Asset purchases

Practical Law ANZ Practice Note w-018-1855 (Approx. 36 pages)

Asset purchases

by Practical Law New Zealand

Scope of this note

This note considers the common scenario where one company (buyer) purchases a business and all or some of the assets of that business from another company (seller) (commonly referred to as an "asset purchase", "asset sale", "business purchase" or "business sale"). In this note, these terms are used interchangeably, although a reference to:

"Asset sale" or "asset purchase" is generally a reference to the sale or purchase of particular assets.
"Business sale" or "business purchase" is generally a reference to the sale or purchase of a business including some or all of its assets.

Although this note contemplates a sale by only one seller, it is also applicable where the sale assets are held by multiple related sellers. This note briefly sets out the differences between asset purchase transactions and share purchase transactions. It does not consider in detail the purchase of shares in a company. For information about share purchases, see Practice note, Share purchases.

Reasons for a purchase

The reasons for the purchase or sale and the commercial objectives of the buyer and seller have an impact on their negotiations over the purchase price and other commercial terms.

Understanding the parties' commercial drivers for a purchase is important for legal advisers because it helps to focus them on key matters and provide efficient, cost-effective advice. Sometimes these drivers are commercially sensitive and may only be known by senior members of the legal team, but where possible they should be shared with the entire legal team.

Buyer objectives in an asset purchase

There are many ways in which a buyer may seek to develop its business, including through the purchase of assets (or purchase of the seller's rights in relation to those assets, for example, by way of a lease or a licence to use a particular asset) from other companies. In many situations, a target company's business will be particularly valuable to the buyer due to its own business operations and strategic goals. For example:

The target business may complement the buyer's business because it manufactures and supplies a critical part of the buyer's product.
The buyer may be able to benefit from economies of scale and other efficiencies where it purchases a competitor business.

The buyer should have a clear strategy that justifies the commercial and other reasons for making an purchase and sets out the criteria for finding an appropriate target business. The buyer should also have a clear idea of:

What it can afford to pay (for example, from cash reserves or available debt finance).
The nature, size and type of business it wishes to purchase.
The proposed timetable for completing the purchase (including post-completion integration).

There are important differences between strategic and financial buyers in the context of mergers and acquisition transactions. For example, a financial buyer is not directly engaged in an operating business. Instead, its business is to invest in existing operating companies and realise a return on its investments by building value in the companies. A strategic buyer on the other hand pursues an acquisition for strategic reasons rather than as a financial investment.

Seller objectives in an asset sale

The commercial reasons for wishing to sell a business are wide ranging. Some examples of sellers' objectives are:

The seller wishes to realise a profit on its investment and re-allocate its capital to other higher growth investment opportunities.
The seller wishes to move out of the business area or industry because it no longer fits with the seller's wider corporate group strategy.
The business is not achieving profitability targets and the seller wishes to re-focus on other more profitable areas.
The business is in severe financial difficulty and there is no reasonable prospect of it remaining solvent. In this situation the directors will need to consider all options including whether an involuntary sale is required. Insolvency is a complex legal area and directors should seek specific legal advice on corporate insolvency law and the related directors' duties owed under the Companies Act 1993 (CA 1993).
For smaller, closely held companies there is a change in the personal or financial circumstances of founding or controlling shareholders.

Valuing a business

Once a specific target business has been identified, the buyer can begin to assess its value. Valuations carried out by the buyer or seller (or both) are used to validate or challenge the purchase price during negotiations. An independent accountancy firm is usually engaged by the buyer or seller to conduct the valuation process and provide an independent assessment of value.

Independent valuations will provide guidance to the parties in agreeing the final purchase price for the transaction. However, other factors will also be taken into account, including individual objectives, bargaining positions and the circumstances of each party (see Reasons for a purchase).

Valuation methods

There are various valuation methods that can be adopted for valuing a business and its assets. Different methods may be preferred according to the target business's industry sector, and a prudent buyer may wish to compare the results of more than one method. Some commonly used examples include the following:

Discounted cash flow. This method calculates the worth of a business as being equal to the present value of all its estimated future cash flows. This is calculated by estimating the future cash flows of the business and then discounting these cash flow projections (discounted because cash in the future is worth less than cash today) at an appropriate discount rate (typically, the cost of the business's capital) that reflects the riskiness of the estimated cash flows. This method is useful where future cash flows can be predicted with reasonable accuracy, such as mining companies or large, stable companies.
Market multiple. The value is calculated by taking a key financial indicator, such as EBITDA (earnings before interest, tax, depreciation and amortisation), and multiplying it by an agreed number. For example, if the EBITDA is $2.5 million and the multiple is four, the value of the business is $10 million. This is the value of the business assets including stock, plant and equipment and goodwill. Although trade debtors and trade creditors are not usually sold (debtors are usually retained by the seller, who also pays out the creditors at completion of the transaction), they are almost always included in the net working capital calculation as part of the overall value (see also Trade debtors and creditors).
Net asset valuation. The business's value is measured as the total of all its current assets less all of its current liabilities. A drawback to this method is that valuing a business's intangible assets (for example, intellectual property (IP) and business goodwill) can be difficult. However, in modern valuation methods, goodwill is not directly calculated. It is derived by subtracting the value of the tangible assets, such as plant and equipment and stock, from the valuation figure.
This method does not take into account the profitability of the business and so it is the most appropriate method for valuing underperforming businesses, new businesses or any business where the value of the assets is greater than the value that would be achieved by a sale of the business as a going concern (see Goods and Services Tax).

Cash-free, debt-free basis

The valuation of a business may be calculated on a "cash-free, debt-free" basis. This means that the valuation is carried out as if the target business had no cash reserves or outstanding debt (except as required for normal working capital purposes). This provides a useful basis for comparing different offers for the target business because the impact of fluctuating cash and debt levels is eliminated.

Completion accounts and locked-box approach

Completion accounts are often used to retrospectively establish the value of the target business at completion, with the purchase price being adjusted as necessary after those accounts have been agreed.

Another seller-friendly approach is for the purchase price to be agreed by reference to a pre-completion balance sheet, with no recourse to any post-completion price adjustments (known commonly as a "locked-box" approach). On a locked-box approach, the balance of advantage lies with the seller in terms of certainty, even though it will normally have to agree to restrictions designed to prevent any reduction in the value of the target business during the period up to completion (for example, disposal of assets).

Purchase structures

There are two structures available for the purchase of a business:

Asset purchase. The buyer purchases each of the individual assets (or the seller's rights in relation to an asset, as the case may be) that make up the target business, or a selection of those assets, and any agreed business liabilities (see Assets to be acquired and liabilities to be assumed).
Share purchase. The buyer purchases all of the shares in the target company that operates the business (and so automatically acquires all of the business assets and liabilities) (see Practice note, Share purchases).

The two purchase structures are fundamentally different. The table below sets out a high-level summary of the main differences.

Asset purchase versus share purchase

	Asset purchase	Share purchase
Target	The buyer purchases a number of specific assets owned by the seller, plus any agreed business liabilities.	The buyer purchases all of the shares in the target company owned by the seller, plus all of the target company's assets, liabilities, rights and obligations (even those the buyer does not know about).
Sale document	Asset purchase agreement.	Share purchase agreement.
Form of transfer	Transfer provisions in asset purchase agreement, plus any specific transfer documents required for the type of asset.	Share transfer form, and delivery of share certificates (if any).
Consents and approvals	Approvals regarding any restrictions on transfer of assets. Consents from third parties to any assignment or novation of business contracts. Regulatory approvals.	Approvals regarding any restrictions on transfer of shares. Consent of third parties to a change of control in the target company. Regulatory approvals.
Due diligence focus	Focus on the particular assets being purchased.	Focus on the target company as a whole, including all of its assets and liabilities.

Target

A key commercial difference between the two transaction structures is in the nature of what the buyer acquires:

For an asset purchase, the buyer acquires certain business assets from another company. There is no automatic transfer of business contracts or existing trading arrangements to the buyer (see Novation and assignment of contracts). The assets may or may not be sufficient by themselves to operate a business.
For a share purchase, the buyer purchases a company that owns all of the assets required to operate its business (subject to any change of control provisions).

Sale document

An asset purchase is usually effected by the parties entering into an asset purchase agreement. A different form of agreement is required for share purchase transactions.

Form of transfer

For an asset purchase, the target assets will need to be accurately described in the asset purchase agreement. In addition, some of the assets may need to be transferred using specific forms of transfer. For instance:

Real property (for example, land and buildings) needs to be transferred in the form required by the Land Transfers Act 2017. This requires either a written contract for sale of land (for the sale of freehold property) or a written assignment of lease (for a transfer of lease).
Different types of IP and information technology (IT) may need separate forms of transfer or assignment, such as trade marks and software licences.
Key contracts may need to be assigned or novated to the buyer or its nominee (see Novation and assignment of contracts).
In some business sales, the assets of the business being purchased may include shares of any subsidiary companies in the seller's corporate group. In this circumstance, the transfer of those shares from the seller to the buyer will usually require the parties to enter into a share purchase agreement. The share transfer will also require the parties to sign a share transfer form and exchange physical share certificates (if any have been issued). For more information on the transfer of shares, see Practice note, Transfer of shares, and Standard documents, Share transfer form and Share certificate.

Consents and approvals on purchases

More consents and approvals are likely to be required for an asset purchase than for a share purchase. This is because under a share purchase, the assets of the target company (for example, supplier contracts), are transferred from the seller to the buyer without the need for the consent of third parties, because the business will be carried on by the same entity and the contracting parties remain the same. Under an asset purchase, however, the transfer of assets such as customer and supplier contracts may require the consent of customers, suppliers, landlords and others. See Consents and approvals for asset purchases and Novation and assignment of contracts.

Due diligence focus

For a discussion of due diligence considerations for an asset purchase, see Due diligence. Similar concerns arise for share purchases, although in an asset purchase due diligence the focus is on the assets themselves and not the target company.

Key factors influencing purchase structure

The main factors that tend to influence whether a business is acquired by way of asset purchase or share purchase are summarised as follows.

Potential for unknown liabilities

An asset purchase does not have the effect of transferring any of the target company's liabilities to the buyer because the buyer will not acquire the target company or its business. Asset purchases allow the buyer to purchase specific assets without assuming any unknown liabilities of a company that has been operated by the seller. The buyer may, however, agree to take on certain liabilities of the business. For example, if employees are transferred from the seller's business to the buyer's business as part of the transaction, the buyer may agree to assume the accrued employee entitlements subject to a reduction in the purchase price for the assets. See Assets to be acquired and liabilities to be assumed.

Conversely, for share purchases, any known liabilities of the target company will be factored into the valuation process and reflected in the purchase price. However, the seller will also be transferring responsibility for any unknown liabilities to the buyer. This is particularly attractive for the seller where there may be a reason to suspect such liabilities might arise in future, although comprehensive buyer due diligence should assist with identifying these. The buyer will wish to negotiate contractual protections in the share purchase agreement against any unknown and unquantified liabilities, in the form of warranties and indemnities and limitations on liability.

The level of due diligence required to satisfy a buyer of shares is often greater than for a buyer of assets because of the potential for unknown liabilities of the target company (see Due diligence).

Tax

So far as tax is concerned, the parties will probably have different objectives that may impact their preferred deal structure (see Tax considerations).

Partial sale

If the buyer wishes to purchase a specific division of a company's business, it may be more practical to structure the transaction as an asset purchase. Otherwise, for a share purchase transaction, it will be necessary first to set up a new company (known commonly as a "cleanskin") and transfer or "hive off" the relevant division to that company. After this, the shares in that company can be purchased by the buyer (that is, by way of a share purchase).

Consents and approvals

Where third-party consents or approvals are required to transfer assets, and it is impractical or thought to be impossible to obtain any or all of the necessary consents (for example, where customers refuse to consent to the novation of key customer contracts or where a key government licence or permit is not assignable), a share purchase may be the only practical way of acquiring the target business. However, in a share purchase, third party consents may still be required in respect of some contracts which contain change of control clauses that allow the third party to terminate the contract if there is a change in the target's effective control.

Similarly, where consents or approvals are required for the transfer of a target company's shares, an asset purchase may be preferable. For examples of the types of approvals that may be required, see Consents and approvals for asset purchases.

Financial products

Anyone contemplating a share transaction needs to be aware of the regulatory regime under the Financial Markets Conduct Act 2013 (FMCA 2013). In some circumstances, an offer of a financial product, which includes shares in a company, requires disclosure under the FMCA 2013. For information about financial products in the context of a share purchase, see Practice note, Share purchases: Financial services regulation.

If the disclosure requirements apply, then an asset purchase may be favoured because the target assets will not be financial products.

Parties to a share transaction should also be aware of the operation of the Takeovers Act 1993 and Takeovers Regulations 2000, which apply to all code companies.

Debt finance and security arrangements

If the target company has entered into debt finance arrangements with its financiers that are not on favourable terms, a buyer may prefer to purchase assets rather than be burdened with taking on those arrangements or having to re-finance the debt. Similarly, if there are complex security arrangements over the target company's shares then the buyer may wish to avoid having to arrange for their discharge by purchasing assets instead.

Method of sale

The seller of a business or assets will usually determine whether to sell by one of the following methods:

Auction sale, where the business or assets are offered to a number of prospective buyers in a competitive tender process.
Exclusive sale negotiation with one particular buyer.

Even where one particular buyer approaches the seller, the seller will usually consider whether a wider auction sale process would yield a better commercial result.

Buyers will often request that the seller enters into an exclusivity arrangement that restricts the seller from dealing with any other prospective buyers for a specified period. This will usually take the form of an exclusivity agreement or deed. The buyer's exclusivity requirements are justified to the seller as necessary because of the time and resources required for due diligence and negotiation of the transaction documents. The seller may also wish to create competitive tension by approaching other buyers, so the buyer may threaten to withdraw from negotiations if exclusivity is not granted by the seller. For examples of standard form exclusivity agreements, see Standard documents, Exclusivity agreement: share and asset purchases (buyer friendly) and Exclusivity agreement: share and asset purchases (seller friendly).

This note primarily considers an exclusive sale negotiation between the seller and one particular buyer, although it is also relevant for auction sales.

Heads of agreement

A heads of agreement (also known as a term sheet or letter of intent) is a short agreement signed by a prospective buyer and seller setting out the main commercial terms of the purchase as agreed between them. The heads of agreement is not a legal requirement, and not all transactions will have one. However, heads of agreements are commonly used because they help avoid misunderstandings and provide an anchor point for the parties in negotiating the transaction. Legal advisers should familiarise themselves with the heads of agreement and use it as a road map for drafting the purchase agreement.

The buyer's and seller's legal advisers may be involved in reviewing the heads of agreement, although it can also be agreed commercially between the parties without any legal review. There are several issues that should be considered when drafting or reviewing the heads of agreement, including exclusivity and confidentiality provisions which should be expressed to be binding and supported by consideration.

For more information about heads of agreement, see Practice note, Heads of agreement. For standard form heads of agreement, see Standard documents, Heads of agreement: asset purchases and Heads of agreement: share purchases.

Key issues for asset purchases

All lawyers advising on an asset purchase should familiarise themselves with the types of issues that commonly arise. While each asset purchase transaction will have its own particular issues, consider the following in all cases:

Board and shareholder consents or approvals. The requirements for consent or approval of the board of directors and shareholders of a corporate buyer or seller may be set out in the company's constitution (if it has one), including any specific requirements on how those consents or approvals are to be obtained (for example, voting thresholds and formal document requirements). See Consents and approvals for asset purchases.
Regulatory authority consents or approvals. Consider whether the purchase needs to be conditional on any matters even where the parties themselves have not requested any conditions precedent. For example, the transaction may require disclosure to, or the consent of, regulatory authorities such as the New Zealand's Exchange (NZX), the Commerce Commission or the Overseas Investment Office (OIO).
Third-party consents. Consent from third parties such as landlords, customers, suppliers and financiers may be required to assign or novate contracts that are material to the operation of the business. See Consents and approvals for asset purchases and Novation and assignment of contracts.
Third-party guarantee. In certain circumstances the buyer or the seller may want the obligations of the other to be guaranteed by a third party such as a bank or holding company. This may be of particular relevance:
- for the buyer if the seller is disposing of its entire business and intends to distribute the proceeds of sale to its shareholders, so that after the transaction it will only be a shell company with no assets for the buyer to seek recourse against in the event of a warranty claim; or
- for the seller if the buyer's funding appears to be uncertain or subject to unusual conditions.
However, bank guarantees are expensive and onerous, and are likely to be resisted for that reason. If security for the obligations of either party becomes an issue, it may be necessary to consider alternative payment structures such as deferred consideration or retention accounts and rights of set-off.
Drafting considerations. Key drafting issues to be considered when preparing the asset purchase agreement include:
- accurate and correct descriptions of the assets being purchased. Consider also whether it is practical to list assets in schedules to the agreement or whether to rely on generic definitions;
- purchase price calculations including any earn-out arrangements (see Earn-out arrangements);
- completion mechanics;
- whether completion accounts will be required (for example, it may not be possible to identify the value of fluctuating assets such as stock and debtors without an audit of the relevant items);
- whether any conditions precedent will be required;
- covenants (for example, consider whether to include a specific provision detailing how the seller should act after completion if approached by prospective customers of the business being sold) (see Protection of the business); and
- warranties and indemnities and the allocation and limitation of liabilities.
Structuring considerations. Consider how the purhcase is to be structured. For example:
- consider whether the buyer is to purchase the whole business, or just certain assets. Consider also whether the assets of the business being purchased currently include shares of any subsidiary companies in the seller's corporate group; and
- the assets of the target business may be held by more than one entity in the seller's group. It may be desirable from the perspective of either, or both, parties that a pre-completion internal reorganisation of the sale assets be undertaken (for example, so all assets are held by one entity prior to sale). An internal reorganisation may take considerable time and this should be factored into the transaction timetable. See Transaction timetable for an asset purchase.
Transfer of employees. Employees are not automatically transferred from the seller to the buyer under an asset purchase transaction. Retention of employees in the business is usually negotiated between the parties. The buyer will need to consider which employees, if any, it would like to employ in the business and it will need to make an offer of employment to, and enter into a new employment agreement with, each of those employees. See Employment-related considerations.
Assumption of liabilities and obligations. Consider how debtors and creditors of the business are to be dealt with. Will they be taken over by the buyer or remain with the seller? See Trade debtors and creditors. Consider which, if any, other liabilities and obligations of the seller are to be assumed by the buyer. The value attached to these will usually directly affect the purchase price and so must be clearly itemised or otherwise dealt with. See Assets to be acquired and liabilities to be assumed.
Tax implications. Tax implications for the seller and the buyer depend on a number of factors, including the location and nature of the business and the business assets. GST may be payable on an asset purchase. Apportioning the purchase price between the various assets may also have important tax implications. See Tax considerations.
Insurance. Where the buyer is uncertain of the seller's ability to pay warranty claims, or where the seller does not want to hold a proportion of the proceeds of sale to cover any potential claims, either party may negotiate the purchase (usually by the buyer) of warranty and indemnity insurance as a way of bridging the gap. See Warranty and indemnity insurance.

Novation and assignment of contracts

There are essentially two ways of ensuring that the buyer receives title to all the contracts of the business:

Novation. This is a means of transferring a party's rights and obligations under a contract to a third party. Strictly speaking, the original rights and obligations are not transferred: novation extinguishes the existing contract and replaces it with a new contract, under which the incoming third party (in an asset purchase scenario, the buyer or its nominee) takes up rights and obligations duplicating those of the outgoing party to the original contract.
Assignment. This is the transfer of a right from one person to another. Assignment does not generally require execution by the third party (in an asset purchase scenario, the party that will continue to be bound by the contract). The benefit of a contract is a right (a thing in action) and, in principle, can be freely assigned by the benefiting party without requiring the consent of the other party to the contract. Contractual obligations, however, cannot be assigned without the consent of the original parties to the contract (see Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85; [1993] UKHL 4), although in practice the parties often act as though they can be, particularly in relation to ongoing arrangements where the assignee takes over the performance of the contract from the assignor. The perceived benefit of assignment over other forms of transfer is that, in principle, a party may assign the benefit of an agreement to a third party without the other contracting party's consent and only give notice of assignment after the event. However, in practice, this benefit is subject to limits. For example, some contracts contain a clause prohibiting assignment or requiring the would-be assignor to obtain the other party's prior consent. It is desirable for notice of the assignment to be given to the third party because the third party will otherwise be entitled to continue to make payments or provide the service (as the case may be) to the assignor.

Contracts are commonly novated in asset purchase transactions where the seller wishes to transfer all its rights and obligations under the business's contracts to the buyer. As contractual obligations cannot be assigned, the seller can only achieve this aim if both the buyer and the third party agree to a novation. In this way, the seller is released and discharged from the contract and the buyer undertakes to be bound by the terms of the new contract.

However, novation is generally only considered for contracts that are key to the target business, or where the outgoing party (the seller) is anxious to be released from future liabilities under the contract. This is partly because of the logistics involved (all the original parties and the incoming party have to sign the novation agreement) and partly because of the perceived risk that the original parties may treat the novation of the contract as an opportunity to renegotiate its terms.

In practice, an assignment is commonly used as an alternative to a novation, but as noted above, under an assignment only the benefit of the contract can be transferred. Liability for breaches of the contract will stay with the seller. While the buyer may be happy to obtain rights under a contract without the obligations, a seller will not. The seller is therefore likely to require an indemnity from the buyer in the asset purchase agreement or relevant assignment, regarding the performance of contracts assigned by it.

In an asset purchase, if a contract is considered to be fundamentally important to the business, the buyer may insist on making completion of the transaction conditional on the contract's novation. If contracts are to be novated, the buyer may wish to take an indemnity from the seller for any pre-novation breaches of contract by the seller.

For an example of a standard form deed of novation, see Standard document, Deed of novation. For an example of a standard form deed of assignment, see Standard document, Deed of assignment. For more detailed information about novation and assignment, see Practice notes, Novation of contracts and Assignment of contractual rights.

Earn-out arrangements

Earn-out arrangements are typically used in business sales where:

The future performance or value of the business is uncertain.
Key management individuals retain an interest in the business (for example, where key management remains employed by the business because of their expertise) and the buyer wants to incentivise those individuals to ensure a strong business performance post completion.

Under an earn-out mechanism, the buyer gives to the seller an initial purchase price payment plus a right to future payments that are contingent on the revenue or profit performance (for example, EBITDA) of the business (earn-out right). Earn-out rights are usually structured so that the payments are made for one or two years (but sometimes more) after completion of the sale. Some transactions include reverse earn-out mechanisms, where the seller will repay amounts to the buyer if certain performance thresholds are not met within a particular time. Earn-out arrangements are often complex and require careful drafting to ensure precise effect is given to commercial terms.

The taxation of earn-out payments is based on a "look-through" approach where certain earn-out rights (including reverse earn-out rights) are treated as being related to the purchase of the underlying business assets, provided certain strict conditions are met.

If an earn-out mechanism is to be included as part of an asset purchase, the parties should seek specialist tax advice.

Protection of the business

The relevant asset purchase agreement will usually include covenants, often referred to as restraints of trade, that seek to limit the activities of the seller following completion. Such restrictions are intended to prevent the seller, during a specified period after completion, from:

Carrying on any business in competition with the target business (as such business is carried on at completion of the transaction).
Poaching any customers or employees of the target business.

Tax considerations

The tax implications that commonly arise in relation to a business sale are summarised below. Tax is a complex area and parties considering a business sale should seek specialist advice.

Goods and Services Tax

The GST position on a sale of business arrangement will differ depending on the assets being sold and, in particular, whether the assets being sold include land or an interest in land or whether the business is being sold as a going concern.

Where the assets include land or an interest in land (for example, a lease of land), the entire purchase must be GST zero-rated (the compulsory zero-rating or CZR rules) if:

Both parties are GST-registered.
The buyer is purchasing the assets with the intention of using them to make taxable supplies.
The land is not intended to be used as a principal place of residence.

(Section 11(1)(mb), Goods and Services Tax Act 1985 (GSTA 1985).)

To enable the seller to GST zero-rate the transaction, the buyer must provide specific disclosures to the seller about its GST registration status and its intentions for use of that land. These disclosures should be included in the asset purchase agreement. Any change to the status of any disclosure item before settlement must also be notified to the seller or the seller's solicitor.

If the assets do not include land or if the business is not being sold as a going concern, the parties will need to consider the GST consequences of the sale. This may result in the seller being required to pay GST.

To be considered a supply of a going concern and therefore GST zero-rated, the GSTA 1985 provides that the following requirements must be satisfied:

GST-registered. The buyer is registered or required to be registered for GST.
Written agreement. The buyer and seller must have agreed in writing that the sale is a supply of a going concern. The asset purchase agreement must expressly record that the sale is a going concern and the agreement must be entered into on or before the transfer of the business. Note that the payment of GST cannot be avoided by the parties simply agreeing in the contract that the sale of a business is the supply of a going concern if that is not the case.
Taxable supply. There must be a taxable supply.
Taxable activity. There must be:
- a supply of the whole or part of a taxable activity that must be capable of being carried on as a going concern by the recipient;
- all of the goods or services necessary for the continued operation of that taxable activity or part of a taxable activity are to be supplied to the buyer; and
- the carrying on of the taxable activity or part of the taxable activity by the seller up until the time of transfer to the buyer.
- (Section 2(1), GSTA 1985.)

The parties should keep in mind that if the business sale also includes the supply of items that are not related to the business, those items are treated as a separate supply for GST purposes and may not be GST zero-rated. For example, where the sale of a business also includes the sale of residential land unrelated to the business, GST may be charged on the supply of that residential land.

Where GST is payable, the GST component is usually passed on to the buyer of the business as an increase to the purchase price. It is recommended that the parties negotiate the price on a GST-exclusive basis, so that if GST is payable, the seller will still receive the agreed price. An asset purchase agreement should clearly state whether the purchase price is "plus GST, if any" or "inclusive of GST, if any". Where the asset purchase agreement is silent on GST, all of the purchase price will be considered to be GST-inclusive.

A well-drafted asset purchase agreement should contain a provision that the buyer will reimburse the seller for GST and penalties if the Inland Revenue Department (IRD) later considers that, because one of the conditions for the sale of a going concern was not met, GST must be paid. The risk that the IRD may not view the transaction as a supply of a going concern ultimately lies with the seller because, even if the asset purchase agreement provides that the buyer is liable for the payment of GST, it is the seller who is required to remit the GST to the IRD.

For asset purchases involving land, the risk for any unpaid GST rests with the buyer. This is irrespective of whether the purchase price is agreed on a "plus GST" or "GST-inclusive" basis. Under the CZR rules, where a supply has been incorrectly GST zero-rated, the buyer is deemed to be the supplier and it is the buyer that is required to return the GST payable (together with any interest and penalties) to the IRD. Depending on whether the price was plus GST or inclusive of GST determines whether the buyer may claim the GST component back from the seller under the agreement.

Income tax

When selling or buying a business or a portion of its assets, the following should be borne in mind from an income tax perspective. These comments are general in nature and specific tax advice should be obtained by both the seller and the buyer for their specific circumstances. These issues may influence the negotiations and resulting deal structure for the asset purchase agreement:

Issue	Seller's perspective	Buyer's perspective
Allocation of purchase price to: Inventory. Depreciable assets. Goodwill or intangibles. Land. Buildings.	The sale of inventory in excess of its book value (adjusted for any obsolescence provision) is taxable to the seller. Depreciable assets sold for more than book value will result in depreciation recovered for tax purposes. Goodwill and certain intangible assets are not taxable to the seller. Where the seller or an associate purchased land for resale, as part of a land dealing, building, developing or subdividing business, it may be taxable on any gain arising on disposal. Any gain on disposal of a building may be taxable to the extent depreciation was claimed on that building before the 2011/2012 income year. See further Assets to be acquired and liabilities to be assumed.	The cost base of inventory is deductible against its subsequent disposal value. The purchase price of depreciable assets will be deductible over time for tax purposes. Goodwill and certain other intangible assets are not depreciable. Where the buyer or an associate is purchasing the land for resale, as part of a land dealing, building, developing or subdividing business, it may be taxable on any gain arising on a subsequent disposal of that land. Buildings are not depreciable for tax purposes. See further Assets to be acquired and liabilities to be assumed.
Accounting book values versus tax book values.	Both the accounting book values and tax book values of assets should be taken into account when determining the impact of the transaction on the seller's financial statements and the seller's income tax return.	Not a concern for the buyer.
Historic transfers of assets among members of a tax consolidated group.	On the assets leaving a tax consolidated group.	Not a concern for the buyer.
Liabilities assumed: Holiday pay. Lease obligations. Straddle returns (paying for items already received). Straddle returns (delivering goods already paid for).	Holiday pay: where the parties are not associated, the seller is treated as having paid the accrued leave balance and is entitled to a tax deduction for the accrued leave balance at the date the buyer assumes the obligation; or where the parties are associated, the seller is not entitled to a deduction for the accrued leave balance. Lease obligations. See lease. Straddle returns. Goods transferred as part of sale. Where liability for payment assumed by buyer, no impact to seller.	Holiday pay: where the parties are not associated, the buyer is not entitled to a deduction for the amount of leave subsequently paid out. The amount is effectively treated as part of the purchase price; or where the parties are associated, the buyer is entitled to a deduction for the accrued leave balance when the leave is paid out. Lease obligations. See lease. Straddle returns. Goods transferred as part of sale. Liability taken into account when determining purchase price where liability assumed. Payment is on capital account.
Tax filing and payment history, status of tax audits.	May prefer to sell shares rather than business or assets.	May prefer to purchase business or assets rather than shares.

Assets to be acquired and liabilities to be assumed

Assets commonly acquired as part of the purchase of a business may include tangible assets (such as land, machinery and stock) and intangible assets (such as goodwill and IP). Each of the assets to be purchased should be clearly identified in the asset purchase agreement. From a tax perspective, from 1 July 2021, the buyer and seller of a bundle of assets will both generally be required to make the same allocation of the total purchase price across the different assets being purchased.

Unlike a share purchase, in an asset purchase, the buyer will only assume those pre-sale liabilities of the business that it expressly agrees to assume in the asset purchase agreement. The extent of the assumed liabilities is usually a key point of negotiation between the buyer and seller. Each of the liabilities to be assumed should be clearly identified in the asset purchase agreement.

The purchase of assets and the assumption of liabilities by the buyer may require the consent of third parties. See Consents and approvals for asset purchases.

Assets commonly purchased and liabilities commonly assumed under a business purchase are set out below.

Plant, machinery and vehicles

The buyer may wish to define these assets broadly so that all the plant, machinery and vehicles used in the business (including those listed in the schedule and any accidentally omitted from it) will be transferred to the buyer. The asset purchase agreement may provide that the risk for these items will pass to the buyer on signing of contracts (or, if later, as soon as the contract becomes unconditional). The buyer should, therefore, put its own insurance in place with effect from the date risk passes, or have its interest noted on the seller's insurance policy until it can put in place its own insurance.

Stock

Before completion, it is often impossible to ascertain what stock will be transferred to the buyer and its value. It is, therefore, usual for the stock to be determined and valued either:

On a specified date between signing of contracts and completion, with stock movements after valuation being monitored and reflected in the purchase price of the stock at completion.
As at completion, with a post-completion stock valuation undertaken by the buyer, following which any required purchase price adjustment is paid by the relevant party as soon as the valuation has been agreed.

Contracts

The business may depend on a number of different contracts with suppliers, customers and others. The buyer must ensure that it receives title to all the contracts if the business is to continue operating smoothly. The contracts may be assigned or novated (see Novation and assignment of contracts). The terms of the relevant contracts must be investigated to ensure that assignment is not prohibited. The consent of the third party to assignment of the contract will often be required. Novation requires the consent of all parties. The asset purchase agreement should stipulate, with suitable cross indemnities, that the seller is responsible under these contracts up to completion or the effective time, if earlier, and that thereafter the buyer assumes all obligations.

Real property

On a business sale, the properties necessary for the operation of the business will need to be conveyed to the buyer. Title to freehold property will need to be transferred to the buyer and leasehold property will need to be assigned to the buyer. The landlord's consent will likely be required to assign a lease to the buyer. This consent may require the satisfaction of certain conditions, such as the buyer demonstrating it has sufficient financial resources to meet its obligations under the lease.

Contracts for the transfer of freehold property (for example, contracts for sale) are often not included within the definition of "business assets" in an asset purchase agreement on the basis that the transfer of freehold property assets is governed by the terms of the relevant property transfer instrument rather than the terms of the asset purchase agreement.

Title to freehold property may be passed to the buyer pursuant to an electronic conveyancing transaction (generally referred to as e-dealing).

Information technology

When purchasing a business, the buyer needs to ascertain the extent to which the target business is reliant on the seller's IT systems to ensure that:

The seller can transfer the relevant IT systems.
The buyer purchases the right to use the IT systems in a manner that ensures the smooth transfer of the business.

If both the seller and the buyer need to access all or part of the IT systems following the sale of the business, agreement will be necessary on the basis that one party will offer IT services to the other after completion. The buyer may also require the seller's assistance while the buyer transitions the business smoothly onto its own IT system. The terms of the provision of such IT services and/or IT systems can be documented in the business purchase agreement. It is also common for the parties to set out these arrangements in a separate IT services-specific agreement or a broader transitional services agreement.

Intellectual property

Most businesses will own or have rights to IP, whether it is an insignificant feature of the business or a major asset and fundamental to its continuance (for example, the patent for its main manufacturing process). The buyer will want to ensure that it acquires all intellectual property rights used by the seller in the business.

Know-how and confidential information

Perhaps one of the most fundamental assets of any business is its know-how and confidential information. Know-how is an intangible asset that can loosely be described as the body of knowledge and technical experience intrinsic to the business that is not within the public domain.

The buyer must seek an assurance from the seller that no confidential information or know-how of the business has been disclosed to any third party and also an undertaking that it will not disclose any confidential information or know-how of the business to any person in the future. For further information, see Practice note, Confidentiality agreements.

Goodwill

Goodwill is an intangible asset derived from the reputation and connection of the business. Any goodwill in the business being purchased should be assigned to the buyer. To protect this valuable asset, the buyer should require the seller to undertake that, pending completion, it will not do anything to prejudice or diminish the goodwill of the business. The buyer is also likely to want the business records, including customer lists, linked with the goodwill of the business to be transferred to it. This should be acceptable to the seller, provided the buyer allows it reasonable access to such records, for example, to enable it to deal with any tax queries.

Generally, the buyer will want the right to use any distinctive name under which the business trades. It should, therefore, seek to prohibit the seller from holding itself out as being connected with the business or from using the business name after completion. In addition, the buyer should require the seller to change its corporate name to a name that cannot be confused with the business name on, or as soon as possible after, completion. The buyer should also seek covenants (for example, non-compete undertakings) from the seller to protect the goodwill of the business (see Protection of the business).

Hire-purchase and leasing agreements

If the buyer wishes to take over hire-purchase and leasing agreements, these agreements should be novated or assigned (see Novation and assignment of contracts). The terms of the relevant agreements must be investigated to ensure that assignment is not prohibited. The consent of the third party (such as a leasing company) to the assignment will often be required, whereas novation will always require the consent of all parties. The asset purchase agreement should stipulate, with suitable cross indemnities, that the seller is responsible under these agreements up to completion or the effective time, if earlier, and that thereafter the buyer assumes all obligations.

Business loans

The target business may have certain business loans in place (for example, equipment finance). Depending on the terms of those existing loans, the buyer may prefer to take over those loans rather than put in place their own business loan arrangements. The consent of the relevant lenders will be required and those lenders will need to be satisfied that the buyer has sufficient financial resources to ensure that business loans and interest are repaid and that there is no credit risk.

Employee entitlements

The buyer will sometimes agree to take on certain employee entitlements of transferring employees (for example, annual leave and long service leave), subject to a reduction in the purchase price for the assets. However, the buyer may decide not to recognise a transferring employee's previous accumulated service for annual leave or redundancy pay, in which case the seller will be under an obligation to pay the affected employees their accrued entitlements up until the termination of employment with the seller (with the exception of sick leave, which does not have to be paid if it has not been taken).

Straddle returns

The buyer will sometimes agree to be responsible for certain supply and payment obligations (also known as "straddle returns"). These include the obligation to:

Deliver goods or services where a third party prepaid the seller before completion, but the business has not yet delivered them at completion.
Pay for goods or services where a third party advanced those to the seller before completion, but the business has not yet paid that third party at completion.

The buyer will then be responsible for fulfilling those obligations at its cost, which should be reflected as a reduction in the purchase price.

Trade debtors and creditors

The buyer and seller need to agree on the treatment of trade debtors and creditors, as the consequences may have commercial implications for the buyer. Options for the treatment of trade debtors and creditors include:

Debtors and creditors remain with the seller. Trade debtors and creditors are not transferred to the buyer and the seller continues to collect the debts and pay the creditors. If the debtors and creditors are to remain with the seller, the buyer will want to protect its customer base and it should negotiate provisions in the asset purchase agreement to prohibit the seller, for a specified period, from issuing proceedings for non-payment against any trade debtors who continue to be customers of the business after completion.
The buyer collects debts and pays creditors as agent for the seller. This method may suit the seller, particularly if all its employees are transferred with the business to the buyer, as it will not have to administer the collection process. If this procedure is likely to involve the buyer in time-consuming administration, it may seek to negotiate a fee based either on the value or number of receivables (or book debts) collected. The buyer may be prepared to undertake this task, as it will be involved directly in paying the seller's debts to suppliers of the business and so will know for certain that they have been paid.
Assignment of debtors to, and assumption of liabilities by, the buyer. Both the seller and the buyer will want to be absolutely clear about what is being transferred. The debtors and creditors should ideally be identified by reference to separate schedules to the asset purchase agreement.
The seller will want to ensure that the creditors are paid promptly, despite the buyer's agreement to pay. The seller cannot transfer its contractual obligation to pay its debts to the buyer without novation and the agreement of the creditors; without this agreement being obtained, the seller will remain liable to its creditors. The seller should therefore seek to negotiate an indemnity from the buyer in respect of any such claims.
For the assignment of the debtors to be enforceable by the buyer in its own name and effective against each debtor, the buyer must give actual notice of the assignment to each debtor which, depending on the number of debtors, can be time-consuming and expensive. In New Zealand, debt assignment is codified under Subpart 5 of Part 2 of the Property Law Act 2007. If debtors and creditors have high levels of fluctuation, then completion accounts may be desirable so that the final price paid reflects the level of debtors and creditors taken on.

Excluded assets and excluded liabilities

The buyer and seller will need to consider whether any business-related assets and liabilities need to be expressly excluded from the sale.

Transaction timetable for an asset purchase

It is useful to prepare a proposed timetable for an asset purchase because it highlights the various stages of the transaction and the parties' timing expectations. The transaction timetable should encourage the buyer to set a realistic deadline for signing and completion as well as post-completion integration. It should also set out the likely time frames required for:

Any pre-sale internal reorganisation (see Key issues for asset purchases).
Obtaining any consents from regulatory bodies (see Consents and approvals for asset purchases).
Satisfying any conditions precedent to completion.
Complying with any notice periods required for calling meetings of shareholders.
Any regulatory notice periods.
Signing and completion (see Practice note, Signing and completion).

Confidentiality

During the course of a proposed purchase, the buyer will usually be provided with a substantial amount of information regarding the target company and its business (see, in particular, Due diligence). It is likely that the target company and the seller will wish to keep some of this information confidential (for example, sensitive commercial information). The buyer is usually asked to enter into a confidentiality agreement that requires that all disclosed information is kept confidential and not used for any other purpose or disclosed to any other person (see Practice note, Confidentiality agreements). For a standard form confidentiality deed, see Standard document, Confidentiality deed (mutual).

Due diligence

Due diligence for an asset purchase is the process of gathering important information about the target business and its associated assets. It is usually carried out by a potential buyer to help with deciding whether to commit to the purchase, although is sometimes carried out by sellers for auction sale processes where multiple buyers may submit tender offers for the target business. The purpose of due diligence is for the buyer to obtain and review sufficient information about the target to form a view on an appropriate price for the target business and what other commercial terms are acceptable.

In some share purchase negotiations, if a potential buyer's due diligence on a target company discloses risks and liabilities (for example, tax liabilities) that the buyer is unwilling to assume as part of the share purchase, it is not uncommon for a buyer to change course and initiate negotiations with the seller for an asset purchase instead.

Due diligence is usually completed as an essential preliminary step to negotiating contractual protections (in the form of warranties and indemnities) into the asset purchase agreement and agreeing the form of disclosure letter.

For a full discussion of the legal due diligence process, see Practice note, Due diligence: purchases. Also see Practice note, Disclosure letters and Standard document, Disclosure letter: asset purchases.

Consents and approvals for asset purchases

A proposed asset purchase may require various consents and/or approvals that could affect the transaction timetable. The main types of consent or approval that may be necessary include:

Board approvals.
Shareholder approvals.
Consent of regulatory authorities.
Other third-party consents.

The nature and extent of approvals required will obviously have an important bearing on the timing of the transaction. For example, if a regulatory consent has not been obtained before the asset purchase agreement is signed, it may be necessary to have a split signing and completion to allow time for the regulator's consent process to be completed.

Consents and approvals are often included in the asset purchase agreement as conditions precedent to completion of the transaction. Common conditions precedent include:

Consent under the Overseas Investment Act 2005 (OIA 2005) (usually evidenced by the receipt of a decision of the relevant Ministers or the OIO). For more information, see Practice note, Regulation of overseas investment in New Zealand.
Approval for the transfer of all permits and authorisations necessary to carry on the business.
Third-party consent to the novation of all key contracts.

A share purchase transaction will usually require similar consents or approvals. For further information, see Practice note, Share purchases.

Board approvals

If the asset purchase transaction involves a corporate buyer and seller it will usually be necessary for the board of directors of each party (or a duly appointed committee of the board) to consider and approve:

The transaction, including that it is in the best interests of the company and its shareholders as a whole.
The execution of the key transaction documents, and any other ancillary documents required to give effect to the transaction.

Minutes should be taken of any meeting of the board of directors (and any committee meeting) for this purpose. For an example of standard form board minutes approving an asset purchase, see Standard documents:

These minutes are important because they are evidence of the board's decision to enter into the transaction, and of the designated signatories' authority to bind the company by signing the transaction documents. Counterparties to the transaction will usually request a copy of these minutes as part of the documents deliverable at completion.

For information on the due execution of documents by companies, see Practice note, Execution of deeds and documents by companies registered under Part 2 of the Companies Act 1993.

Shareholder approvals

If a buyer or seller is a New Zealand company, the company must not enter into a "major transaction" unless the transaction is either:

Approved by special resolution.
Contingent on approval by special resolution.
(Section 129(1), CA 1993.)

A "major transaction" includes:

The acquisition of assets or an agreement to acquire assets, whether contingent or not.
The disposition of assets, or an agreement to dispose of assets, whether contingent or not.
A transaction that has or is likely to have the effect of the company acquiring rights or interests or incurring obligations or liabilities, including contingent liabilities, the value of which is more than half the value of the company's assets before the transaction.
(Section 129(2), CA 1993.)

Regulatory authorities

The parties will need to give early consideration to the question of whether the asset purchase will trigger the need for the involvement of any regulatory authorities. In New Zealand, this includes:

The NZX (for example, whether the purchase or disposal of the assets requires disclosure by the seller to the market under the NZX Listing Rules).
The Commerce Commission. Competition laws are complex and broad-ranging in scope and can cause major issues for transactions, so it is important to identify any competition issues at an early stage.
The OIO (purchases of sensitive land or significant business assets by an overseas person within the meaning of the OIA 2005 requiring consent under the OIA 2005). For an overview of the regulatory framework governing overseas investment in New Zealand, see Practice note, Regulation of overseas investment in New Zealand.
The IRD (for example, whether a tax ruling is required).
Regulators of particular business sectors (for example, financial services, utilities, broadcasting and telecommunications).

Other third-party consents

There may also be consents or approvals required to be obtained from other third parties, such as:

Landlords. Consent from landlords in relation to properties that the target business leases for its operations, such as for office space or other business premises. Landlords will wish to ensure that the incoming lessee will have sufficient financial resources to continue making rental payments. These consent requirements are usually contained within the lease document. The landlord's consent will usually be required to the assignment of any property leases required for the operation of the business.
Counterparties to contracts. The parties should review major contracts with customers and suppliers. All parties to these contracts will be required to agree to the novation of the contract. Some contracts (for example, licences of IP) may require the approval of the other party to assignment of the licence. See Novation and assignment of contracts.
Lenders. Consent from the seller's financiers where the target business's existing business loans (for example, equipment finance) will stay in place following completion of the sale. The financiers will need to be satisfied that the buyer has sufficient financial resources to ensure that business loans and interest are repaid and that there is no credit risk. Depending on the terms of the existing loans, the buyer may prefer to take over the existing loans rather than putting in place their own business loan arrangements.

Transaction documents for an asset purchase

While the particular documents for an asset purchase will depend on the circumstances of the transaction, they usually include a common set of documents, which are summarised below.

Asset purchase agreement

The asset purchase agreement (also known as a "sale and purchase agreement", "business purchase agreement" or "asset sale agreement") is the principal contractual document relating to an asset purchase. It sets out the agreement between the parties to sell and purchase the assets of the target business at a specified price and sets out the other agreed terms governing the purchase. Depending on the complexity and size of the particular purchase, the asset purchase agreement can be as short as ten pages and as long as 100 pages or more.

The first draft of an asset purchase agreement is often prepared by the buyer's lawyers and provided to the seller and its advisers for their review and negotiation. This is different for an auction sale process, where the seller's lawyers usually prepare the first draft.

As well as containing warranties and indemnities, the asset purchase agreement deals with:

How the consideration is to be satisfied, for example:
- cash, shares or a mixture of both;
- whether it is to be a fixed amount or linked to net assets or future profits (see Earn-out arrangements);
- when it is to be paid, for example, wholly at completion or deferred pending determination of a net asset value or an earn-out formula;
- if there is to be any retention of the consideration, for example, to cover potential warranty or indemnity claims.
What conditions precedent the purchase may be subject to.
Any restrictive covenants that bind the parties (for example, non-compete restrictions).
Completion arrangements.
Other matters such as the treatment of employees (see also Employment-related considerations).

Climate change-aligned clauses

There is increasing awareness of climate change and the need to take action to mitigate it. Parties to acquisition transactions are increasingly focused on taking positive steps to address climate change and other environmental, social and governance (ESG) issues. Such action can be embedded in all commercial contracts, including asset purchase agreements, to help focus the parties' minds on ESG issues and assist them to make real change to address climate change risks.

The Chancery Lane Project (TCLP) have put together climate-aligned resources that parties seeking to be market leaders in this area may wish to consider when entering into an asset purchase agreement. In particular, Green Acquisition Obligations (Sienna's clause) requires the buyer to maintain or improve the green credentials or behaviours of the asset or business following completion. The clause is also linked to the payment mechanism, with funds released from an escrow account if the post-completion climate targets and obligations are met.

For more information about TCLP and a full list of the TCLP model clauses that are relevant to a wide range of commercial arrangements, including commercial due diligence, see Toolkit, The Chancery Lane Project: model climate clauses.

For more information about ESG issues impacting companies generally, see ESG and sustainability toolkit (Australia).

Disclosure letter

On most purchases (whether structured as a share or asset purchase), the seller will prepare a disclosure letter that contains both general and specific disclosures against the warranties contained in the purchase agreement. Warranties and disclosures must be considered together. If a warranted fact turns out to be untrue, the buyer has a claim for breach of contract regardless of whether it relied on the warranty in question. However, no claim will lie if the facts that give rise to the breach were specifically disclosed to the buyer. The disclosure letter is therefore a key transaction document and will usually be heavily negotiated between the parties. For more information about disclosure letters, see Practice note, Disclosure letters. For a standard form disclosure letter for use in an asset purchase, see Standard document, Disclosure letter: asset purchase.

Completion

The asset purchase agreement will usually set out the process for completion in detail. This is the parties' road map for the exact steps each party is required to follow and in what order. Well-drafted completion provisions in an asset purchase agreement will be very useful to ensure that the completion process runs as smoothly as possible. This is often critical because the completion process will be conducted in a high pressure environment and must generally occur on the day set for completion (particularly where there is a very large purchase price, where an interest rate penalty for one day could be a material amount).

The asset purchase agreement will also specify any conditions precedent that must be satisfied before completion occurs. Each party's legal advisers should have a process for ensuring that all conditions precedent have been satisfied before completion occurs. For more information on the completion process and timing, see Practice note, Signing and completion. See also Standard document, Completion agenda: asset purchases: simultaneous signing and completion.

Post completion

Following completion of an asset purchase, there will usually be various post-completion matters to attend to, including:

Announcing the transaction.
Making certain filings with the Companies Office (for example, if shares are acquired as part of the transaction, the Companies Office must be notified of any changes in the directors of the relevant company).
Certain administrative matters such as insurance, payroll, PAYE and GST.

See Standard document, Completion agenda: asset purchases: simultaneous signing and completion.

Other specialist issues on an asset purchase

The parties will invariably need to consider other specialist issues while negotiating and documenting an asset purchase. Examples of these issues are set out below.

Employment-related considerations

Employees of the target business will usually be employed by the seller or entities controlled by the seller. As employment agreements are personal in nature, the employment relationship cannot be transferred from the seller to the buyer as part of the asset purchase transaction. The seller will need to terminate the employment agreement with the employee and the buyer will need to offer in writing to employ those employees it wishes to employ in the business and enter into a new employment agreement with each of those employees who accept the buyer's offer. The seller has a duty to negotiate on behalf of its employees to obtain for them terms of employment no less favourable to the employees, overall, than their terms of employment with the seller. However, the buyer is free to offer the employees whatever terms of employment it chooses, so long as the minimum employment standards are met. The employees are free to accept or reject the terms offered by the buyer.

The parties will need to consider the treatment of the accrued entitlements and costs arising from recognition of past employee service, which can vary depending on each employee's terms and conditions of employment. Generally, where there is a transfer of employment, service with the old employer counts as service with the new employer. However, there are exceptions to this general principle. If the buyer is not an associated entity of the seller, the buyer may decide not to recognise a transferring employee's previous accumulated service for annual leave or redundancy pay, in which case the seller may be obliged to pay the affected employees their accrued entitlements (such as annual leave or redundancy).

The buyer will need to comply with its employee obligations under any relevant collective employment agreement.

The rules governing the transfer of employees are complex and specialist legal advice on the treatment of employees should be sought.

Sellers in capacity of trustees

As noted earlier, in some asset purchases, the assets of the business being purchased may include shares of a subsidiary company (or companies) in the seller's corporate group. If the sellers of those shares are not selling the shares in their own right but are doing so in their capacity as trustees for other persons, the buyer will have to consider three main issues:

Whether the sellers as trustees have the capacity to sell those shares.
The level of protection in the form of warranties and indemnities that the buyer can expect to secure. (For example, trustees may not have the capacity to give warranties or indemnities, unless they have an express power to do so in the underlying instrument).
Whether the limitations on the trustee's liability are acceptable.

Warranty and indemnity insurance

An asset purchase agreement will include warranties and indemnities given by the seller to protect the buyer against any unknown and unquantified liabilities. Warranty and Indemnity insurance (W&I insurance) is the generic name for insurance that provides cover for the buyer (or, less commonly, the seller) for losses arising from a breach of a seller's warranty or in certain cases under a tax indemnity (or other equivalent provisions) in a purchase context.

W&I insurance can assist in mitigating a seller's potential liability by transferring the risk of financial loss associated with a claim for a breach of an insured warranty or indemnity from the seller to the insurer. If the seller decides it requires the buyer to purchase W&I insurance, it will need to inform the buyer early in the negotiations that the sale will be conditional on the buyer purchasing W&I insurance. The cost of W&I insurance is usually factored into the calculation of the purchase price for the business. An insurance broker will need to be engaged at an early stage in the transaction process. It is the broker's job to find an insurer (or insurers) to provide the W&I insurance policy.

For more information, see Practice note, Warranty and indemnity insurance.

Asset purchases | Practical Law

Asset purchases

Practical Law ANZ Practice Note w-018-1855 (Approx. 36 pages)

Asset purchases

Scope of this note

Reasons for a purchase

Buyer objectives in an asset purchase

Seller objectives in an asset sale

Valuing a business

Valuation methods

Cash-free, debt-free basis

Completion accounts and locked-box approach

Purchase structures

Asset purchase versus share purchase

Target

Sale document

Form of transfer

Consents and approvals on purchases

Due diligence focus

Key factors influencing purchase structure

Potential for unknown liabilities

Tax

Partial sale

Consents and approvals

Financial products

Debt finance and security arrangements

Method of sale

Heads of agreement

Key issues for asset purchases

Novation and assignment of contracts

Earn-out arrangements

Protection of the business

Tax considerations

Goods and Services Tax

Income tax

Assets to be acquired and liabilities to be assumed

Plant, machinery and vehicles

Stock

Contracts

Real property

Information technology

Intellectual property

Know-how and confidential information

Goodwill

Hire-purchase and leasing agreements

Business loans

Employee entitlements

Straddle returns

Trade debtors and creditors

Excluded assets and excluded liabilities

Transaction timetable for an asset purchase

Confidentiality

Due diligence

Consents and approvals for asset purchases

Board approvals

Shareholder approvals

Regulatory authorities

Other third-party consents

Transaction documents for an asset purchase

Asset purchase agreement

Climate change-aligned clauses

Disclosure letter

Other ancillary documents

Completion

Post completion

Other specialist issues on an asset purchase

Employment-related considerations

Sellers in capacity of trustees

Warranty and indemnity insurance