Question

1. In the case of a deal structured as an asset purchase, what is the general rule regarding successor liability?

2. What happens to Target’s obligations under a lease if Bidder acquires Target by : -direct merger -reverse triangle merger -sale of assets -stock purchase

3. What is a non-assignment clause?

4. Where the acquisition is structured as a sale of assets, will the transaction trigger the non-assignment clause? Explain.

5. What about direct mergers and forward triangular mergers? Will these types of mergers constitute a transfer of lease obligations such that it triggers the non-assignment clause in the lease agreement? Explain.

Answer 1

1. People who buy and sell businesses will often look to structure the deal as an asset purchase in an effort to avoid getting stuck with the liabilities of the seller. The general rule is that a company that acquires a seller’s assets is not responsible for the seller's liabilities simply due to the ownership of those assets. This is in contrast to a merger or consolidation, where the liabilities of the acquired corporation are assumed by the buyer.

3. A contract may contain a non-assignment clause, which prohibits the assignment of specific rights and some various rights, or of the entire contract, to another. However, such a clause does not necessarily destroy the power of either party to make an assignment. Instead, it merely gives the other party the ability to sue for breach of contract if such an assignment is made. However, an assignment of a contract containing such a clause will be ineffective if the assignee knows of the non-assignment clause, or if the non-assignment clause specifies that "all assignments are void".

Two other techniques to prevent the assignment of contracts are rescission clauses or clauses creating a condition subsequent. The former would give the other party to the contract the power to rescind the contract if an assignment is made; the latter would rescind the contract automatically in such circumstances.

4.  In order to guard against becoming involved with unintended parties through the sale of asset, non assignment provisions are often broadened to include language that addresses the transfer of ownership, This expanded language prohibits the change of control of a party, stating that the sale of asset will require the prior written consent of the other party. Sometimes these change of control provisions can deem that a change of control is an assignment for the purposes of the agreement, thereby triggering the same assignment requirements, including whether consent can or cannot be unreasonably withheld. Specifically, in the context of an asset purchase, only non-assignment provisions will necessitate obtaining consent.

5.Forward mergers, also known as direct mergers, are those in which the target company merges directly into the buyer. The target company ceases to exist, and the two companies continue to operate as a single entity under the buyer's name and structure. In addition, the buyer assumes all of the target company's assets and liabilities.

Triangular mergers are those that involve three companies: the buyer, the target company and a third organization that is a subsidiary or shell company. In a forward triangular merger, the target company is merged into the buyer's subsidiary, which also assumes the target company's assets and liabilities.