemnifying party without prejudice may apply to the court or tribunal for setoff, deduction and any payment etc.
• If any third party claims against the assets arises, the indemnified party shall notify it to the indemnifying party and the indemnifying party shall make the statement in good faith for the choosing of assets. This will be done in front of counsel chosen by the indemnifying party and counsel should be satisfied with the statement made by the indemnifying party.
• If the indemnifying party doesn’t respond to the notice made by the indemnified party within thirty days then the indemnified party can act on behalf of the indemnifying party.
• If the indemnifying party dispute the claim, the indemnified party without prejudice can go to the court or tribunal for the claim and that shall be entitled to claim set-off price.
• The indemnification rights of parties are independent and in addition, some other rights and remedies are also available to the parties as prescribed by law.

Terms and termination

This agreement between the parties shall be executed from the date of execution by both parties. Also, the agreement may be terminated before closing:

• With mutual consent of purchaser and seller.
• By purchaser, upon written notice to the seller if there has been a breach of warranty.
• By purchaser in the event that the seller becomes insolvent or bankrupt.

Miscellaneous

The seller shall not assign the agreement to any of the other parties such as their son or daughter and any other relative of the seller without the consent of the purchaser and the purchaser can assign the agreement to any other party after giving notice to the seller.

This agreement shall be governed by the law in India and shall be subject to the jurisdiction of Indian courts.

The parties should agree that any dispute arising out of this agreement shall be settled by the arbitration and both parties should appoint the arbitrator by mutual consent.

All the notices, documents, and other information shall be delivered between the purchaser and seller in writing. This agreement may be modified and supplemented by a written instrument executed by the parties. If any provision of this agreement becomes unenforceable or invalid such provision should be interpreted as broad as to make it enforceable. There shall be no delay or omission in the exercise of any right, power or remedy accruing to the purchaser upon any breach or default of seller under this agreement.

All parties to the agreement shall pay all costs, expenses subject to the negotiation, execution, and delivery of this agreement.

Common mistakes in the asset purchase agreement

In the asset purchase agreement people fail to take even the basic steps which protect their interests and rights. So the asset purchase agreement should be well-drafted to execute a deal.

Entering into a deal with the wrong person

The best-drafted asset purchase agreement will be of no use when the deal is with an incompetent and fraud person. Therefore, critical due diligence is required to be performed, critical due diligence includes:

• Review of books for the past five years.
• Interviewing customers and partners.
• Checking if any proceeding is against the seller.
• Making things clear about secured and unsecured debt.

It gives an idea about the details of the seller.

Essential parties are not part of the asset purchase agreement

In an asset purchase agreement, it often happens that the shareholders of the company buys the assets themselves but sign it in the name of another company and treat themselves as the owner of the company.

Failure to identify and address essential condition of the deal

Condition precedents (condition relating to the agreement) are important terms and conditions between buyer and seller. Any event occurring during the transaction must be resolved before the transaction gets completed. Buyer and seller have to ensure that all the conditions mentioned in the asset purchase agreement are properly addressed such as:

• Bank approval. 
• Approval from the authorities.
• Third-party approval etc.

Failure to specify a “long stop date” in the agreement

Longstop date gives both parties an exit opportunity if the delay becomes unsuitable for them. It often happens that a deal between the buyer and seller can be delayed from a week to a month. In that situation, both buyer and seller should specify the long stop date in their agreement.

Failure to agree on necessary financial adjustment 

In some deals, the buyer includes post-acquisition adjustments in their agreement to protect themselves. Upon completion of the transaction, the accountant of the buyer finalizes the account and determines the net asset value of the company to decide whether the price paid for the purchase of assets was favourable or not. If the price is greater than the market value, the buyer will be granted a chance for reconciliation. An alternative to post-acquisition adjustment can be a “locked box” in which the seller makes a detailed commitment.

Failure to specify closing requirements

An asset purchase agreement should specify the detailed action to be taken and detailed documents to be submitted after the closing of the agreement. For example, change of bank and regulatory signatories, a charge of customer and financial records, original documents and regulatory approval. This also includes escrow under these agreements.

Failure to protect against competition from seller

Any buyer should not forget to include a non-competition clause in their agreement so that the seller is not able to compete with the buyer in future. The terms and conditions of non-competition should be such that, the seller should not hire the key professional of the purchaser and should not attract the customer of the seller.

No effective dispute resolution system

In asset purchase agreements, arguments over money are very common. This problem could be solved by having an expert settling the dispute.

Not hiring lawyers for review, negotiation and drafting of the asset purchase agreements 

The asset purchase agreement is a very complex deed. It requires an expert and knowledgeable attorney who can not only draft the agreements but can also negotiate the deal as well. Many people do not want to hire lawyers for the drafting of agreements, but after the transaction they regret it. Hiring a professional to negotiate and review is the very first step towards closing the deal.

Conclusion

An asset purchase agreement is a must for ensuring that  the party gets the highest value from the sale or purchase of assets. In addition, all the terms of the contract are reviewed and the parties can derive maximum benefits. Asset purchase agreement is an agreement between the seller and purchaser for sale and purchase of assets. The asset purchase agreement can be used by the seller or a purchaser for the purchase of all or a portion of assets. If the agreement between seller and purchaser is for sale of portion of assets then agreement will specify those particular assets. 

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skill.