Asset purchases – preliminary agreements

The seller and buyer may sign various preliminary agreements prior to negotiating the asset purchase agreement. The writer would like to touch on three different types, namely a confidentiality agreement, an exclusivity agreement and a heads of agreement (otherwise known as heads of terms, memorandum of understanding or letter of intent).

Regarding confidentiality agreements, it is imperative to appreciate that in the majority of sales important and confidential information pertaining to the target business will be disclosed to the buyer. The seller will therefore customarily ask a prospective buyer to enter into a confidentiality agreement before they impart the relevant information. Â

With respect to exclusivity agreements, it is necessary to comprehend that a prospective purchase will normally require a significant investment of time, effort and money. In order to avoid getting ‘gazumped’ by the competition, a prospective buyer will usually exhort the seller to not negotiate with other parties for a certain period of time (commonly referred to as a ‘lock-out’). An exclusivity agreement will afford this kind of protection.

Lastly, an agreement concerning the main terms of a proposed acquisition will ordinarily precede the investigative (due diligence) and disclosure process, and will materialise before the asset purchase agreement is drafted. These terms are conventionally recorded in writing as heads of terms. It is noteworthy that heads of terms are generally not enforceable there is no binding legal obligation on the parties. A heads of agreement however, can comprise individually binding provisions. It is absolutely crucial that the parties are able to discern such clauses. Furthermore, there are commercial entities that deem heads of terms to be morally binding. One should consequently seek professional legal advice when dealing with such agreements. Â Â

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