A few posts ago, I began a section by section commentary of an asset purchase agreement (APA) using a genericized composite of deal docs I’ve used in past sell-side deals. In my first post of the series, I covered the ‘Recitals’ section of the agreement. Today, I will briefly cover ‘Definitions’ in an Asset Purchase Agreement.

While the first few posts of our APA series (‘Recitals’ and ‘Definitions’) are somewhat mundane on the surface, it is important to remember that a contract’s Definitions section is critical for a number of reasons:

• The Definitions make up what is essentially the alphabet of the deal document. If you get the spelling part wrong (a combination of unclear or unfavorable definitions [letters]), you are likely to have a “misspelling” (an agreement that does not match your perception of reality).
• Vague definitions (depending on how they are used) can either represent a foundation for misunderstanding and litigation, or as a means to “get to yes” in certain cases. The difference between the two lies in the level of sophistication with which the APA is negotiated.
• Strong definitions can be used to bolster a party’s legal positioning post transaction and in some cases improve financial outcomes (such as in defining working capital, basis for earn out payments, etc).
• Definitions can be used to ease the blow when conceding a point of contention in APA negotiations. An example would be carving out items from the definition of “Material Adverse Change” or “MAC” after a seller allows a buyer a termination right should a MAC occur between signing and closing a deal.

Given the foregoing, any prospective seller/buyer should select legal counsel with specific experience negotiating and drafting Asset Purchase and Merger agreements in its particular sector. In situations where legal counsel has not done work in seller’s/buyer’s industry, yet offers market-leading credentials in M&A, the selection of an industry expert M&A banker becomes even more crucial.

Below is a short sample of terms often defined in an Asset Purchase Agreement:

DEFINITIONS

Section 1.1 Certain Definitions. As used in this Agreement, the following terms shall have the following meanings:

“Affiliate” shall mean, with respect to any Person, any other Person directly or indirectly controlling, directly or indirectly controlled by, or under direct or indirect common control with, such Person or a member of such Person’s immediate family; or if such Person is a partnership, any general partner of such Person or a Person controlling any such general partner. For purposes of this definition, “control” (including “controlled by” and “under common control with”) shall mean the power, directly or indirectly, to direct or cause the direction of the management and policies of such Person whether through the ownership of voting securities, by contract or otherwise.

“Agreement” shall mean this Asset Purchase Agreement and Plan of Asset Transfer, as the same may be amended or otherwise modified from time to time in accordance with its terms.

“Best Efforts” shall mean the reasonable best efforts that a Person desirous of achieving a result would use in similar circumstances to reasonably attempt to insure that such result is achieved.

“Contracts” shall mean any agreement, contract, purchase order, service order, trust, indenture, instrument, note, deed, lease, license, obligation, arrangement, understanding, commitment or undertaking (in each case whether written or oral).

“Material Contract” shall mean, with respect to any Person or Persons, any material contract, agreement or other understanding to which such Person or Persons is a party, or by which any of their respective material assets or properties may be bound.