Classification: Under the Radar
Negotiation Time: Minimal
Transaction Costs: Insignificant
Major Impact: Risk Management
Bulk Sales Laws
What is This? Bulk sales laws apply to transfers of significant assets that are not made in the ordinary course of business, and they generally require the Buyer to notify the Seller’s creditors of the acquisition prior to the Closing so the creditors can protect their interests.
The Middle Ground: The notification requirements associated with bulk sales laws can be burdensome, so typically the parties agree to waive compliance with those laws, and the Seller agrees to take responsibility for any Liabilities arising from the parties’ noncompliance.
Purpose: The provision plays a small role in limiting the Buyer’s transaction risk, but its main purpose is to speed up the acquisition process and limit transaction costs.
Buyer Preference: The Buyer wants to include the Seller’s explicit assumption of liabilities in this provision, as the default rule automatically transfers liability to the Buyer along with the transfer of assets. An aggressive Buyer may require indemnification for claims related to bulk sales laws rather than simply relying on the Seller’s covenant. Additionally, a Buyer may impose a requirement on the Seller to litigate any claims brought by creditors under the bulk sales laws. Alternatively, a more conservative Buyer might comply with bulk sales laws if it is not comfortable with the Seller’s level of debt or with a particular creditor.
Seller Preference: The Seller will likely seek to limit this provision to a waiver of compliance while remaining silent regarding the assumption of liability related to bulk sales. If the Seller does agree to assume that liability it might not object to granting the Buyer indemnification rights, but it will most likely resist any requirement to litigate claims brought by creditors. The Seller’s views on complying with bulk sales laws may depend on the transaction timeline (i.e. if compliance would delay the Closing), but the more decisive factor is likely to be how much additional work it creates for the Seller, who is already having to balance running the Business while simultaneously trying to sell it.
Differences in a Stock Sale Transaction Structure: This provision is not included in a stock sale because there is no transfer of assets between entities, the Buyer simply stands in the Seller’s shoes with regard to Business-creditor relationships.
We want The Middle Ground to be an ongoing dialogue for and resource to the lower middle market M&A community. The outline above is generally applicable, but there is always specific case law and nuance around certain industries that can be useful in helping buyers and sellers come together. If you are a lawyer or deal professional, we encourage you to add your perspective below.