Business transfers can be structured in a variety of ways. There may be reasons to choose to transfer all or part of a business in the form of an asset/liability transaction.
The asset/liability transaction differs from an equity transaction. In this expert post, I will explain why you would choose that mode of transfer and what concerns exist when drafting a purchase agreement.
Equity transaction vs. asset/liability transaction
The status quo prior to the sale is often as follows. The business is operated by a corporation. The shares in the company's capital are held by the seller. It is then possible to transfer ownership over the company in two ways, namely through (i) a share transaction or (ii) an asset/liability transaction.
In an equity transaction, the seller transfers ownership of the business to the buyer by selling its shares in the company.
In an asset/liability transaction, something different happens. The objects of the sale are the assets (and possibly liabilities) defined in the purchase agreement. Thus, the buyer does not become the new shareholder of the company, but only buys from the company the assets/liabilities he wants. Thus, the buyer does not enter into the purchase agreement with the shareholder but with the company that owns the assets.
The advantage of an asset/liability transaction is that the buyer can cherry pick. He can choose which assets/liabilities are purchased from the business. This avoids the buyer having to do extensive research on the history of the business. The buyer's research focuses specifically on the assets and liabilities to be acquired. The buyer therefore runs a more limited risk for (un)known (tax) liabilities of the company from the past. In addition, an asset/liability transaction is also a way to shape a carve-out in which specific assets are purchased from a company prior to the actual (share) transfer, so that they remain with the seller and do not transfer with the company to the buyer.
Obviously, this form of transaction also affects the agreements that the parties lay down with each other in a purchase agreement. I will list a number of points of attention for the purchase agreement.
Assets/liabilities
It is important to focus in the purchase agreement what assets/liabilities are being transferred. Assets can include inventory, stock, buildings, intellectual property rights.
The buyer may also wish to take over certain agreements and related obligations (read: liabilities) from the seller. Examples are a rental agreement or other long-term agreements. Liabilities must also be clearly described in the purchase agreement.
For the buyer, it is further important that the assets are in good condition and not encumbered with limited rights. Thus, in the purchase agreement, the parties will agree on the warranties (and possibly indemnities) that the seller gives with respect to the assets/liabilities.
Delivery acts
Different delivery requirements may apply to the transfer of assets/liabilities. In the purchase agreement, the parties regulate how the assets/liabilities will be delivered. If the delivery requirements are not met then the buyer is also not the owner. By comparison, the delivery of shares in a limited liability company takes place through the execution of a notarial deed. Thus, in a share transfer, the time of delivery is clear.
Inventory and stock are delivered by providing possession to the buyer. For certain assets, such as intellectual property rights but also automobiles, the delivery must also be registered. Parties would be wise to agree on the registration (and its costs) in the purchase agreement.
When the buyer takes over agreement(s) from the seller, it is done through contract assumption. A contract takeover requires the cooperation of the seller and the other contracting party. It is important to identify this in a timely manner and notify the contracting parties to avoid unexpected surprises.
Transfer of business
The buyer may not intend to take over the company's employees as well. However, the law mandatorily prescribes that in a transfer of undertaking the employees (and the rights and obligations under their employment contracts) are transferred to the buyer by operation of law. There is a transfer of undertaking if, in short, (part of) the undertaking is transferred and is also continued. It is therefore worthwhile for the buyer to seek advice on this and, in the case of the acquisition of the employees, to investigate the employment contracts of the employees.
Conclusion
In some cases it is more appropriate for the parties to transfer a company or part of it by means of an asset/liability transaction. It is then important to seek (legal) advice on the arrangements in the purchase agreement to avoid loose ends.
