Assumed and Excluded Liabilities
Essential Question:
Who takes on what risks when?
In Brief:
Applicable liabilities are transaction- and business-specific, but misunderstandings can significantly affect the risk profile.
Buyers generally want to limit the liabilities they’re taking on.
Review to ensure the liability allocation from the business deal is reflected here – and get out in front of any elements that affect what you want your post-close situation to look like.
Category: Explaining the Deal; Risk Allocation
What is it?
These sections spell out who, between the buyer and the seller, takes on what risks after the transaction is completed. These liabilities are, of course, extremely transaction specific, can be inherently part of the business or industry, or could be particular risks relevant to the individual business, but the most common are those liabilities related to outstanding performance obligations a buyer is assuming (having taken over contracts).
When does it matter?
Generally, buyers will want to limit the liabilities they’re assuming as much as possible (and are, as an almost knee jerk reaction, reluctant to assume any historical liability of any kind under a “my watch, your watch” mantra). Historical liabilities will generally fall on the seller; there are things that can help guard sellers against the effects of these liabilities going forward such as discontinued operations insurance. In a deal-specific sense, this section should be driven by the business deal buyers and sellers have put together. Deviations and misunderstandings on who assumes what liability risk when can significantly change the risk profile of the transaction.
What to look out for?
The items that are included in the assumed and excluded liabilities section are meant to ensure that both parties are taking on what they anticipated. Review to confirm that separate and specific elements of the business deal are reflected here. And, as a seller, if there are particular elements that would normally be excluded liabilities that are important to what you want your situation to look like post-close, you must get out in front of those items, discuss them with your counsel, and discuss them with the buyer.
Also look to see that any liabilities that you’ve agreed to split are accurately reflected. For example, there are statutory obligations that arise in terms of employees who are transferred or terminated in the course of a transaction. If an employee is terminated, the seller still has the obligation to provide COBRA, benefits, etc. In cases like these, the parties may agree on a different risk allocation in order to make sure that those obligations are met. In manufacturing, what do you do with product liability and warranty claims. Some or all of that risk may be assumed by the buyer. Know what you discussed in the business deal and make sure that any decisions are appropriately captured.
And, note that the list of excluded liabilities will appear again in the purchase agreement in the indemnification section – a buyer will be seeking indemnity for “excluded liabilities.”
