Dealing with a Business Rescue headache? What is an Asset Purchase Agreement and how do you get negotiations to play in your favour?In previous articles in this business rescue series, we have looked at the current economic climate affecting businesses, how to fund the acquisition of assets of a company that has entered administration with a view to rescuing it and demonstrated just how to conduct legal due diligence on a distressed company so that a buyer is aware of the legal risks if it completes the acquisition.After sourcing funds and completing due diligence a buyer is likely to be required to enter into an asset purchase agreement (APA) with the administrators after they have been appointed to manage the distressed company’s affairs.
What is the purpose of the Asset Purchase Agreement (APA)?The APA is the main contract under which the assets of the Distressed Company are bought by the buyer, although there may be additional documentation to support the business rescue process such as an assignment of rights in any intellectual property that is being sold to the buyer and a new licence or lease between the buyer and the Distressed Company’s landlord.Some clauses that appear in an APA will be familiar to buyer’s that acquire assets in a ‘usual’ Mergers and Acquisitions transaction, and some will be new or different.
Common Clauses in an APA• Purchase Price: how much is the buyer paying for the assets and is 100% of the purchase price being paid upfront or will there be any deferred element?
• Stock: it is advisable for a buyer to request sight of any stock that is being acquired (particularly if it is perishable) during due diligence and itemise the different types and quantities of stock in detail in the APA. Broad references to ‘stock held at X, Y or Z location’ should be avoided by the buyer so that any discrepancy in stock levels that are discovered post-completion can be successfully argued.
• Intellectual Property: does the buyer want to purchase and exploit any trademarks, domain names, confidential information, goodwill, or trade secrets that the Distressed Company owns? The IP being acquired needs to be listed in the as this can prevent separate claims of ownership regardless as to whether the IP is registered or unregistered.
• Business Contracts: the buyer should ascertain the commercial risk of providing/receiving goods and/or services under supplier contracts and customer contracts during the due diligence process. The buyer’s legal team may be required to negotiate whether the buyer or administrator should have the benefit of any prepayments made to suppliers or by customers for goods or services that have not been provided at completion.
• Retention of Title: if suppliers of goods to the distressed company have well-drafted commercial contracts the buyer may notice during due diligence that those terms include retention of title clauses that confirm the legal ownership of any goods supplied to the Distressed Company does not pass until all goods supplied by that supplier have been paid for in full. The buyer is rarely able to negotiate such clauses but should be advised of the potential impact of any stock that it buys for which the supplier has not been paid as a retention of title claim may be brought by the supplier in question.
• Administrators Liability: administrators will not generally agree to any degree of personal liability as they may not know everything about the Distressed Company and the buyer usually acquires the assets at a discount due to the short timeframe to completion, however, there are arguments that the buyer’s legal team can make to negotiate such clauses.
ConclusionAs the acquisition of assets from a Distressed Company is generally completed under tight timeframes it is important that the buyer clearly states to its legal team what assets are to be bought and that the legal team digests the terms of the APA quickly and negotiates the best deal for its client.
Our next article will explore how a buyer can limit its legal risk in relation to any property that will transfer to the buyer under the terms of the acquisition.
At Glenville Walker we are expert at identifying the risks and opportunities presented by an APA. If you would like any help and advice, please contact our specialist corporate and commercial team on 0151 305 9650 or email email@example.com
This article is not intended to be interpreted as advice.