Title to Purchased Assets
What is the Title to Purchased Assets? In this section, the Seller provides information regarding its ownership of the Purchased Assets. It is part of the Representations and Warranties of the Seller section.
The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading.
The Middle Ground: Here, the Seller represents that it has good and valid title to, or a valid leasehold interest in, all of the Purchased Assets (i.e. it is the legal owner or lessee of all the Purchased Assets). It also represents that the Purchased Assets are free and clear of any Encumbrances other than Permitted Encumbrances. The remainder of the clause is devoted to defining Permitted Encumbrances (usually in list form). Permitted Encumbrances are generally limited to Encumbrances that are not material to the Business or the Purchased Assets, either individually or when taken together.
Purpose: In an asset sale, the Buyer is purchasing every single asset for a reason, so it’s important that the Seller is able to transfer every single asset according to the transaction terms. Its failure to do so could meaningfully alter the value of the deal for the Buyer. This clause and the Indemnification section of the Agreement place the risk of that failure squarely on the Seller’s shoulders so that the Buyer is compensated for any such loss in value.
Buyer Preference: The Buyer wants this section to apply to all the Purchased Assets to avoid receiving assets with Encumbrances other than the Permitted Encumbrances. Furthermore, it wants to limit the list of Permitted Encumbrances to those Encumbrances that do not impede the use or reduce the value of the Purchased Assets. The Seller may insist on excluding Intellectual Property Assets from this representation because they are addressed in a separate section of the Agreement, and if that is the case the Buyer wants to make sure there is a similar representation included in the Intellectual Property section.
Seller Preference: The Seller wants to limit this representation to tangible personal property (which excludes Intellectual Property). If Intellectual Property is included in this representation, the Seller wants to make sure that the representation does not exceed the scope of what is required by the Intellectual Property section of the Seller Representations and Warranties. Also, instead of qualifying the Permitted Encumbrances using a general materiality standard, the Seller may want to argue for the narrower Material Adverse Effect standard. The Seller also wants an expansive definition of Permitted Encumbrances, including a catchall clause for any Encumbrances that would not have a Material Adverse Effect on the Business.
Differences in a Stock Sale Transaction Structure: There is a minor drafting difference when using a stock sale structure, which is that use of the phrase “purchased assets” is not accurate since the entire company, not just the assets, is being purchased.
