Purchase and Sale Agreements legally transfer the ownership of a business or some of its assets to a new owner.
A Purchase and Sale Agreement is one in which a seller agrees to sell assets or a business, including all of the assets owned by the business, to the purchaser. These agreements are often used for high-value sales such as real estate, equipment and machinery, multiple sales that will occur over a certain period of time, or sales that will occur sometime in the future.
Apart from the main details of the sale price and date, a Purchase and Sale Agreement can provide many relevant details of the exchange. A common limitation included in such agreements is a limitation on what types of damages a party can expect. The parties may specify that they are entitled to “specific performance” in the event of a default, meaning that if one party defaults on the terms of the agreement, such as failing to transfer the business or assets as required, the other party can ask a court to force them to transfer the business or assets. Likewise, the parties may limit the damages to the price already paid pursuant to the agreement and no more. Damages provisions can consequently guarantee a party’s expectations regarding the contract and can act to deny a non-performing party the benefit of the bargain if market conditions change after the agreement is signed.
A common Purchase and Sale Contract is for the sale of a business, either through a stock sale or an asset sale. A stock or interest sale of a business involves the sale and purchase of an ownership in a specific entity, that is owned by the owners via shares or interests in the entity. A stock sale has many advantages, including tax advantages to the seller due to capital gains treatment on the profits, the buyer can more easily maintain valuable contracts such as employment contracts or leases, and there are generally fewer legal transactional costs because the assets stay with the company.
An asset sale sells each of the assets of the business individually, often including intangible assets such as goodwill and intellectual property rights. An asset sale has greater flexibility—parties can choose which assets are specifically sold in the transaction. Similarly, it can help the buyer avoid some of the disadvantageous contracts or other obligations of the seller. An asset sale often provides the buyer a better tax consequence due to the ability to depreciate the purchased assets (however some assets may be subject to a sales tax). Asset sales are sometimes governed by an Asset Sale Agreement or Asset Transfer Agreement, as opposed to a Purchase and Sale Agreement, as the sale relates only to a sale of specific assets.
The Importance of Due Diligence Clauses in Purchase and Sale Agreements (PSA)
Nearly four years after having signed a purchase and sale agreement formalizing an approximately $2.4 billion acquisition by Marathon Petroleum of a Houston-area refinery from its previous owner, British Petroleum (BP), Marathon has filed a lawsuit alleging that BP breached terms contained in the 2013 purchase and sale agreement signed by the two companies.
Specifically, Marathon’s stated position is that at the time of the transaction BP knew that its refinery was not in compliance with a number of environmental laws but had stopped trying to correct areas of non-compliance in the period leading up to the sale date, all of which was in violation of the terms set forth in the purchase and sale agreement.
In response, BP has stated that “[b]efore the sale, BP spent billions of dollars on substantial upgrades to the refinery, and Marathon insisted on and received a discounted sales price so it could make some additional capital investments,” and that “Marathon conducted extensive due diligence and was given virtually unrestricted access to documents and equipment at the refinery. When BP transferred ownership of the refinery to Marathon, it had satisfied all commitments made to federal regulators and was in full compliance with the terms of the purchase agreement.”
Regardless of whether Marathon’s lawsuit has any merit, its suit underscores the importance of due diligence clauses and how each party will certify both that it is in compliance with the terms of the purchase and sale agreement and what corroborating documentation is required for the completion of the sale.
Review & Draft Legal Purchase Agreements From Your Contract Lawyer
Your Contract Lawyer can help you review, draft, or negotiate a purchase and sale agreement whether you are the buyer or seller of a business or its assets. Please contact our office to learn more about how our attorneys may be able to help.
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