PA SGS 7:
Asset Sales, Legal and Commercial issues.
Lecture notes, Ch 6:
Very important that there is a list of the assets the purchaser is wishing to acquire from
the business sale. What is being bought v left behind etc.
Assets excluded from business sale? Not strictly necessary but often included so that the
parties are both clear.
Debtors:
If debts are to be sold to the buyer = the seller will expect a payment for them. The
buyer will then be left with the task of collecting them. The buyer’s concern will be that
it may not be able to collect in all of the debts as some may prove to be bad debts and
need to be reduced or written off. This is overcome by the buyer purchasing the debts at
a discount, i.e for a price less than their face value.
Pros – maintain business relationships
Cons – risk of bad debts
The seller cannot sell debts that arise under a contract which prohibits the assignment
of the benefit of the contract. Where this is an issue, one of the methods below will need
to be used.
1 – seller retains ownership of the debts and to collect them itself
Advantage: seller keeps everything it collects , but seller will need personnel to carry
this out; careful if all staff was purchased under TUPE. Also, buyer might not like this
since the seller may damage the ongoing commercial relationship the buyer wants to
maintain with the debtors
2 – seller retain ownership but the buyer collects them as its agent in return for a
collection fee/commission.
• The seller can get around the problem of having no employees here and the buyer
may be able to control what steps the seller can take to enforce collection from
debtors which do not or cannot pay (in the provisions of the asset sale
agreement).
• This method allows the buyer to have a good relationship with the debtors
without having to pay for debts and take the risk that certain debts may prove
irrecoverable
• It also allows it to make some money from the collection fee it gets.
3 – buyer gets book debts
Sold at a discount
Option 1 -
Creditors:
• Liabilities of the business, not assets
,Pros – control of money owed
Cons – more money owed
Unusual for buyer to agree to assume liabilities towards the seller’s creditors under an
asset deal.
Usually, the only reason why the buyer would do this is to give control over the payment
to the relevant creditor so it can ensure the relationship with the creditor is preserved
for the general welfare of the business.
Third party contracts:
• Ex, Exoil contract, largest contract.
• Burden + benefit
o Burden = language training to exoil
o Benefit = money it gets for the training
3 possibilities:
• Assignment
• Novation
• Negotiate fresh contract
Assignment:
• Only benefit of contract can be assigned at law
• Burden stays behind with Seller
• Contract may restrict assignment, i.e manoteo contract
• Note the benefit of a contract for personal service cannot be assigned (Tollhouse v
Associated Portland Cement Manufacturers Limited)
Novation:
• Buyer steps into Seller’s shoes
• Benefit and obligations transferred too
• Original contract continues between buyer and 3rd party
• Parties can renegotiate any onerous
• Consent of 3rd party needed
New contract:
• Renegotiate with 3rd party a completely new contract
Conditional contracts:
• Condition precedent: assign/novate/new contract
• Important for confidentiality and timing
Exercise 1 in chapter: clause 6 in the key supply contracts
Clause 6(a) of the supply contract effectively prohibits assignment of the supply contract
without the supplier’s consent. The supplier can terminate the contract with immediate
effect if CCL purports to assign the contract to MML as part of the sale of its wallpaper
and furnishing business.
If the contract is key to the transaction, MML should ask CCL to contact the supplier to
obtain confirmation that it will not exercise its right to terminate the agreement
,(under clause 6(a)) as a result of the business sale and that it is happy to contract with
MML in the future. If confirmation is obtained, MML would be keen for the supplier to
agree to a novation of the contract for the reasons discussed in this Chapter. Alternatively,
a new contract could be negotiated between the supplier and MML.
CCL and MML may enter into a conditional contract for the sale of the business if the
supplier’s consent to assignment or novation, or agreement to a new contract, is not
obtained by the date of exchange.
Note that clause 6(b) would have no effect on a business sale. This is a Change of Control
provision which would allow the supplier the right to terminate the agreement if
ownership of CCL’s shares changes hands. It would therefore be an issue on a share sale.
Employees:
• Automatic transfer under TUPE
, Key points:
• TUPE is only applicable to business sale
• Transfer of an undertaking OR part of an undertaking
• Reverses common law position – no dismissal
• Automatic transfer of contracts of employment
Which employees are affected? 2 limb test
Limb 1: Reg 4(1)
‘ a relevant transfer…shall not operate to terminate the contract of employment of any
person employed by the transferor and assigned to the (organised grouping of resources
or employees that is subject to the relevant transfer)
So – employees will transfer if they are working for the business / part of the business
being sold. What if employees work in several different parts of the organisation?
Test – is the employee assigned to the business being sold?
Test set out in Botzen v Rotterdamsche; whether employees are wholly engaged or
assigned to the business “which formed the organisational framework within which
their employment relationship took effect’, particularly where part of a business is
transferred and employees work in both the part being transferred and the part being
retained by the seller. The court will look at the employee’s function rather than the
terms of his/her contract.
Employment Tribunal in Duncan Webb Offset v Cooper – further guidance.
In determining whether the employee is ‘assigned’ to the business or part transferred,
tribunals should consider the following:
• The amount of time spent working in one part of the business over the other
• The value given to each part of the business by the employee
• Contractual terms setting out what the employee’s job comprises and
• The allocation of the cost of the employee’s services.
Exercise 2, page 11
Asset Sales, Legal and Commercial issues.
Lecture notes, Ch 6:
Very important that there is a list of the assets the purchaser is wishing to acquire from
the business sale. What is being bought v left behind etc.
Assets excluded from business sale? Not strictly necessary but often included so that the
parties are both clear.
Debtors:
If debts are to be sold to the buyer = the seller will expect a payment for them. The
buyer will then be left with the task of collecting them. The buyer’s concern will be that
it may not be able to collect in all of the debts as some may prove to be bad debts and
need to be reduced or written off. This is overcome by the buyer purchasing the debts at
a discount, i.e for a price less than their face value.
Pros – maintain business relationships
Cons – risk of bad debts
The seller cannot sell debts that arise under a contract which prohibits the assignment
of the benefit of the contract. Where this is an issue, one of the methods below will need
to be used.
1 – seller retains ownership of the debts and to collect them itself
Advantage: seller keeps everything it collects , but seller will need personnel to carry
this out; careful if all staff was purchased under TUPE. Also, buyer might not like this
since the seller may damage the ongoing commercial relationship the buyer wants to
maintain with the debtors
2 – seller retain ownership but the buyer collects them as its agent in return for a
collection fee/commission.
• The seller can get around the problem of having no employees here and the buyer
may be able to control what steps the seller can take to enforce collection from
debtors which do not or cannot pay (in the provisions of the asset sale
agreement).
• This method allows the buyer to have a good relationship with the debtors
without having to pay for debts and take the risk that certain debts may prove
irrecoverable
• It also allows it to make some money from the collection fee it gets.
3 – buyer gets book debts
Sold at a discount
Option 1 -
Creditors:
• Liabilities of the business, not assets
,Pros – control of money owed
Cons – more money owed
Unusual for buyer to agree to assume liabilities towards the seller’s creditors under an
asset deal.
Usually, the only reason why the buyer would do this is to give control over the payment
to the relevant creditor so it can ensure the relationship with the creditor is preserved
for the general welfare of the business.
Third party contracts:
• Ex, Exoil contract, largest contract.
• Burden + benefit
o Burden = language training to exoil
o Benefit = money it gets for the training
3 possibilities:
• Assignment
• Novation
• Negotiate fresh contract
Assignment:
• Only benefit of contract can be assigned at law
• Burden stays behind with Seller
• Contract may restrict assignment, i.e manoteo contract
• Note the benefit of a contract for personal service cannot be assigned (Tollhouse v
Associated Portland Cement Manufacturers Limited)
Novation:
• Buyer steps into Seller’s shoes
• Benefit and obligations transferred too
• Original contract continues between buyer and 3rd party
• Parties can renegotiate any onerous
• Consent of 3rd party needed
New contract:
• Renegotiate with 3rd party a completely new contract
Conditional contracts:
• Condition precedent: assign/novate/new contract
• Important for confidentiality and timing
Exercise 1 in chapter: clause 6 in the key supply contracts
Clause 6(a) of the supply contract effectively prohibits assignment of the supply contract
without the supplier’s consent. The supplier can terminate the contract with immediate
effect if CCL purports to assign the contract to MML as part of the sale of its wallpaper
and furnishing business.
If the contract is key to the transaction, MML should ask CCL to contact the supplier to
obtain confirmation that it will not exercise its right to terminate the agreement
,(under clause 6(a)) as a result of the business sale and that it is happy to contract with
MML in the future. If confirmation is obtained, MML would be keen for the supplier to
agree to a novation of the contract for the reasons discussed in this Chapter. Alternatively,
a new contract could be negotiated between the supplier and MML.
CCL and MML may enter into a conditional contract for the sale of the business if the
supplier’s consent to assignment or novation, or agreement to a new contract, is not
obtained by the date of exchange.
Note that clause 6(b) would have no effect on a business sale. This is a Change of Control
provision which would allow the supplier the right to terminate the agreement if
ownership of CCL’s shares changes hands. It would therefore be an issue on a share sale.
Employees:
• Automatic transfer under TUPE
, Key points:
• TUPE is only applicable to business sale
• Transfer of an undertaking OR part of an undertaking
• Reverses common law position – no dismissal
• Automatic transfer of contracts of employment
Which employees are affected? 2 limb test
Limb 1: Reg 4(1)
‘ a relevant transfer…shall not operate to terminate the contract of employment of any
person employed by the transferor and assigned to the (organised grouping of resources
or employees that is subject to the relevant transfer)
So – employees will transfer if they are working for the business / part of the business
being sold. What if employees work in several different parts of the organisation?
Test – is the employee assigned to the business being sold?
Test set out in Botzen v Rotterdamsche; whether employees are wholly engaged or
assigned to the business “which formed the organisational framework within which
their employment relationship took effect’, particularly where part of a business is
transferred and employees work in both the part being transferred and the part being
retained by the seller. The court will look at the employee’s function rather than the
terms of his/her contract.
Employment Tribunal in Duncan Webb Offset v Cooper – further guidance.
In determining whether the employee is ‘assigned’ to the business or part transferred,
tribunals should consider the following:
• The amount of time spent working in one part of the business over the other
• The value given to each part of the business by the employee
• Contractual terms setting out what the employee’s job comprises and
• The allocation of the cost of the employee’s services.
Exercise 2, page 11
