With an asset purchase, the acquirer doesn’t buy the shares but instead purchases the assets of the target company – generally comprising goodwill, intellectual property, real estate, contracts, plant and equipment.
While the acquisition of the share capital of a company means that the buyer will also acquire the liabilities of the target company, the position is different on an asset purchase where the buyer can generally “cherry pick” the assets and leave behind the liabilities.
For example, a buyer may only be interested in some valuable intellectual property (such as a trademark) or a particular aspect of the business.
In this scenario, the buyer may only need to acquire certain key assets and leave behind the rest. In this scenario, due diligence can simply focus on certain assets.
Best Practice NDAs
For the reasons set out above, the due diligence process will vary greatly from transaction to transaction.
There are however some best practices that should apply to all due diligence exercises.
Firstly, it is essential for both parties to enter into a properly drafted and legally binding confidentiality agreement, commonly referred to as a Non-Disclosure Agreement or NDA.
Without the benefit of an NDA, a discloser of information risks passing commercially sensitive information to a potential competitor or, worse still, putting customer or employee information at risk without any legal recourse.
An NDA does not solve all potential problems though. If a party breaches its confidentiality obligations under an NDA, the harm has already been done.
The only remedy available may be a claim in damages for any losses caused to the discloser as a result of the breach or, in more limited circumstances, an injunction preventing any further use of the information.
In reality, NDAs are seen as more of a deterrent to reduce the chances of a person using confidential information for the wrong purpose.
It is far more effective to reduce the chance of a breach in the first place by being careful and methodical in the way information is disclosed.
For example, on most legal transactions, the vendor’s solicitors will host a secure electronic data room where information concerning a business can be deposited in a secure environment which is only accessible by a limited group of people.
Typically, these are key people in the buyer’s organisation who need to know the information together with their professional advisers.
In the early stages of a transaction – particularly the initial commercial due diligence phase, which may take place directly between the parties – the temptation may be to pass information more informally between two organisations without the involvement of professional advisers or data rooms.
