When sell a business, the seller is generally expected to provide certain warranties and indemnities to the buyer. If a warranty is subsequently found to be false or if a risk for which an indemnity was provided materializes, the buyer will want to recover damages from the seller.
However, the seller is usually a holding company that is not economically active, and the purchase price received will quickly be paid out to the underlying shareholders. To prevent the seller from having no assets to cover the loss, a buyer often requires the seller to provide security.
There are various forms of security, such as a bank guarantee or withholding a portion of the purchase price from the notary's bank account (the amount is then "in escrow"). This contribution discusses another form of security: the asset conservation declaration.
What is an asset conservation statement?
An asset conservation declaration is, in fact, exactly what the name suggests: a declaration by the seller that he will maintain a certain asset. The seller undertakes to the buyer to keep a portion of the purchase price available for a specified period of time. The seller is often allowed to invest the amount so that the seller can make a return on the money, as long as it can be quickly converted back into cash.
In addition, the underlying shareholders are required to make up any deficit immediately; after all, they determine what happens to the money in the holding company. Typically, this means that the seller's shareholders are jointly and severally liable or surety for the seller's obligations under the asset maintenance statement.
Why choose an asset conservation statement?
The asset conservation statement is one of the least burdensome forms of security a seller can provide. The bank guarantee and escrow are costly because the bank or notary charges fees for these services. Currently, in addition, the cost of negative interest is passed on.
In addition, the seller cannot use the money to invest. The asset preservation statement, on the other hand, is relatively inexpensive, and the parties also get to decide the content.
What should you look for in an asset conservation statement?
The asset conservation statement should be proportionate to the purchase agreement. For example, the amount of the amount to be maintained is often related to the seller's maximum liability (the "cap") for the general warranties, and the term is related to the period during which claims for damages for breach of the warranties can be made.
It is important to a buyer that the amount can be made available as cash within a short period of time to satisfy a claim. Thus, the buyer will want regular insight into the amount and use of the money and will want that recorded in the asset maintenance statement.
A seller will need to pay attention to the fact that private liability is often required of the seller's shareholder in the event the seller fails to meet its obligations under the asset conservation statement. If the shareholder is married, the consent of the spouse or registered partner will be required to enter into the private joint and several liability or surety bond issued in connection with the asset conservation statement. For both parties, it should be very clear what should happen when the buyer makes a claim. Can the seller dispute the claim and refuse payment? What if another claim is made just before the end of the term?
The trick is to write the asset conservation statement in such a way that it provides the buyer with the desired security while at the same time minimizing the burden on the seller and his shareholders. Finally, the asset preservation statement should contain a clear roadmap of everyone's rights and obligations so that it does not itself become a breeding ground for disputes.
