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Jan

28

Dental Lawyer Toronto (Part 3): Asset Purchase Agreement terms and conditions

Toronto dental lawyer Michael Carabash

Toronto Dental Lawyer

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, you should seek professional assistance (e.g. make a post on Dynamic Legal Forms). We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you. I should know – I’m one of them and you can contact me directly (michael@carabashlaw.com).

This is the third in a series of blog posts about purchasing or selling dental assets. In my first blog, I talked briefly about the letter of intent that parties to these agreement usually enter into prior to negotiating an asset purchase agreement. In my second blog, I talked about some of the things to keep in mind when negotiating an asset purchase agreements – such as risks, due diligence, and negotiating. In this blog, I’ll start off with some of the typical terms that you’ll find in a general asset purchase agreement.

Introductory Clause

We start off with the introductory clause. This will tell you the type of agreement being entered into (i.e. asset purchase agreement), the date that the agreement is being entered into, and the parties to the agreement. You don’t need to use archaic language such as “on the first part”. Nor do you need to include as much information here about the parties. For example, you can put the contact information for the parties in the “notice” section. You can also put the background information about the parties in the “background” section. You don’t need to clutter up the introductory clause. Just keep it nice and simple.

Background Section

This is where you want to give some context about the transaction. You can describe the parties. You can mention the lease. You can say that the dentists assets as herein defined are going to be bought and sold. This information doesn’t really form part of body of the agreement, but rather gives some background or context or purpose for which the parties are entering into the agreement. It’s used to help guide an interpreter (i.e. a judge or arbitrator in case of a dispute) about why the parties entered the agreement. You don’t want to insert definitions here (leave that to the definitions section), nor do you want to include significant terms – like representations and warranties.

Definitions

The first part of the body of the agreement deals with the definitions that will be used throughout the dental asset purchase agreement. Things that are typically defined here include: relevant legislation, the parties, the assets being purchased, etc. The defined terms are generally put into quotes, made bold, and underlined to make them distinguishable. Also, the first letter of the words are usually capitalized. This is how you can tell that the word is a defined term throughout the rest of the agreement. For example, if you see the words Purchased Assets appear like that in the middle of the agreement, you can always refer to the definitions section to see what those words mean. In the definitions section, it’ll typically say something like “Purchased Assets” includes… You get the idea.

The Assets being Purchased

When you’re dealing with buying assets (instead of shares), there’s a real challenge with properly identifying what you’re buying. You see, when you’re buying shares of a corporation, you’re just buying the shares. You take a look at the corporate minute book. You can see the shares. You can see the articles, by laws, shareholder registry, etc. So you know exactly what you’re buying. But, like I said, when you’re buying assets, you need to take your time to properly identify what you’re buying. Sometimes, if an evaluation has been done of the dental practice, it will include a list of all the assets that were included in the appraisal. This should cover most – if not all – of the assets that are being acquired. Sometimes there will be specific assets that are excluded from the general list and these should be mentioned in the asset purchase agreement. Also, after the letter of intent has been entered into, but before the agreement of purchase and sale has been entered into and before the transaction has closed, the selling dentist may have changed their assets. For example, they may have stopped ordering inventory. They may have sold some assets. They may have removed other assets. In any event, you want to make it clear that the selling dentist is not to touch the assets – as described in the letter of intent and asset purchase agreement – in a way that materially affects the asset purchase agreement. This is where representations (i.e. statements of past or present facts which the selling dentist says are true) and covenants (promises to do or refrain from doing something during a relevant time period) come into play.

The Purchase Price

After describing the assets to be purchased, another essential term of the asset purchase agreement is the purchase price. This will have been negotiated by the parties in light of relevant appraisals, a review of the financial statements, and good old fashion back and forth discussions. Now, when it comes to the agreement of purchase and sale, the purchase price is not just a number that needs to get paid. First, there may have been a deposit initially paid along with the letter of intent. This amount is to be credited towards the purchase price upon closing. Second, how the purchase price is to be paid is also an important consideration: certified cheques or bank drafts are acceptable, while personal cheques will not be. Third, there will generally be adjustments that need to be made to the purchase price. For example, if things latter pop up which affect the purchase price (in a positive or negative way), then those adjustments will need to be addressed. Fourth, the allocation of the purchase price is an important consideration – especially for accounting and tax purposes. Finally, although somewhat complicated, the purchase price may be paid out over the course of a series of milestones being reached. The idea is that part of the purchase price will be earned out after certain things have been achieved (e.g. revenues achieved). These types of earn out clauses can be very complex.

Representations and Warranties

As previously mentioned, a representation is a true statement about a past or present set of facts. The idea is that a party giving a representation will need to assert that something is true. Now, it can’t be an opinion; nor can it be about a future statement; nor can it be a mere expression or sales puffery. It’s gotta be about the past or present and it must be a fact. A breach of a representation may give rise to a claim of misrepresentation and either undoing the agreement or damages – depending on whether the misrepresentation was fraudulently made, negligently made, or innocently made. For a more general discussion on misrepresentation at law, check out this previous blog post I wrote.

So what kinds of things will the selling dentist be required to represent? Well, typically, they’ll need to represent that:

  • they have the ability, authority, and capacity to enter into the agreement;
  • entering into the agreement won’t break a statute, contract, or any other law;
  • they own the assets (i.e. they have good title to the assets);
  • the assets are free and clear of any encumbrances;
  • they can sell the assets; and
  • there are no consents, authorizations, etc. required in to obtain in order to sell the assets.

There will no doubt be more representations, but these are the basic ones. The purchase will be relying upon these representations in order to enter into and complete the asset purchase.

Now, it’s important to point out that the selling dentist can try to reduce the risk of being in breach of a representation by doing a few things. First, the selling dentist can qualify representations by appealing to “materiality”. What does that mean? Well, instead of a selling dentist being required to disclose ALL contracts, consents, licenses, etc. in respect of its assets, it can choose to disclose ALL MATERIAL contracts! This helps reduce the risk that the selling dentist will be found to be in breach in case it has disclosed immaterial or trivial contracts. The second way in which the selling dentist can try to protect him or herself is by stating that it will only make representations of facts which it has knowledge of. The idea here is that the selling dentist will only make statements as to what it knows, which is a subjective standard. If there were problems with the assets which the selling dentist did not know, but which it OUGHT to have known based on a reasonable standard, then the dentist may not have been in breach of a representation or warranty. In other words, the selling dentist won’t get in trouble for things that it didn’t know about. Just bear in mind that the term “knowledge” should be clearly defined.

So that’s it for now…in my next blog, I’ll be discussing covenants, indemnifications, closing conditions, closing, and general terms.

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