asset acquisitions - Jackson Walker LLP

The negotiation as to whether a particular seller’s representation or warranty should belimited by a phrase such as “in the conduct of the business” presents another illustration of thesignificance to the buyer of the contractual definition of the “Business”. For example, thewarranty contained in Section 3.6 of the Model Agreement that the transferred assets constituteall of the assets “required to operate the seller’s business” often is of relatively little significancein a transaction in which all of the assets of the seller are being acquired, but is of fundamentalconcern to the buyer in a divisional acquisition. The effectiveness of that warranty dependsentirely on whether the contractual definition of the “Business” is sufficient to comprehend all ofthe activities which the buyer seeks to acquire. Similarly, where the division buyer concedes thatthe typical seller representations relating to contracts and commitments, adverse changes, orlitigation, for example, need not apply to the seller’s entire activities, the limitation of suchprovisions to the “Business” places a further burden on that definition to protect the buyer fromrisk of loss. It is not possible to illustrate the negotiating positions between buyer and seller as toall representations and warranties, but the following issues deserve particular attention:Financial Statements. There will be a broad range of reliability of divisional financialstatements. Buyer’s counsel will wish to include specific warranties as to the nature of therepresentation being made by such statements, particularly as to related party transactions (and asto whether all related party services are billed to the division). Divisional financial statements asused for the seller’s internal purposes often lack notes, and unless notes are added for purposesof the transaction documents, counsel for the buyer must be sure that the buyer’s assumption asto the accounting principles and method of preparation of internal divisional statements arebacked by a representation of the seller.Intellectual Property. In those situations where the division being sold employs some ofthe same technology as the activities which will be retained by the seller, the buyer will beconcerned that the agreement identify and contain appropriate warranties as to all such property.The buyer may seek specific assurance that it is acquiring ownership or use of all of thetechnology required to conduct the Business. Where research and development activities of theseller are conducted on a centralized basis, the buyer requires assurance that it will receive allrelevant information (subject, most likely, to non-compete and confidentiality agreements) (seeSection VI, below).V. SELLER’S PRE-CLOSING COVENANTS IN A DIVISIONAL ACQUISITIONIn a typical acquisition agreement the buyer will require the seller to take, or refrain fromtaking, certain actions between the date of the agreement and the closing date in order topreserve for the buyer the condition and value of the business which is being acquired. The kindsof covenants illustrated in the Model Agreement generally are suitable to divisional acquisitions,but the following points should be considered.1. Seller’s counsel is likely to take the position that covenants relating to the seller’spre-closing activities should be limited only to the “Business” which is being acquired. As tomany of the standard covenants, seller’s counsel is correct, and the covenant can be confined tothe Business and the assets which comprise the Business. Buyer’s counsel, financial staff andadvisors must understand the implications of each covenant on a case-by-case basis.2415257v2Appendix D – Page 4