Navigating an Asset Sale/Acquisition: A Guide

BACKGROUND – WHAT IS AN ASSET?
Common types of assets that can be transferred in an asset sale include:

1. Business: the seller’s business, on a “going concern” basis.
2. Tangible assets: these are physical assets that can be seen and touched, they include:

• Real estate: land, buildings, warehouses, offices, etc.
• Equipment: machinery, vehicles, furniture, fixtures, etc.
• Inventory: finished goods, raw materials, work-in-progress, etc.

3. Intangible assets: non-physical assets that have value but cannot be touched, they include:

• Intellectual property: patents, trademarks, copyrights, trade secrets, etc.
• Goodwill: the reputation, brand value, customer relationships, and other intangible assets that contribute to the company’s value.
• Contracts and licenses: customer contracts, supplier agreements, licenses, permits, leases, etc.

4. Financial assets: these represent ownership of a claim on the assets or income of another entity, they include:

• Cash and cash equivalents: bank accounts, cash on hand, marketable securities, etc.
• Receivables: amounts owed by customers for goods or services sold on credit.
• Investments: stocks, bonds, mutual funds, etc.

5. Liabilities: certain liabilities may also be transferred as part of the asset sale, although this is less common. Liabilities may include accounts payable, accrued expenses, warranties, and other obligations.
6. Contracts and agreements: any contracts, agreements, or commitments that are necessary for the operation of the business may be transferred in an asset sale. This could include customer contracts, supplier agreements, employment contracts, lease agreements, etc.
7. Technology and software: technology assets such as software licenses, proprietary technology, and IT systems may also be transferred in an asset sale.
8. Data assets: such as customer databases. The buyer and the seller will need to clearly identify and define the assets to be transferred in the asset purchase agreement (APA).

KEY STAGES IN AN ASSET SALE/ACQUISITION

1. Pre-acquisition matters
Once negotiations have progressed enough on the key terms of the deal, parties will usually consider formalising these arrangements in Heads of terms (HOT), confidentiality agreements and exclusivity arrangements.

• HOT are also known as a letter of intent or memorandum of understanding. This is a non-binding agreement (save for specific provisions) setting out the key terms of an asset sale (such as consideration, payment mechanism, description of the asset/liabilities transferring, approach to due diligence, warranties/indemnities and a deal timetable, etc.). A negotiated HOT should make drafting/negotiating the acquisition document an easier process as the main bones of contention ought to have been covered in it.
• Confidentiality agreements aim to safeguard the information relating to the assets that is to be given to a buyer as part of the due diligence.
• Exclusivity arrangements. The buyer will often want a seller to enter into an exclusivity arrangement to prevent the seller from seeking an alternative buyer whilst the buyer incurs the costs of the transaction.

2. Due Diligence (DD)
DD in an asset sale typically focuses on identifying and assessing the specific assets and liabilities being transferred. The buyer wants to ensure that the assets being acquired are free from any encumbrances or legal issues and that the liabilities being assumed are accurately identified and quantified.

The buyer will also review contracts, leases, permits, licenses, intellectual property rights, and other relevant documents associated with the assets being acquired to understand any potential risks or obligations. If employees will be transferring, employee information will need to be considered carefully (subject to any data protection issues) to determine who and on what terms employees and workers will be transferring.

Where required, a buyer’s financial advisors or accountants generally carry out financial DD (known as FDD) and a buyer will usually carry out operational and commercial DD. Legal DD (carried out by lawyers) focuses on a review of contracts, litigation, regulatory compliance, and other legal matters, providing insight into potential liabilities.

The results of the buyer’s overall DD exercise will inform their lawyer’s approach to drafting the transaction documents.

3. The APA
The APA is the key legal document outlining the terms and conditions of the asset acquisition. In reality, this is often drafted alongside the DD exercise.

The APA should include a detailed description of each asset being sold, its value, any associated liabilities, and any specific terms or conditions of the transfer. After that, the most highly negotiated provisions in an APA are those dealing with the purchase price, warranties, indemnities and limitations (warranties and indemnities are covered in further detailed below). A more complicated APA might also include deferred payments, security for payment, apportionment of the purchase price among the assets being sold (usually for tax reasons).

It is also important to address any employee-related matters in the APA, including the transfer of employees to the buyer under the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE), and compliance with employment laws and regulations.

If there will be a gap in time between exchange/signing and completion, the APA will usually include provisions regarding conditions precedent to completion, obligations in the interim period, etc. The legal issues that may arise in a split sign/completion deal will be considered in a standalone article in this series.

a. Warranties
Warranties are assurances or statements of fact made to the buyer by the seller about the assets. These warranties typically cover areas such as title to the assets, absence of liens or encumbrances, compliance with laws (especially environmental, health and safety and anti-money laundering), absence of litigation, contracts, employees and other material information.

If a warranty in an APA is breached, it means that the statement made by the seller is found to be untrue or inaccurate. The specific remedies available to the buyer will depend on the terms of the APA, as well as applicable laws and jurisdiction. Typically though, a buyer will have several options:

• Claim for damages (generally): the buyer may seek financial compensation from the seller to cover any losses incurred as a result of the breach. The amount of damages would depend on the extent of the breach and the impact it has had on the buyer’s investment.
• Specific performance (sometimes): in some cases, the buyer may seek specific performance, where the seller is required to fulfil their obligations as outlined in the agreement. This could involve rectifying the breach or taking other corrective actions to remedy the situation.
• Indemnification (sometimes): the buyer may also be entitled to indemnification, where the seller agrees to reimburse the buyer for any losses, costs, or expenses incurred due to the breach of warranty. This would need to be specifically provided for in the APA. Such a provision is common in US deals and used to be rare in the UK but is becoming a more frequent buyer ask.
• Termination of the APA (very rarely): in severe cases where the breach is significant and fundamental to the transaction, the buyer may have the right to terminate the APA altogether. Again, this would need to be specifically provided for in the APA.

b. Indemnities
Indemnities serve as a financial safety net allowing the buyer to seek compensation, often on a pound for pound basis, for certain losses, damages, or liabilities that arise from specified circumstances or events. The indemnities are usually based on specific known liabilities discovered as part of the buyer’s DD process, such as ongoing litigation. If TUPE does apply, it may be necessary to include appropriate indemnities in the APA to apportion liabilities between the seller and the buyer.

Read our article entitled Indemnities in business-to-business contracts : A Guide for further information on indemnities.

4. Disclosure letter (“DL”)
The seller typically provides a DL, a detailed document that identifies any exceptions or qualifications to the warranties given in the APA.

Whilst it serves as a mechanism to reduce the seller’s liability (by preventing the buyer from later claiming that they were misled or unaware of certain matters), it also promotes transparency by giving the buyer detailed information about any potential risks or liabilities associated with the assets being acquired. This can also serve as a basis for negotiating adjustments to the purchase price or additional protections in the APA.

5. Ancillaries
Ancillary documents accompany the main transaction documents (APA, DL, etc.) and address various transaction-related matters. These typically include:

• Novation/assignment agreements to transfer contracts, leases, licenses, permits, and other agreements from the seller to the buyer. It typically identifies the specific contracts being assigned/novated, outlines any necessary consents or approvals, and specifies the responsibilities of each party regarding the assumed contracts.
• In situations where the seller will continue to provide certain services or support to the buyer for a transitional period after the sale, a transitional services agreement may be drafted. This agreement outlines the scope of services, duration, payment terms, data protection provisions, and other relevant terms governing the transitional period.
• If the transaction involves the sale of intellectual property rights, such as trademarks, patents, copyrights, or trade secrets, an intellectual property assignment agreement is often used to transfer these rights from the seller to the buyer.
• If real estate is included in the asset purchase, additional property documents may be required, such as deeds, leases, or lease assignments, to transfer ownership or leasehold interests in the property.
• If employees or consultants are being transferred as part of the asset sale, employment contracts or consultancy agreements may be necessary to document the terms of their employment or engagement with the buyer. Documents relating to any TUPE transfer will also need to be prepared including, information about the transferring employees (the “employee liability information”) by the seller and details of any measures to be taken in relation to the transferring employees by the buyer.
• Buyer/seller board resolutions approving the APA and the transaction documents to which they are a party and authorising the entry into those documents.
• Consider whether there will need to be some form of data sharing agreement in place.

6. TUPE/Employees
An asset purchase is likely to be subject to TUPE. If TUPE applies, the buyer will in most cases acquire all of the employees employed in the business at the time of the transfer on their existing terms of employment, together with any rights and liabilities relating to them.

If TUPE applies, it will be necessary to inform appropriate representatives of affected employees of the proposed transfer and, if it is envisaged that any measures will take place in connection with the transfer, consult with appropriate representatives.

If it will be necessary to make any redundancies or other dismissals thought should be given as to which groups of employees are affected, when the dismissals will take place and who will bear the costs. Any redundancies or other dismissals may give rise to other obligations to inform and consult. Provision may need to be made in the APA for this too.

Specialist advice should be sought on employment/TUPE matters to avoid any pitfalls during or after the transfer process.

7. Data protection
An asset sale will involve the direct transfer of personal data from the seller to the buyer, and a change in the controller of that data, and so data subjects need to be informed.

Organisations are required to keep individuals informed about certain changes relating to the processing and that they may have a right to object. Specialist data privacy advice should be sought on the specific facts of the transfer.

8. Signing/Completion
As a deal progresses, parties prepare for signing and completion. This involves (amongst other things):

• finalising outstanding issues;
• ensuring all necessary regulatory approvals are obtained, and third-party consents are secured;
• where there is a split sign/close, confirming that all conditions precedent are met before proceeding to signing and completion; and
• having all signatories in place.

Nowadays most transaction documents are signed electronically, often using DocuSign. Find out more about electronic signing in our article DocuSign: Making signing contracts easier and (sometimes) more complex…

9. Post-Completion Matters
Following completion of an asset acquisition, attention shifts to post-completion matters. This involves integrating the assets into the buyer’s operations, including transitioning employees, systems, processes, and customer relationships to ensure a seamless transition. There are a number of legal points that need to be addressed in consultation with legal advisors such as:

• Transfer of title and ownership: confirming that all necessary documents for transferring ownership of the assets have been executed and filed appropriately. This includes bills of sale, assignments, deeds, or other transfer documents required for tangible and intangible assets.
• Notification and consents: ensuring that all relevant third parties, such as customers, suppliers, landlords, and regulatory authorities, have been notified of the asset sale, and any necessary consents or approvals have been obtained. The buyer should send employees notice of any changes made to their terms of employment; even if this only the change of employer.
• Data protection: for quick tips on data protection, see our article Data protection in the Workplace: 5 quick wins.

Comment
Navigating the key stages of an asset acquisition requires careful attention to detail, strategic planning, and professional expertise.

From initial due diligence to negotiating the terms of the APA, each stage presents unique challenges and opportunities for both buyers and sellers. By understanding and effectively managing the complexities involved, parties can mitigate risks, maximise value, and ultimately achieve a successful transaction.

Contact our Corporate & Commercial team if you would like advice and assistance with navigating an asset sale/acquisition.