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Asset Purchase Agreement Ontario

Any business looking to expand or make a strategic move by taking over another complementary business, will have to look into how they will acquire the business. One way of doing so is through a business acquisition. In a business acquisition, an asset purchase is one method that one company can take over another, essentially buying it in a strategic business move.  An alternative is an acquisition of the other companies shares, but this article deals with asset acquisitions.

This is a complex process that must take into account a number of factors including legal and financial effects. Because of this, it is important to know what must be accounted for in an asset acquisition.

What is an asset purchase agreement?

An asset acquisition itemizes a detailed list of assets that are either included and excluded in the sale of the business. It should detail the specific representations, warranties, and terms under which both parties are acting when entering the sales transaction. It will usually cover terms that address tax issues, indemnification, purchase and sale of stock, employees, representations and warranties.

There are two types of purchase agreements:

  • Long Form –  This form of Asset Purchase Agreement reflects the business deal between the parties, including representations, warranties, covenants and non-competition clauses. It is comprehensive and includes specific terms and assumes that the signing and closing of the transaction are not simultaneous.
  • Short Form –  This form differs from the Asset Purchase Agreement Long Form in that it includes all of the basic terms and conditions you will need to conduct the transaction. It is less comprehensive regarding more specific terms.

As to the process itself, during an asset purchase you will need a closing agenda. This is essentially a program for the transaction and will outline what events are planned for the transaction. More importantly, a closing agenda will contain the details of the meeting, listing the time, place, and parties involved. It will also have a list of the documents to be delivered, by whom and how many copies of each are required. Usually, the first draft of the closing agenda can be based upon the initial draft of the purchase and sale agreement or a commitment letter.

What should be included in an asset purchase agreement?

The content and considerations in drafting the asset purchase agreement basically includes and outlines the assets and matters to be considered during the transaction. Not only will it list the actual assets, but also any documents, agreements and declarations that are necessary to carry out the transaction.

Here is a listing of what an asset purchase agreement should contain:

  • Name of Vendor
  • Name of Purchaser
  • Closing date
  • Included assets
  • Excluded assets
  • Shared assets
  • Purchase price
  • Assumption of liabilities
  • Valuation of inventory
  • Representations and warranties from Vendor
  • Representations and warranties from Purchaser
  • Employees
  • Environmental Matters
  • Access to books, records and real property during Interim Period
  • Conditions precedent to closing
  • Non-Competition Agreement
  • Other agreements
  • Confidentiality
  • Survival of representations and warranties
  • Press releases
  • Insurance
  • Operation of business until closing
  • Disaster
  • Documentation to be delivered on closing
  • Assignment
  • Governing laws
  • Arbitration
  • Schedule agreements

For some items in this list, you will need to include some important documents and pay special attention to requirements. Below is a look at a few major items that call for some extra attention:

-Included and Excluded Assets – This is one of the essential items you will want to pay attention to. When drafting an asset purchase agreement, you will need to include a detailed list and of the assets being sold or purchased and specify those which are not. This involves a wide range of assets that are tied to the business:

  • Inventory
  • Equipment
  • Receivables
  • Cash and securities
  • Intellectual property (patents, trade-marks, trade names, industrial design and copyright)
  • Books and records
  • Software
  • Goodwill and customer lists
  • Supply contracts
  • Purchase contracts
  • Leases of real property
  • Material contracts and licenses

– Representations and Warranties – Representations and warranties are factual statements where a party “represents” and states that a given state of facts is true and correct at a given point in time. These statements are important to document because such statements can have legal implications. One party may be liable to pay damages if the other party suffers losses as a result of those false statements.  

From the vendor perspective, some essential representations and warranties include statements about items such as:

  • Total assets and gross revenues
  • GST registration and tax matters
  • Bank accounts, books and records, financial statements
  • Conditions, location, accurate descriptions, net worth and title to assets
  • Employee matters (benefits, terms, payments, pension plans, health and safety)
  • Insurance
  • Licenses, permits, leases
  • Capital expenditures
  • Inventory in good standing and merchantable condition
  • Intellectual property
  • Capacity to carry on business

From the purchaser perspective, representations and warranties cover some items such as:

  • Organization and good standing  
  • Due authorization
  • Absence of conflicting agreements
  • Enforceability of obligations
  • Governmental consents
  • Financing
  • GST registration

-Other Agreements – Aside from purchasing assets, there are other supplementary agreements that may be necessary for the transaction. These can include third party and liability claims, indemnification provisions, and schedule agreements such as Supply or Non-Competition Agreements.   

Conclusion

The purpose of a purchase agreement is to accurately depict the assets or shares involved in a business acquisition. Because of this, it becomes essential to have a well-drafted agreement. This can prevent common conflicts on payments, assets or disputes, from cropping up.

Getting legal advice from a corporate lawyer will be one of your best strategies to ensuring you have all the important aspects covered. Having a lawyer present at the time of the transaction or involved in reviewing the agreement, can help you and the other party find a common understanding so that everyone involved is interpreting the transaction and terms in the same way.