If you think of a company as a box and all of the companies assets, the equipment, goodwill, book debts, shares in subsidiaries, liabilities, stock, employees are inside the box.
When a buyer is purchasing the shares in a company they are effectively purchasing the box and everything in that box, good and bad.
An asset purchase is when the buyer purchases some or all of the assets and/or liabilities owned by a company. The seller keeps the box and the buyer will take out of the box the bits they want. This could include some or all of the assets and some or all of the liabilities. The buyer has freedom to choose through negotiation with the seller what they take and what they leave behind.
The exception to this is the employees. The Transfer of Undertakings Regulations or TUPE for short applies to asset purchases and means that the employees automatically transfer to the buyer who inherits all of the rights and liabilities and obligations in relation to those employees. The employees are protected against dismissal in connection with a TUPE transfer and the seller has an obligation to inform and consult with the representatives of the affected employees.
The starting point for a buyer in any purchase is buyer beware. The buyer will not be in a position to know exactly what they are acquiring and therefore must seek protection by negotiating appropriate contractual protections in form of warranties and indemnities. The buyer is responsible for checking the quality and suitability of the box and/or its contents before the purchase is made.
The process of the buyer conducting its own investigation into the box and its contents is known as due diligence.
Completion of a thorough due diligence exercise enables the buyer to understand the risks and liabilities involved with the purchase of the company or its assets. The information gathering process will highlight the areas where protection against potential future liabilities or existing liabilities should be sought from the seller. The findings of due diligence may also influence the amount of money the buyer will pay for the company or the assets.
