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What Are a Buyer's Obligations Under an Asset Purchase Agreement?

What Are a Buyer's Obligations Under an Asset Purchase Agreement?

Whenacquiring a businessthrough an asset purchase agreement, it is important to understand what specific obligations the buyer takes on from the seller. A well-drafted purchase agreement should identify the exact assets and liabilities transferred from the buyer to the seller. Any ambiguity in the agreement may lead to costly litigation even after the deal is completed.

Acquiring Assets Does Not Always Mean Acquiring Liabilities

Here is arecent example involving a failing live-event production company. The seller entered into an asset purchase agreement with the buyer. The agreement provided that each party would pay its own “transaction costs,” meaning the buyer was not liable for any “fees, costs, and expenses” owed by the seller to any “financial advisor” regarding the sale.

Prior to the buyer's decision to purchase the business, the seller hired a third company to serve as an “exclusive financial advisor” in connection with its planned sale. The seller paid the financial advisor an initial fee of $50,000 to help it find a suitable buyer. In the event the financial advisor's efforts led to a sale within one year of the agreement, the seller agreed to pay an additional “transaction fee” of $450,000.

Although the financial advisor did attempt to locate a seller, it was ultimately unsuccessful. The seller's chief executive subsequently located a buyer on his own initiative. After the sale was complete, the financial advisor then demanded the buyer pay the $450,000 transaction fee promised by the seller. The buyer refused, so the financial advisor then demanded arbitration, which was required for all disputes arising under the buyer's asset purchase agreement with the seller.

In response, the buyer petitioned Manhattan Supreme Court to stay the arbitration, arguing it never assumed the seller's obligation to the financial advisor. The Supreme Court refused to stop the arbitration, but on appeal, a divided panel of the Appellate Division, First Department, agreed with the buyer's interpretation of the agreement. The First Department concluded the purchase agreement “unambiguously provides that the buyer did not assume the seller's liabilities to pay the fees of brokers, finders, or financial advisors retained in connection with the contemplated sale of the business.”

The First Department also rejected the financial advisor's argument that, irrespective of the purchase agreement's terms, the buyer is still liable for the transaction fee as the “successor” entity to the seller. In other words, the financial advisor claimed the buyer and seller entered into a “de facto” merger. But as the First Department explained, the buyer did not acquire any equity in the seller. There is “no continuity of ownership” between the seller and buyer here, the court said, so the financial advisor cannot hold the buyer liable for any debts of the seller.

Need Help With a Business Matter?

This case highlights not only the importance of precise drafting in asset purchase agreements, but also the difference between mergers and asset sales. These are complex legal arrangements that require the assistance of an experienced New York business attorney. The lawyers at Waldhauser & Nisar, L.L.P., can assist you with all types of business transactions and litigation.
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