The Asset Purchase Agreement, Recitals
In my most recent post, we completed our discussion of the net working capital adjustment. Parts I, II, and III of the series defined net working capital, identified why such an adjustment exists, and analyzed one extremely important component of the adjustment: deferred revenue.
This week, we begin a section by section analysis of an asset purchase agreement (APA) using a genericized composite of deal docs we've used in past sell-side deals. This week, we’ll cover the ‘Recitals’ section of the agreement.
Simply put, Recitals are used to explain those matters of fact which are necessary to make a proposed transaction intelligible.
Recitals are like a quick start guide to an APA, acquisition contract, or merger agreement. They don’t explain each detail associated with the transaction, but they do outline the general purpose and vision behind the contemplated deal. While numerous legal scholars (and bankers) lament the superfluous language often found in the Recitals, the section does cover extremely important ground. This is because the Recitals delineate the intentions, desires, and facts associated with the proposed transaction. Recitals in an APA often answer the following questions, among others:
- What does the transaction propose to accomplish (usually the transfer of assets and certain liabilities)?
- Are any liabilities being assumed in the transaction?
- Are any assets being excluded from the proposed transaction?
While not overly fertile ground for a captivating M&A discussion, Recitals are very important as the preamble to the rest of the agreement. Absent a clear Recitals section, it is much more likely that the principals of either the buyer or the seller (or those leading due diligence) won’t fully comprehend the foundational components of the deal. Such disconnects regarding the intent of the transaction can cause a deal to break down before closing or lead to legal battles post closing. Thus, each party to a proposed transaction should establish his foundation for contract negotiations by first understanding the full meaning of the transaction Recitals.
Below is a short, cut-down version of a Recitals section of an Asset Purchase Agreement:
WHEREAS, subject to the terms and conditions set forth herein, Seller desires to sell, convey, transfer, assign and deliver to Buyer, and Buyer desires to purchase and acquire from Seller, free and clear of all Liens (as defined below) other than the Assumed Liabilities (as defined below), all of Seller’s right, title and interest in and to all of the Acquired Assets (as defined below) in exchange for the consideration set forth below; and
WHEREAS, concurrent with the execution and delivery of this Agreement, and as a material inducement to Buyer to enter into this Agreement, Seller shall execute and deliver to Buyer a Noncompetition Agreement, substantially in the form attached hereto as Exhibit A (a “Noncompetition Agreement”), which shall be conditioned on and effective upon the Closing (as defined below).
NOW, THEREFORE, in consideration of the covenants, representations, warranties and mutual agreements hereinafter set forth, the parties hereto agree as follows:
For a longer, more verbose version (with commentary on superfluous content) of a Recitals section in a public M&A deal, please see the following link from Adams Drafting.