Following is an analysis of the different requirements and effects of choosing to structure the sale of Company as a sale of assets. The analysis includes a numerical exemplification of the said effects.
I. Approval requirements
In a sale of business such as the present one, vote requirements are essential before any further analysis can be done.
In particular, as far as the seller is concerned – in the present case Company – both the approval of the board and of the shareholders are required.
Complete information about the composition of the board is not yet available to us, though it can be expected that at least some of the five (5) sole shareholders are part of it. Even though the owners of Company themselves have asked for advice on potential sale structures, their final consent cannot be given for granted since their interest in selling today cannot yet be interpreted as a firm decision to do so tomorrow.
Taking a closer look to the buyer entity, instead, it not sure whether approval by its board will be required as it depends on whether or not the present transaction can be defined as a material one from its perspective. Though, even in the event the transaction should not be a material one for the acquirer, it would still be advisable to get the board’s approval.
The acquirer shareholders will not be asked to express their vote on the matter, unless the transaction will fundamentally change the nature of their initial investment.
While the default rule, in terms of votes required to consider the voted issue approved, is majority, it could be the case – for either or both the corporations involved – that the voting requirement has been changed internally in the articles of incorporation. Thus, the articles should be carefully read also in light of this.
II. Liabilities distribution
Differently from other types of transactions, in an asset sale, the acquirer will only assume those liabilities that chooses to – some restrictions apply in this case as it is not a sale of just some assets but rather of the entire business.
In fact, in the event should want to continue running the business acquired through the asset sale, the continuity of enterprise doctrine would come into play. This doctrine provides that it is not possible for the acquirer to avoid all the liabilities that it would have otherwise taken just by labeling a merger as an asset sale. In such cases, for successor liability issues only, the transaction will be treated as if it was a merger.
In addition to this, California also applies the product line exception, but this does not seem to apply to the present transaction, as the seller is interested in selling the complete business rather than part of it.
Even though this does not seem necessary from the available information, if it would make the buyer feel more confortable in making the transaction, it could decide to create a shell corporation as a vehicle for the purchase of the seller’s assets for the purpose of shielding itself from future liabilities.
III. Contracts with third parties
It is important to consider that the Company does not own the land where its primary manufacturing facility is located. Instead, it has a lease contract (the “Lease”) with a third party.
Of course, the buyer will most certainly assume the Lease given its centrality for the business and its operation. In particular, the Lease is a long-term lease agreement that still has a considerable amount of time remaining on the term – specifically fifty (50) years.
The concern regarding such lease contract is that it contains a “non-assignment” clause. This provision entails that written approval of the landlord is required in for the Lease to be assigned to the buyer.
For this reason, it is advisable to first investigate whether the landlord would agree to such an assignment or not. This investigation, of course, cannot be done before a potential buyer is actually…