LAW710 CONTRACT DRAFTING AND STRATEGY

WEEK 4 ASSIGNMENT 1: ASSET PURCHASE AGREEMENT

In an Asset Purchase Agreement, Seller has made the following representation: To Sellers
knowledge, there are no lawsuits or other proceedings pending or threatened against it. If
you were the Buyer, would you want to revise this? If so, how? If you were the Seller, would
you want to revise this? If so, how? Give reasons for your changes. Also, draft a definition
of knowledge on behalf of Buyer and one on behalf of the Seller.
As we are discussing an Asset Purchase Agreement, we know that the purchase agreement
typically contains representations and warranties made by the seller with respect to the target
company. The scope and detail of these representations and warranties are usually negotiated and
tailored to reflect both the nature of the target and its business, financial condition and
operations. However, representations and warranties not only provide information to the buyer,
but it also operates to allocate risk that may arise between the buyer and seller with respect to the
matters covered in the agreement.
We are given the following representation in the Asset Purchase Agreement in question: To
Seller knowledge, there are no lawsuits or other proceedings pending or threatened against it.
As we look at this representation we are asked if we would change anything or revise the entirety
of the representation in which can positively affect the buyer and/or seller. In negotiating an
Asset Purchase Agreement or any M&A agreement, the seller has an incentive to keep its
representation and warranties as narrowly drawn as possible; while the buyer wants those
representations and warranties to cast a wide net, figuratively speaking. The following
representation above, is in the style of a seller as the seller would try to achieve its objectives to
qualify the representation and warranties to it knowledge. The buyer, however wants the
sellers representation and warranties to be unqualified therefore not qualified by knowledge or
anything else.
If I were the buyer, because I would like the representation to be broad I would attempt to add a
few more details, which gives a more in-depth understanding of what the Buyers knowledge
covers. If there were no pending litigation and/or proceedings disclosed I would like the
following representation as stated above to be revised and resemble that to my example below:
No action, suit, investigation, claim or proceeding of any nature or kind whatsoever,
whether civil, criminal or administrative, by or before any Governmental body or
arbitrator is pending or, to the knowledge of the Seller, threatened against or affecting
Sellers, the Business, any of the Purchased Assets, the Real Estate, or any of the
transactions contemplated by this Agreement.
The reason I would revise it as stated above, is because it strictly mentions certain areas in which
I am interested in knowing whether there are any legal issues regarding the seller and the

business. I also mentioned knowledge of the Seller but refer to the actual knowledge of the
seller, and the seller knowledge group.
If there was in fact a proceeding, or litigation risk that was disclosed by the seller, I would revise
the representation to reflect the following:
Except as set forth in Section__________ of the Disclosure letter, there are no actions,
suits, investigations, or proceedings pending or, to the Sellers knowledge, threatened
against or affecting the company or business, or any of the assets, or Sellers rights
thereto, at law or in equity, by or before any court or governmental department, agency,
or instrumentality.
The reason I would construct the representation as stated above, is because if the Seller disclosed
information about a possible proceeding or litigation risk that took place or may take place I
would like for it to be clearly stated in the agreement along with the understanding that other
than the disclosed risk there are no other risks that is unforeseeable or hidden by the Seller.
If I were the seller, there would not be much I would want to revise with the original
representation, however in good faith I would perhaps try and make the buyer comfortable in
adding a few minor details which in my opinion would still leave the representation narrowly
drawn.
To Sellers knowledge, there are no lawsuit, proceedings, or governmental
investigations pending or threatened against Seller that relate to the selected assets.
The reason why I would draft the representation as stated above, is because its simple, in plain
language and if needed to be interpreted, can be narrowly drawn upon with no significant detail
given it protects the Seller from possible risks/suits that may arise.
If I were to use a different approach to structure the representation provided to us, I would draft
the representation as follows:
There are no actions, suits, investigations or proceedings (public or private) pending
against or threatened against or affecting any of the assets of Purchaser or that question
the validity of this Agreement.
The reason I structured the representation as I did, is because I would be aware in negotiation of
the agreement that the buyer would be hesitant in using knowledge qualifiers and as a result I
decided to leave the term knowledge out is because it allows the interpretation of the
representation to be wider, while still keeping it simple in which the Seller would appreciate as it
does not provide much detail in the possibility of risk. However, perhaps not having the term
knowledge presents, leave the representation to lack the reassurance the buyer or/and seller
may want in terms of the agreement.

Even when the knowledge concept is agreed between the seller and buyer, the scope of that
knowledge needs to be determined. It must be determined whether the knowledge is only
actual knowledge, or does it include constructive knowledge?
Knowledge Definition:
Usually there are two components of defining knowledge. The first one is whether the sellers
knowledge is actual knowledge, or whether it includes constructive knowledge as well. The
second one is whether the sellers knowledge is to be tied to the knowledge of specifically
identified persons (officers, employees etc.).
I would think a sellers definition of knowledge would be concise and far more narrow than
that of a buyers definition. The seller would be more interested in including only, actual
knowledge rather than that of constructive knowledge. Therefore, I believe a buyer would
possibly define knowledge as structured below:
Sellers knowledge or words of similar import shall mean and be limited to the
personal actual knowledge of the following officers of seller:_____________. Nothing
contained in this agreement shall create or impose any personal liability on these
individuals, nor shall they be deemed under any circumstances to be parties to this
agreement.
Perhaps a buyers definition of knowledge may be structured as the following to cover not only
the sellers knowledge but also those who may fall within the sellers knowledge group as
mentioned below:
Knowledge an individual will be deemed to have knowledge of a particular fact or
other matter if:
(i)
That individual is actually aware of the fact or matter (making reference to actual
knowledge);
(ii)
A prudent individual could be expected to discover or otherwise become aware of that
fact or matter in the course of conducting a reasonably comprehensive investigation
regarding the accuracy of any representation or warranty contained in this Agreement.
Now relating this definition to a scenario, the individual described above will be deemed to have
Knowledge of a particular fact or matter if any individual who is/were serving, as a director,
officer, partner, etc. in any similar capacity.
While I have drafted a definition of knowledge regarding the perception of both the buyer and
seller, perhaps another way to structure the definition is to create one for actual knowledge as
well as constructive knowledge.
Actual

Knowledge means, when referring to the knowledge of the Seller, or any similar
phrase or qualification based on knowledge, the actual and conscious knowledge.
Constructive
Knowledge means, when referring to the knowledge of the Seller, or any similar
phrase or qualification based on knowledge, the actual knowledge of ___________ and
the knowledge that each such person would have reasonably obtained after making due
and appropriate inquiry with respect to the particular matter in question.
Conclusion:
In conclusion, a takeaway from this assignment is that, in an Asset Purchase Agreement, buyers
and sellers will be expected to negotiate. With regards to the issue of knowledge I believe the
following would be negotiated by both parties:
(i)
Which seller representations and warranties are to be qualified by knowledge;
(ii)
How knowledge is to be defined, whether it be actual knowledge only, or actual and
constructive knowledge;
(iii)
As well as who is in the knowledge group
As a general proposition knowledge qualifiers, in my opinion, are appropriate for facts or matter
which are outside the sellers control or which cannot reasonably be determined through the
sellers diligence. An example of this, could be whether or not litigation is being threatened but
not yet asserted in the form of a complaint. Therefore, I would conclude by stating that I believe
the use of knowledge qualifiers can be helpful and operate to shift risk for post-closing problems
as between buyer and seller, and should be tailored specifically to the particular transaction in
negotiation.