Introduction To Asset Transfer Agreements
Asset transfer agreements, also known as asset purchase agreements, are legal contracts that outline the terms surrounding the transfer of assets from one party to another. Typically, they’re used in the process of buying or selling a business.
An asset transfer agreement is essential for the completion of the transfer of all of the seller’s assets; however, it may also be possible for a business to keep hold of some of its assets. As such, the transfer agreement will need to determine which parties get which assets, and what the specific terms of the transfer are.
Various types of assets could be included in the agreement, depending on the nature of the transaction. Some assets might include inventory, financial accounts, intellectual property such as trademarks or patent rights, investment accounts, real estate, buildings or other property, production equipment, vehicles and more . The name and address of the seller and buyer, as well as the date on which the agreement was made, should also be included in the document.
This transfer agreement serves several purposes both before and after the transfer. Before the transfer, it will give both parties a written understanding of how the transfer is going to occur, and what will happen to the various assets. This could allow them to resolve any potential conflicts or disputes before they actually occur.
After the transfer, it will serve as a legal document both parties can use to their benefit. For example, the seller may use it to hold the buyer accountable in the event of issues with any of the assets or failure to meet specific terms. The buyer may also use the agreement as proof of ownership of the assets. It may also be used in accounting and filing taxes, as another form of evidence of the transaction.
Types Of Asset Transfer Agreements
Asset transfer agreements cover the full spectrum of assets. Broadly, we can categorize asset transfer agreements as agreements transferring tangible assets, agreements transferring intangible assets and agreements transferring mixed assets.
Agreements transferring tangible assets
Tangible assets include, for example, tangible assets which are movable (stocks and shares) or immovable (fixed property). Tangible movable assets may be transferred simply by physical handover, but an agreement is normally recorded in writing to avoid disputes. However, transfer of tangible immovable assets requires a written agreement by the parties, even if the contract is not recordal, in order to enforce the transfer against the third party. In the case of real estate, for example, transfer must be effected by a notarial deed of transfer executed before a notary public.
Agreements transferring intangible assets
Transfers of intangible assets such as intellectual property, debts, or shares require a written agreement in order to effect the transfer. Such transfer is not enforceable against third parties without registration, if required by law, and may constitute infringement of the third party’s rights. For example, if the creditor of a debt is transferred, the debtor cannot be held to the performance of the contract with the previous creditor. A creditor’s rights may be assigned, including intellectual property rights like trademarks.
Agreements transferring mixed assets
Agreements transferring mixed assets, or a combination of various tangible and intangible assets, are used to effect the sale of a business. The scope of the assets to be transferred is usually thoroughly described in this kind of agreement. There are certain restrictions on the type of assets which may be covered in a business transaction. Any assets subject to a pledge, for example, cannot be transferred without the concurrence of all the pledgees of the assets in question.
Common Provisions In An Asset Transfer Agreement
An asset transfer agreement will typically include, among other things, the following terms and conditions:
Keywords and Definitions Some asset transfer agreements will include definitions of terms that are used throughout the agreement. For example, the asset purchase agreement may define "Instrument" to mean a deed or other document that conveys property and it may define "Buyer Indemnified Parties" to mean a buyer, subsidiary, corporation, partnership or other legal entity or organization in which the buyer or one or more of its subsidiaries has an interest.
Term The term of the project from which some or all of the assets are being transferred.
Parties Recitals In some asset transfers, you may have parties recitals to identify the relevant parties.
Transaction Generally, an asset transfer agreement will contain a transaction. In the transaction, a buyer will agree to buy (and seller to sell) certain assets of a business in exchange for purchase price payment. The agreement typically also identifies the closing date and the time and place for the closing.
Terms and Conditions An asset transfer agreement will describe the terms and conditions of the sale. It will generally describe the obligation of a buyer to pay cash or a note and the obligation of a seller to transfer title or deliver possession.
Representations and Warranties An asset transfer agreement will usually include a schedule of representations and warranties. Oftentimes, the schedule is attached at the end of the agreement. The warranty statement will typically contain a list of representations including, among others: An asset transfer agreement will also include an exchange of covenants. Such covenants will usually contain the following elements: The majority of covenants given by the buyer will focus on the buyer’s limitation of liability. It normally will contain a clause that will state that the buyer will not have any liability for any of the acts, omissions, liabilities, obligations, losses, claims, proceedings, judgments, damages, costs, claims, expenses, payments or damages until the sum of all such matters exceeds a stated amount. Once this stated amount is reached, the indemnification responsibility of a buyer will begin.
Payment The payment section of an asset transfer agreement will list the purchase price and designate the closing price and the escrow agent to whom the closing price will be delivered. An escrow will be paid out upon the completion of specified conditions.
Advantages Of Asset Transfer Agreements
The process of transferring assets, be it between family members or in the course of a business transaction, requires a delicate balance of trust and legwork. An asset transfer agreement is a tool parties can use to establish a formal understanding of the transaction, as well as any conditions or warranties associated with it.
Legal Protection
As with any legally binding document, an asset transfer agreement provides legal protection to the parties involved because each party’s rights and obligations are defined and agreed upon in advance. In the event that something goes wrong or the parties fail to perform any of their obligations, the injured party has recourse in the courts. Without a written agreement, the parties would have little recourse if a problem occurred, especially if there was no proof of their original intentions.
Clarity in Transactions
An asset transfer agreement is meant to clarify exactly what items are being transferred and what items are not. It eliminates the confusion about what is included in an exchange and what is not. It also provides the opportunity for a detailed clause setting forth who is responsible for payment of any taxes or fees that arise as a consequence of the transaction.
Avoiding Regulatory Requirements
There are regulatory requirements the states put in place to try to avoid sales being made that do not reflect fair market value for particular assets. People generally want to pay the lowest price they can for items they want, while sellers want to sell them for the highest price. Regulations regarding asset transfers often require parties to document that they are complying with the principle of the arms’ length transaction, or where the buyer and seller are independent of each other and are negotiation the sales price fairly. An asset transfer agreement is a good way to help the parties show they have complied with the regulation’s requirements.
How To Draft An Asset Transfer Agreement
A transfer of assets agreement is normally entered into at the point where parties or businesses may wish to separate, for example, on the acquisition of part of a company’s business whereby the purchaser desires to receive the assets separately on a basis free from the seller’s liabilities in the previous company as the purchaser will continue to carry on the business. Or the purchaser may wish to buy a company on a standalone basis without assuming the liabilities of that company’s trade or business. In either case, these agreements help to set out the sale terms in writing, and helps the purchaser in avoiding future claims from creditors.
It should be noted that the information noted herein is not intended to be exhaustive, and therefore the advice of a solicitor should be sought to ensure that an appropriate and tailored agreement is concluded.
So how do you draft your assets and business purchase agreement?
- Your kicking off, as said , with these types of agreements that parties need to roll up their sleeves potentially and put in many hours to consider what terms are needed. The aim of the agreement is to draft all relevant warranties and indemnities. Warranties are used as a way of assigning liabilities to a specific company. Indemnities are used as a way of removing liabilities and assigning them to a specific entity.
- Usually the agreement will require a non-binding letter of intent to be executed between the parties before proceeding to the next stage. This will ensure that the parties mutually agree on broad commercial terms and relevant fee structures moving forwards.
- You will need to work on the deal. Conduct relevant due diligence on the assets and business you wish to pick up. Once this has occurred you will then need an asset transfer agreement. The agreement should therefore give detailed descriptions of the assets that are to be transferred. It is also worth giving a description of the liabilities at this stage that may affect the assets.
- At this point you should discuss with your solicitor any relevant liabilities and how these will be dealt with in the agreement. In particular the buyer may expect that misdemeanours of the seller’s trading history may have some bearing on the operation of the agreement.
- Key employees are worth considering at this stage. If there’s potential that the key employees may leave after completion the terms of the sale should contain an appropriately drafted obligation for the seller to persuade them to stay.
- In considering the sale price, normally the purchase price is paid in cash at the closing of the transaction, however, other options may be put on the table.
Common Errors In Asset Transfer Agreements
When embarking on the negotiation and preparation of legally binding agreements, there are common mistakes to avoid to ensure a successful conclusion is achieved. When it comes to asset transfer agreements, these often include: Vague or ambiguous clauses: Whether it is the scope of the transfer or the items themselves, the more ambiguous a clause is then the greater the chance that there will be disputes further down the line. It is important to give as much detail as possible to ensure everyone knows exactly what is being transferred. Unclear definitions: Definitions are an important part of the agreement and if they aren’t crystal clear, there is again room for dispute and misinterpretation. Definitions should be relevant to the context of the agreement and should be clearly labelled as such to avoid confusion. Incomplete documentation: A lack of key supporting documents can result in purchase price s being adjusted or the transaction itself being jeopardised altogether, so it pays to have everything in place at the time of drafting. Ignoring due diligence: Due diligence should be a vital step in the process before an asset transfer agreement is drafted. The information gleaned from due diligence can be a huge help in the drafting process, while also helping the seller to manage the potentially extensive negotiations. Limiting the rights and remedies: If either party is limited in their rights or remedies in the event of a claim, it may deter them from pursuing a claim or settling the misconceptions they have with the other party. This might, therefore, mean that the buyer ends up with something that is not in accordance with what they were expecting or that the seller receives less than they were due.
Legal Issues And Compliance
Navigating the legal landscape when it comes to asset transfer agreements is essential for ensuring that both the buyer and the seller are protected. From labor laws and tax implications to intellectual property rights and industry regulations, there are myriad factors to consider. Broadly speaking, all asset transfer agreements must comply with the laws of the jurisdiction within which the transaction takes place. For instance, in the U.S., various federal, state and local laws apply, focusing on areas such as securities, taxes, business practices and data protection. Compliance with international laws may also be necessary if the transaction involves the transfer of assets across national borders or involves companies that are headquartered in different countries. The most common laws that apply to asset transfer agreements likely center on the particular industry being affected, as well as the states or countries in which the companies affected by the transaction operate. For example, companies in the healthcare, finance, food and chemical processing industries are subject to a number of laws governing the safety of their products and how they conduct their businesses. Regulatory bodies such as the Federal Trade Commission (FTC), the Food and Drug Administration (FDA) and the Federal Aviation Administration (FAA) enforce these laws at the federal level, and it’s not uncommon for some industries to be subject to regulation at the state level as well. If you’re contemplating an asset transfer agreement, you should have a clear understanding of the regulatory landscape related to your industry before you begin the process to avoid complications, regrettable oversights and potential losses down the road.
Enforcement Of Asset Transfer Agreements
Enforcement of Asset Transfer Agreements can be complicated. If disagreements arise regarding the proper construction of the terms and particulars of the agreement, it may be necessary to seek redress through a variety of remedies afforded by law. In some cases, the parties may agree to resolve the dispute through binding arbitration rather than litigation.
Conflicts may occur over the transfer of public or private personal assets such as real estate, stocks, intellectual property, and equipment or tangible personal property. When a dispute arises, an aggrieved party may seek resolutions by:
• Bringing a legal action to enforce the agreement
• Seeking equitable relief
• Specific performance
• Temporary restraining order/judicial restraints
• Seeking and obtaining a writ of attachment
• Pursuing arbitration to enforce terms of the agreement
Parties may also pursue damages for breach of a valid and legally binding asset transfer agreement or remedy other defects, such as:
• Fraud
• Misrepresentation
• Breach of a condition precedent
• Breach of warranty
• Breach of fiduciary duty
• Undue influence
• Unconscionability
Non-legally binding agreements can also be the subject of legal action. If the conduct of the parties constitutes a course of the dealing that sufficiently expresses their intentions to create a legally binding contract, the elements of an oral or unwritten agreement may be satisfied . Courts may also impose a fiduciary duty or an equitable remedy to enforce a non-legally binding contract.
Even though an agreement is not valid, courts may enforce the legal rights of the parties or support a cause of action by imposing constructive rights. Courts may imply a constructive trust to limit or restrict rights of possession and transfer. Courts may impose a constructive trust if a party exercises dominion and control over property ho subsequently denies against the true owner of the property.
Agreements may impose a conditions precedent requiring development of a trust or other benefit to a third party. Misdemeanor and other rules may not permit rights to transfer under a contract until the relation of trust exists or the predecessor condition has been established.
Even where restrictions apply to the transfer of title, equitable estoppel permits a party to recover on an expired term, including the right to recoup the value of the benefit of the bargain in later years.
As a practical matter, some agreements must comply with the Statute of Frauds. If the individual or group disunites prior to the execution of the contract, rescission of the benefits and obligations of an agreement may be appropriate. Courts may apply doctrines of estoppel, laches, or other limitations if the statutorily required writing fails to provide notice of the terms of the agreement.