An asset sale can be beneficial to all parties in the right circumstances. Instead of the buyer acquiring the shares of the target company, the parties agree on specific assets which are to be purchased. This allows the buyer to cherry pick the assets it wishes to acquire and reduces the risk of acquiring unknown or hidden liabilities. Typically, technology companies will be looking to purchase intellectual property assets; such as registered trade marks, patents or source code.
During the due diligence process, the buyer is able to review the company’s business and assets and validate the financial and commercial reasons for making the acquisition. Once the buyer has ascertained which assets it wishes to acquire, its legal team will check that the target company owns and controls all of the intellectual property assets which the buyer wishes to purchase. Often intellectual property assets are not owned outright by the seller, but are either used by the seller as part of a licensing agreement with a third party or are jointly owned with another company as part of a joint venture agreement. It may be that either corrective action is required to ensure that the seller has the authority to sell the intellectual property assets, or this assessment may impact which assets the buyer is prepared to acquire.
If the seller is retaining part of the business post-completion, the due diligence process will also need to expose whether the seller will need to continue using certain intellectual property assets after completion in order to maintain its own business continuity. The parties will then need to agree either a transfer of services arrangement or a licensing agreement prior to completion to clarify how the intellectual property assets will be used by the seller going forwards. These documents can take time to draft and negotiate so the sooner that these issues are identified the easier it will be to manage the completion timeline. In this scenario, it is important to ensure that the scope of the intellectual property rights that are being transferred and the intellectual property rights that will be excluded from the transaction are carefully defined.
What are the benefits of an asset deal?
The ability to exclude unwanted assets and liabilities from the parameters of the transaction significantly reduces the buyer’s risk, which in turn can result in asset deals completing in a shorter timeframe than a share sale and at a reduced cost to both parties.
Asset sales can be particularly beneficial to technology companies as it enables the buyer to purchase information integral to its technological development, supply chain or growth without also acquiring unnecessary property, stock and liabilities. It creates greater flexibility for acquisition strategies that rely on purchasing specific talent or intellectual property assets rather than purchasing entire companies and having to manage a complicated post-integration work stream.
What should I be aware of?
Both parties should seek tax advice before agreeing on any terms and sellers, in particular, will need to understand the tax implications of distributing the value earned by the selling company to its shareholders.
As the buyer is purchasing the assets and not the shares of the target company, the seller’s customer and supplier contracts will not automatically transfer to the buyer on completion. The buyer’s legal team will need to review each of the seller’s contracts being purchased to determine if and how they can be validly transferred across to the buyer. In very broad terms, a contract which can be transferred to a buyer without the consent of the relevant customer or supplier is said to be assignable whereas any contract which does require the consent of the relevant third party will need to be novated. Any such required novation process will need to be identified by advisers as soon as possible as it can create delays to the completion timetable.
Importantly, the Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE”) can apply to asset sales. If TUPE applies, all employee contracts will automatically transfer to the buyer. If the buyer does not want certain employees to transfer at completion then one solution is for the buyer to request that those employees sign settlement agreements with the seller terminating their employment contracts ahead of completion. However, there is no way to guarantee that those employees affected will be prepared to sign a settlement agreement. This can be an area of additional cost as buyers may need to create a settlement package to incentivise the employees to leave on completion.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.