Classification: Moderately Material
Section: Purchase and Sale
Negotiation Time: Minimal
Transaction Costs: Insignificant
Major Impact: Risk Management
What is This? The Excluded Assets section consists of a detailed list of the Seller’s assets that will not be transferred as part of the acquisition.
The Middle Ground: The assets to be included here are specific to the deal, and the list will be created in conjunction with the list of Purchased Assets. Basically, any assets of the Business that are not listed as Purchased Assets are considered Excluded Assets.
Purpose: In the event of any sort of confusion regarding the list of Purchased Assets, this list provides clarity about what is and is not being transferred as part of the acquisition (reducing the risk of uncertainty). It is especially useful when the Purchased Assets section lacks detail, or when there are assets with similar names or descriptions but not all of them are being included in the purchase.
Buyer Preference: In terms of the content of this list, the Buyer wants to include assets that hold no value for the Buyer (e.g. unnecessary organizational seals, books, and records), especially if those assets come with significant contingent liabilities (e.g. benefit plans). In drafting terms, the Buyer’s main objective is to achieve the right degree of specificity, ensuring it does not exclude an asset it intends to purchase or include an asset it intends to leave behind.
Seller Preference: The Seller’s motivations in drafting this section largely depend on whether it is selling its entire business or whether it is only selling one division or line of business. If only selling a portion of its business, the Seller will want this section to read broadly so that it retains the assets necessary to continue its own operations. If the Seller will not continue to operate after the sale, a short and detailed list of Excluded Assets is usually not a cause for concern.
Differences in a Stock Sale Transaction Structure: This section will not be included in a stock sale because the Buyer will be purchasing the entire company and will not get to pick and choose which assets to include in the transaction.
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.