Legal Consideration
Assets / Business Purchase Transaction

director appointment removal rectification companies registry form

During economic downturns, potential buyers may be more interested in acquiring assets rather than shares in a company as acquiring assets provides the buyer with more control and flexibility.  There are several reasons for this:

  1. Flexibility in selecting assets: By acquiring assets, buyers can select desirable parts of the business while leaving behind any less profitable or problematic areas. The buyer can choose to acquire assets that they believe can quickly generate profits for them and holds an interest in that portion of the business that is critical to their future growth.
  2. Avoiding historical and future liabilities: Companies may have significant historical or future liabilities that may harm their performance or hinder their chances of recovery. Asset acquisitions allow buyers to choose only those assets that they are willing to accept, while also limiting the potential liability of inheriting any contingent or historical issues.
  3. Lower price: During economic recessions, companies can go through significant declines in value. Purchasing assets offers buyers the opportunity to acquire valuable parts of a company at a reduced price, in the anticipation that they will continue to perform well in the post-recession economy.
  4. Tax Benefits: In some jurisdictions, asset sales may result in beneficial tax treatment, as the resale price of assets can be allocated on an individual basis, and can therefore provide tax savings compared to purchased shares.

Asset purchase transactions involve the buying or selling of individual assets or businesses, as opposed to shares in a company. The transfer of assets or businesses in an asset purchase, such as intellectual property, equipment, and stocks, require a separate set of mindset and documentation to protect the interests of both the buyer and the seller.  We set out below some of the commonly seen areas of negotiation relating to the seller’s warranties in an assets or business transaction.

  1. Qualification to seller’s knowledge – It is common for the seller to minimise its exposure by qualifying the warranties by their knowledge. However, this is always subject to heated negotiations as there could be actual knowledge, constructive knowledge and imputed knowledge. It is advisable for the seller to confine its knowledge qualifier and make enquiries as contractually agreed.  Courts have in earlier cases found that the seller’s ignorance does not give rise to a defence to a contractual warranty.
  2. Seller’s duties to notify breach of warranty – In today’s contract, warranties by the sellers are usually repeated upon various stages of the transaction, and an obligation would be imposed on the seller to notify the buyer of any breach of warranty. It is advisable for the seller to resist on such self-incriminating obligation.
  3. Warranties or representations or undertakings – It is not uncommon for the buyer’s lawyers to attempt to convolute warranties as representations or undertakings to be given by the seller. Given the remedies and the application of mitigation, causation, remoteness, etc. are different for warranties, representations and undertakings, it is advisable for the seller comb through the agreement to avoid any tricky convolution.
  4. Implied terms – Unlike a share transaction, terms may be implied into an asset purchase agreement by statue. For instance, Sales of Goods Ordinance (Cap. 26 of the Laws of Hong Kong) would apply to contracts that involves sale of assets. It will imply the following terms on the seller’s part relating to the sale: free from encumbrances, accuracy as to the descriptions of the goods, fitness for purpose and title.  Seller should ensure whether any statutory implied terms would apply, and to the extent that the implied terms apply, investigate whether such terms can be excluded or varied by express agreement.
  5. Multiplier – In a desperate situation, it is not uncommon for sellers to accept a multiplier provision whereby if the seller committed a breach of the agreement, the seller is required to compensate the buyer with reference to a multiply of earnings or valuation of the subject business and/or assets. Before agreeing to such term, the seller may wish to claim whether the breach is a material breach that would affect the future earnings of the subject assets and/or business, and to further refine the assets and/or business with an aim to limit the multiplier.
  6. Disclosure letter – It is common for the seller to negate or qualify its liability for breach of warranty by disclosing matters in a disclosure letter. Although it is common for the buyer and seller to agree that the disclosure in a disclosure letter be as clear, detailed and specific as possible, it is advisable for the seller to avoid having the need to disclose what is required at law; and ensure that the onus is on the buyer to understand the effect of the information that is contained in the disclosure letter – this would help minimise the scope of compliants down the road. In addition to the information contained in the disclosure letter, advice should also be sought as to the nature and extent of warranties to be given by the seller to the disclosure letter.

If you wish to find out more about this article or how we can help, please contact:

Alfred Leung, Partner (email:; phone: 852 3468 7202)

YTL LLP is a law firm headquartered in Hong Kong, China.  This article is general in nature is not intended to constitute legal advice.