Posted: October 12th, 2021
Asset Purchase Agreement
The attached draft aircraft purchase agreement has many, many drafting errors. There is legalese, provisions are way too long, and there is a total lack of craftsmanship. Please clean it up. Redraft the agreement to reflect the deal below. There will be a fair amount of revision. Do not use any supplementary sources, other than those distributed to you in our course. Do not draft provisions other than the ones I have specifically asked for or those that are required because of the cascade effect (text pages 342-343). Finally, please draft an agreement from the point of view of your client, the seller.
– Draft an Agreement for Purchase and Sale of Assets (“Purchase Agreement”) for your client who wants to sell a law practice.
– Focus on the material covered in class (textbook, class notes, TWEN, articles referenced, these instructions, Assignment, including Chapters 1-12, 14, 16-18 and Chapter 32; plus the Material Adverse Condition article on TWEN (“The MAC Clause: An Emperor With No Clothes”), and the following articles in the course reader: Parol Evidence after Riverisland; Liquidated Damages Clauses; and the Indemnity Primer.
– Use the Aircraft Purchase Agreement, which is posted on TWEN, as the base document on which you will incorporate the information and the deal points.
– Clean up all language used from the form by applying what we have covered (ie, use of “may”, “shall”, active form, no legalese…)
– Do not include language that is clearly not requested.
– If given information to specify a date or amount, calculate date or amount to get full credit.
– 13-page maximum for both documents, but the Promissory Note cannot be longer than 1 page.
– I reserve the right to modify these instructions and deal points up to 1 week before the due date and time. I will accept the latest version you send me before the due date and time.
– Due no later than 09:00 a.m. Saturday, November 5, 2016 by e-mail to [email protected]
Deal Overview (may apply to purchase agreement or the Note exhibit)
– Your California client, a limited liability partnership whose legal name is Bar None, LLP, but who does business as (dba) The Top Law Firm, wants to sell substantially all of the assets in connection with a law practice located at the building with an address of 3333 Sunset Blvd, Los Angeles, CA. As an LLP, your client is an entity in which the attorney-owners are partners, but no partner is liable to any creditor of the law firm nor is any partner liable for any negligence on the part of any other partner (i.e., each partner has limited liability). The managing partner is J.D. Advocate. The buyer, on the other hand, is Prince Law, but – because he also wants limited liability – he does not want to practice as a sole proprietor so he will create a California entity called Prince Law, P.C. and register it with the California State Bar and California Secretary of State. The LLP is registered with the California State Bar and California Secretary of State.
– Purchaser is willing to pay, as the purchase price for substantially all of the assets of the practice, the amount of $2,500,000, based on the value determined by the seller-ordered appraisal of the going concern and the intangible property (goodwill). However, the intangible property to be purchased excludes the name of the business, “The Top Law Firm.” That name carries a lot of value developed and earned through the years of the firm providing outstanding legal work, and seller registered (Trademarked) and owns the name, Seller is relying on this fact. Instead, seller will “rent” or license the name of the business to buyer for $5,000 per month, with the first payment due at closing, along with a signed Business Name Licensing Agreement. Also, the assets transferred do not include the building. Buyer will rent the building for another $5,000 per month, with the first payment due at closing, along with a signed Building Lease Agreement. The transferred assets include all personal property within the building, including office equipment, etc., so that the buyer purchases the practice ready to start practicing. While you do not have to draft a building lease agreement or a business name licensing agreement, your purchase agreement does have to account for this information.
– Purchaser will assume, at closing, a $500,000 mortgage on the building on which the practice is located. Also due at closing, buyer will make first mortgage payment and the parties will exchange a signed Mortgage Assignment and Assumption Agreement, along with the other Asset Assignment and Assumption Agreement. While you do not have to draft an assignment and assumption agreement for the mortgage or the purchased/transferred assets, nor do you have to draft any mortgage loan documents, your purchase agreement does have to account for this information.
– Because the purchase price, net of adjustments, is still a bit too much for buyer, buyer must seek loan financing of $500,000 during the due diligence period. Buyer promises Seller he will try to get such a loan before closing, but if he is unable to get the loan, Purchaser will have a walk-away right. Your client tells you to ensure you provide appropriate qualifications so that this is not an easy walk away right. Trying to get a loan is not enough.
– Buyer does have and agrees to loan seller, upon signing the Purchase Agreement, the amount of $250,000, which $250,000 loan will be evidenced by a promissory note. The loan funds are to be used by Seller solely to pay some outstanding tax debts on the law practice. The $250,000 loan amount will become a deposit upon signing the Purchase Agreement. If the parties do not proceed to a sale (i.e. the deal does not close), the loan will be repaid by Seller within six months.
– The remainder of the balance is due at closing and will be paid by wire transfer, and the closing will be in person (face-to-face) at the location where the asset is to be transferred.
More Deal Points
Purchase and Sale Agreement
– Closing is on the last day of class, but in no event later than the last official day of the semester (drop dead closing date is at semester’s end). Signing date is on the assignment’s due date. Effective date is when the assignment was distributed.
– Add recitals noting details of the promissory note, building lease, name license, and the assignment of the mortgage, in addition to a generic purchase and sale recital, plus any other information that should be included in recitals, based on the textbook.
– Include a complete definitions section, with at least 10 defined terms.
– The purchase price will be paid as noted above.
– Any confidentiality is indefinite.
– Your client requested that a MAC clause be included to ensure that buyer isn’t able to get out of the deal easily if there is a change in economic conditions that affects the industry or economy.
– For items in which knowledge is at issue, draft appropriate knowledge qualifiers to protect your client from overbroad reps, warranties and covenants, yet have buyer’s reps, warranties and covenants be as broad as possible.
– California law applies.
– There are no schedules, so make sure there is no reference to schedules.
– Make sure that all exhibits are consistent with respect to party names [preambles], knowable dates, and signature blocks.
– In addition to the general provisions specifically requested elsewhere, other additional boilerplate language should address the following: this is the entire agreement and any changes have to be in writing; exhibits are part of the agreement; all notices are via email only; time is of the essence; any illegal or unenforceable provision does not invalidate the agreement; because parties will sign the agreement simultaneously and in person, then it canNOT be signed separately with originals later compiled. The boilerplate for all documents (purchase agreement and exhibits should be identical).
Please also take into account the following, if not already addressed:
1. Seller promised buyer that between now and the Closing, all liens (if any) on the assets purchased/transferred would be removed. This point needs to be covered wherever appropriate in the Agreement. At Closing, the practice (not including assets not transferred) will be delivered with title free and clear of all liens and encumbrances of any nature whatsoever. If all liens are not removed by Closing, buyer would like the right not to close as well as the right to sue for damages. As seller’s counsel, use appropriate qualifications to protect you client.
2. Delete in whole or in part any representation and warranty, covenant, or condition that is inapplicable to our situation, or change it to fit the facts as described in our case. Buyer cannot represent and warrant that it has financing now. He asks that you draft a financing out. Do so from your client’s perspective.
A financing out provides a buyer with a walk-away right if it is unable to obtain financing. Sellers generally dislike financing outs, fearing that they transform an obligation to purchase into an option to purchase. Specifically, they worry that a buyer may decide it dislikes a deal and then try to get out of it by claiming it could not obtain any financing or could not obtain financing on commercially reasonable terms. If that happens, a seller could end up losing other sale opportunities, while tied up for months in a contract with the buyer.
3. Do not delete from your agreement Sections 7.4 and 7.5 and Sections 8.4 and 8.5. (Redraft to clean up and include appropriate qualifiers to benefit your client, but do not delete.)
4. Please move all substantive provisions that are in the definitions article or recitals of the Agreement to the appropriate section in the body of the agreement. Also include whatever representations and warranties, covenants, and conditions that the Deal Points and instructions require.
5. Seller told Buyer that The Top Law Firm is a registered trademark. Please make sure that the contract includes this information using the appropriate contract concept.
6. The representations and warranties have lots of language dealing with material adverse changes to Seller’s business. Please come up with a material adverse change type standard that is more transaction specific and to your client’s benefit.
7. Seller has agreed to have the exterior of the building painted by the Closing. But the paint shop may have trouble fitting in the job in between now and the Closing. If the exterior of the building is not painted on time, the parties have agreed that buyer doesn’t have to close.
8. Only some of the restrictions on Section 5.5 make sense for our deal. Choose those that you think apply and make them transaction specific.
9. The Seller and the Buyer each have conditions to their closing obligations related to litigation. Please decide whether each condition should cover litigation against the Seller and the Buyer or against just one party, and if so, which party.
10. Buyer has to pay $3 million if the deal doesn’t close because of something Buyer did wrong. Please figure out how this interacts with the financing out. For clarity, the $3 million payment is intended by the parties to be liquidated damages. Make sure the provision is enforceable.
11. Eliminate references to any schedules. You could always omit the schedule and put the information in the agreement – if appropriate.
12. Seller is the current registered owner of Bar None, LLP. Buyer wants to make sure that Seller gives it any documentation that Buyer needs from Seller so that Buyer can become the owner of this entity. Recall, Buyer is purchasing the business, and among the assets transferred are is the entity. [Query: What consents are needed?]
13. Buyer requests you add a representation and warranty about existing litigation. Use appropriate language to protect your client.
14. Additional information with respect to Buyer’s financing plans: He is currently negotiating with three banks and has submitted full applications to two: First National Bank of Lex and Lex Banking, N.A. Buyer mentioned this to Seller, and it gave Seller comfort to know this. He wants it in the agreement – of course.
15. Please include the necessary provisions so that the Agreement, once signed, supersedes other agreements prior to that point on the subject matter hereof.
16. Include the appropriate signature lines.
17. Add only endgame provisions based on the information provided in these instructions.
– Assuming the $250,000 loan amount does not become a deposit because the deal falls through, then the loan will be repaid by Seller within six months from the signing date. It is a six-month loan (not a day more). The $250,000 loan amount will bear interest at a rate of 10% per annum, simple (not compound). Monthly payments will be interest-only, retrospectively paid on the first of the month, with the first payment including interest from and including the signing date of the purchase agreement through the end of the previous month. The last payment will not be for a full month of interest but it will also include the principal amount (balloon payment). In accounting for stub periods, assume a 30-day month. Prepayment is allowed without penalty.
– Dated same as signing date.
– Boilerplate should be identical to that of purchase agreement.
– Signature block(s) should not include any party that has no obligations under the note.
– Preamble information should be consistent with purchase agreement.
Other Points (may apply to purchase agreement or the note exhibit)
– Buyer wants seller to represent that the appraisal is accurate. Recall: you represent the client!
– Buyer also wants a representation that since the appraisal, there has not been a “Material Adverse Condition” (MAC) with respect to the Seller or any partners. This includes any change or occurrence that is materially adverse to the assets, liabilities, business, results of operations and financial condition of such entity and its partners, taken as a whole, but excluding any effect resulting from or relating to (i) general economic conditions, or changes affecting the industry in which such entity primarily operates which do not disproportionately affect such entity as compared to such entity’s competitors or (ii) any change in financial markets or economic conditions in the United States or elsewhere.
– Purchaser’s obligation to acquire the assets of the business pursuant to a Purchase Agreement shall be subject to the Purchaser’s satisfaction with the results of its due diligence investigation of the business, but not as determined by the Purchaser in its sole and absolute discretion, as the buyer proposes. The Purchaser shall have reasonable access to all documents in the possession or control of the Seller, its agents and affiliates with respect to the business.
– Other than with the express prior written consent of the other party hereto, or to the extent required by law, neither the Purchaser nor the Seller will disclose to the public or to any third party the existence of the purchase agreement, the terms thereof, the fact that the Purchaser and the Seller are considering a proposed purchase and sale of the assets, nor the facts and circumstances related to such transaction. Notwithstanding the foregoing, the parties hereto may disclose the purchase agreement, and the terms thereof, to their respective agents, representatives, consultants, advisors, officers, directors, employees, partners, investors or lenders, and each party’s respective legal counsel, each of whom shall be directed to uphold similar standards of confidentiality.
– Seller shall indemnify, defend, hold harmless, and reimburse Buyer against and in respect of claims, demands, losses, costs, expenses, obligations, liabilities, damages, recoveries, and deficiencies, including interest and penalties, that Buyer may incur or suffer that arise, result from, or relate to any failure by Seller to pay or discharge any of Seller’s liabilities and obligations prior to Closing.
– Seller does not know, or have reason to know, of any matters, occurrences, or other information that has not been disclosed to Buyer and that would materially and adversely affect the assets purchased by Buyer or its conduct of the business involving such assets. Moreover, no representation or warranty by Seller in this Agreement, or any documents furnished to Buyer by Seller, contains any untrue statement of a material fact, or omit to state a material fact necessary to make the statements contained in these sources accurate.
– MAC is a representation, warranty, covenant and condition to closing.
– Purchaser wants his efforts to obtain financing are only a representation and condition to closing. In representing your client, you disagree with buyer’s request and draft accordingly (i.e. to client’s benefit).
– If not already included, add language that the purchase agreement may not be amended or modified except by a writing signed by all of the parties; it is binding upon and inure to the benefit of the successors, assigns, personal representatives and heirs, as applicable, of Seller and Purchaser; all parties represent and warrant that they possess all necessary capacity and authority to sign and enter into the agreement. Each individual signing the agreement for a party which is a corporation, a partnership, or other legal entity, or signing under a power of attorney or as a trustee, guardian, conservator, or in any other legal capacity, represents and warrants that he has the necessary capacity and authority to act for, sign, and bind the respective entity or principal on whose behalf he is signing.
– In using language from the Aircraft Purchase Agreement form, do not simply copy and paste. For full credit, you must “clean” up language using what we have learned throughout the semester (no legalese, active voice unless we are focusing on the action instead of the actor, use of “may” instead of “right” to signal discretionary authority, use of “shall” to signal covenant, etc…). Also, clean up language in the Promissory Note, in addition to including the required information.
– Do not include language that I have specifically requested not be included. This will lead to deductions. I do not deduct points when language not requested is included. However, if the instructions state NOT to include an item and you include it, then I will deduct points.
– If provided information to specify a date or amount, calculate date/amount to get full credit.
– This is intended to be a “closed” assignment in that I do not want you to do outside research. All the material needed, and on which you will be graded, is in the instructions, textbook, class notes, TWEN, course reader and other class material.
– Recall that there are contract parts that must be included in every agreement even if not specifically requested. We have gone over this numerous times in class.
– This is an agreement with a “gap” period. You must apply concepts related to “closings,” including but not limited to the latter part of Chapter 8 and relevant exemplars in Chapter 32.
– Note that the “Action” section for this agreement will include items not covered in Assignment 1. Read Chapter 8 closely, especially but not limited to issues with closings.
– Each party needs its own stand-alone contract-concept-based sections related to the “gap” period – (i) reps & warranties; (ii) covenants; and (iii) conditions to closing. In addition, contract concepts will appear in other contract parts throughout the agreement.
– Buyer has justifiably relied on the following things said by Seller, some of which are also – or should also be – promises, and all of which are conditions to closing: (i) there is no actual or pending litigation involving Seller its managing partner knows of as of signing date – add knowledge qualifier; (ii) Seller is unaware of any information that has not been disclosed to Buyer and that would materially and adversely affect the assets to be purchased by buyer or the conduct of the business to be purchased; (iii) Seller will not let anyone else use the practice name of the business being transferred; (iv) as far as managing partner is concerned, the practice is in compliance with all relevant/applicable laws.
– Don’t forget to include a non-contravention representation and warranty for both parties.
– At closing or before, the following items need to be delivered by seller (in addition to other items discussed elsewhere in the instructions): Bill of Sale, financial statements (audited and unaudited balance sheets, income statements and cash flow statements for the twelve months ending on the signing date); a list of all assets owned by the law practice; proof that all taxes – on personal property, real property and otherwise – are paid up; certified copies of all resolutions of the appropriate entity board approving this deal; certificate of good standing from relevant state of the relevant entity. Delivery of these documents is a condition to closing only. Delivery of other items discussed elsewhere in the instructions may be reps and warranties and/or covenants, as well.
– At closing or before, the following items need to be delivered by buyer (in addition to other items discussed elsewhere in the instructions): certified copies of all resolutions of the appropriate entity board of directors approving this deal. Delivery of these is a condition to closing only. Payment amount in requested form and other items discussed elsewhere in the instructions may be reps and warranties and/or covenants, as well.
– Seller is obligated to close if the following conditions are satisfied or waived (in addition to others noted elsewhere): (i) all reps and warranties are true and correct on Closing Date; (ii) all covenants are true and correct on Closing Date ; (iii) buyer has provided proof of financing. Buyer is obligated to close if the following conditions are satisfied or waived (in addition to others noted elsewhere): (i) all reps and warranties are true and correct on Closing Date; (ii) all covenants are true and correct on Closing Date ; (iii) buyer has obtained financing; (iv) no MAC between signing and closing.
Sale of a Law Practice
Account for the following:
– Giving notice to clients regarding sale of practice
– Obtaining clients’ consent to remain represented by the law firm after the same.
– Warranty that every client account has a written fee agreement in the file.
– Buyer wants all current attorneys to remain.
– Buyer wants seller to guarantee that practice’s fee income for the year after the sale will not decrease from prior year’s.
– How ill cases in process with partially earned or contingency fees be accounted?
– Read and comply with California Rules of Professional Conduct, Rule 2-300 Sale or Purchase of a Law Practice of a Member, Living or Deceased, found at
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