Asset/Business Sale Agreements

July 2010

Following on from last month’s share sale documents, this month sees the launch of a completely new sub-folder of documents containing everything you need in order to complete a transaction involving the sale of a business by the sale of it assets and undertakings (also known as a business sale).

All the steps are covered from the initial discussions where the seller may wish to protect its trade secrets and know how with a Confidentiality Agreement. Equally, the potential buyer may wish to avoid spending considerable amounts on instructing advisors and investigating the target business only to find that the shareholder(s) have entered into discussions in respect of an assets sale agreement or a share sale agreement with a third party and so may insist on an Exclusivity Agreement.

The Heads of Terms are used during early negotiations when the parties have agreed the principal terms of the agreement and wish to put them in writing to identify any pitfalls and avoid future misunderstandings. This will avoid wasting time and costs.

The Legal Due Diligence Enquiries are usually sent by the Buyer’s solicitors to the Seller’s solicitors to assist in investigating the business to be purchased. The Buyer’s solicitors will then report back to the Buyer before a legally binding agreement is signed. This will enable the Buyer to “cherry pick” the assets and liabilities it wishes to acquire.

The Assets Sale Agreement Comparison matrix explains the main features of each of the Assets Sale Agreements. The four agreements that contain a Guarantee would typically be used where a holding company is selling the business of its subsidiary and the Buyer has demanded a guarantee. The holding company will act as guarantor for the obligations of its subsidiary. The Buyer may demand a guarantee because, if the Seller has no more assets after the sale, it may be wound up or the cash may be returned to the shareholders. The Buyer would then have no recourse for a breach of warranty. The four agreements that do not contain a Guarantee would typically be used by a single company selling its business. However, the Buyer may still insist on personal guarantees from the individual shareholders.

The Disclosure Letter should be issued by the Seller shortly before Completion of the sale and purchase of the business and will be closely linked to the warranties given in the Assets Sale Agreement.

The Completion Checklist assists the parties at the Completion meeting by setting out which documents are required and who is responsible for producing each one.

The Board Minutes of the Buyer and Seller are used to record the respective meetings of the boards of directors of the Buyer and Seller each approving the transaction.

The Deed of Assignment is required to formally assign the Books Debts (if applicable), Contracts, Goodwill, Intellectual Property and Seller’s rights against third parties which are sold under the assets sale agreements. It will be exchanged at Completion.

The Deed of Release from a Charge is used when any one or more of the assets used by the Seller in the business which are being sold have been used as security for loans, debentures or mortgages and are subject to fixed charges. If the asset(s) are not released from the fixed charge(s) then the Buyer will acquire them subject to the charge(s).

The Letter Confirming Charge has not Crystallised is required when there is a floating charge over the assets of the business being sold. The Buyer will want to be certain that the floating charge has not crystallised and that the holder of the floating charge has not taken steps to crystallise the floating charge. Otherwise the floating charge will become a fixed charge and attach to the assets and the Buyer will acquire the assets subject to the fixed charge.

A Novation Deed is used because English law allows the benefit of a contract (i.e. payment or receipt of goods or services) to be assigned but the burden (i.e. obligations) cannot be assigned without the consent of the other contracting party. The assets sale agreements state that the parties will use reasonable endeavours to obtain third party consent for the contracts assigned under it. However, a novation deed ensures certainty because the Buyer, the Seller and the other contracting party enter into a tripartite agreement where the Buyer steps into the shoes of the Seller and the Buyer will usually assume liability for the obligations of the Seller at the point of novation.

The contents of this Newsletter are for reference purposes only and do not constitute legal advice. Independent legal advice should be sought in relation to any specific legal matter.