In an asset deal the target property itself is acquired together with certain rights (contractor warranties and securities, intellectual property rights) and contracts (facility management agreements, supply agreements constituting the target business. Usually a framework sale and purchase agreement is signed between the seller and the purchaser, clearly identifying and specifying the assets and liabilities to be transferred and dealing with issues applicable to all transfers (warranties and indemnities, limitation of liability, claim handling, etc). Additional transfer agreements are signed for the transfer of the assets and contracts conforming with applicable legal requirements (property sale and purchase agreement, agreement on transferring contracts, etc). This will be done by defining certain categories of assets and liabilities in the definitions clause, and by reference to specific schedules listing assets within those categories.
In the context of a real estate transaction, a cap typically applies to liability under the warranties and, for share purchases, the tax covenant and is set at the overall consideration. In asset purchases, this should include the value of creditors being assumed, not just the cash paid to the vendor.
The principal purpose of completion accounts is to operate a price adjustment mechanism. To enable the consideration to be adjusted appropriately, closing accounts are drawn up to measure the relevant financial elements at the closing date. Closing accounts enable the purchase price to be linked to the actual assets and liabilities of the target entity transferred by the seller to the purchaser at closing; and/or the financial performance of the target entity in the period between signing and closing. In property-related share deals the completion accounts can usually take the forms of either (i) debt free/cash free/working capital adjustment statements; or (ii) a full profit and loss account and balance sheet.
A corporate guarantee is a contractual promise by the guarantor third party to fulfil the obligations of the guarantee in case the guarantee fails to do so. Generally, parent companies will give the guarantee or (less commonly) other members of the same group as the party whose obligations are to be guaranteed. The scope of the guarantee sought will depend on the particular circumstances of the deal. A “full performance” guarantee (eg a guarantee in respect of all the seller’s obligations, whether financial or otherwise, under the sale and purchase agreement) or a “payment only” guarantee (eg a guarantee in respect of the seller’s obligation to pay warranty claims under the sale and purchase agreement).
Disclosure is the process by which the seller seeks to reduce its exposure and potential liability to the purchaser under the warranties. If a matter is properly “disclosed,” the purchaser will, in effect, take the risk associated with that matter. The purchaser will not be entitled to sue the seller after closing under a warranty for any loss sustained as a result of the circumstances which have been properly “disclosed.” Typical general disclosures (such as information in data rooms, statutory books, public records etc) are, in essence, forms of limitation.
In the context of real estate transaction, indemnities are contractual undertakings by the seller to reimburse the purchaser in respect of a particular set of known liabilities should they arise following the closing. Once the purchaser has made itself aware of the major risk areas in the course of the due diligence, indemnities may need to be drafted and negotiated. The difference between warranties and indemnities is that indemnities are ordinary terms of the sale and purchase acquisition agreement, which the purchaser may enforce in the same way as any other term of a contract if the liability covered by the indemnities arises (eg the target entity acquired is fined by an authority because in the period leading up to the closing it did not possess a licence required for its operation); warranties, on the other hand, are statements made by the seller with regard to the entity or property being purchased which, if untrue, provide the purchaser with a remedy in damages.
When using a locked-box mechanism the purchase price is agreed in advance of signing the sale and purchase agreement by reference to base accounts at a date before signing, known as the “locked box date.” The purchase price may be agreed by reference to a number of parameters, such as debt free/cash free and normalised working capital, net assets or profits, but all these are effectively agreed on the basis of the purchaser’s due diligence with no subsequent price adjustment mechanism. The purchaser bears the risk/gets the benefit of trading in the period between the locked box date (which is a date before signing) and completion. Contractual protections are put in place (the “leakage” provisions) to prevent the seller from extracting value from the target entity after the locked box date.
In a portfolio transaction a collection of properties is acquired (either through a share deal or asset deal) by the purchaser from the seller. The portfolio usually contains assets from the same type spread over a geographical area (eg a portfolio of office buildings in the CEE).
A retention is where a part of the purchase price due from the purchaser to the seller under the sale and purchase agreement is retained by the purchaser for a specified period (and, therefore, available to the purchaser for its use pending payment to the seller). A seller will usually require retentions to be placed in an escrow account. The escrow account is typically opened in the name of either the seller’s or the purchaser’s law firm for the purposes of holding the retention pending its payment out to one or other of the parties in accordance with the terms of the escrow agreement and the sale and purchase agreement. A retention combined with an escrow account offers the seller security against the risk of the purchaser’s inability to pay the retention as and when it subsequently becomes payable. However, it may be unattractive from the purchaser’s perspective, as it is not able to use the amount retained in the interim as it is locked into the escrow account.
In a share deal the legal entity holding the property, together with contracts and rights required for the operation of the property as a business, is acquired. In a share deal usually a single share sale and purchase agreement is signed that sets out the agreement between the parties to sell and purchase the shares in the target entity, the consideration (including the manner in which and when the consideration is to be satisfied), conditions to closing, closing arrangements and the warranties and indemnities.
Surety is an ancillary undertaking of the obligor under which the obligor is obliged to pay (perform) to the beneficiary in case the debtor fails to perform its payment obligation to the obligee. The obligor is not only entitled to raise its own direct objections against the creditor, but also the objections that the original debtor is entitled to default. There are two forms of surety under Hungarian law: (i) simple surety, where the obligor is required to perform if enforcement of the claim is not possible within a reasonable time from the debtor; and (ii) direct surety (or joint and several surety) where the creditor may claim payment from the obligor without any prior enforcement against the debtor.
Typically, the price for an acquisition is agreed on the basis that the target has an assumed level of specified financial elements at completion; for example, cash, debt and working capital; net assets and/or profits. The financial information reviewed as part of the due diligence and the accounts warranted in the acquisition agreement will often be out of date and are unlikely to reflect the current financial position of the target company or business. Hence, acquisition agreements often provide for the consideration to be varied by reference to the actual cash, debt and working capital; net assets and/or profits at closing.
Warranties in sale and purchase agreements are contractual statements about the assets or shares being acquired and the state of the assets or target entity and its business. The main purposes of the warranties are twofold: (i) to elicit information about the property or target entity (complementing the due diligence process) and thereby further aid the purchaser to evaluate the property or the target entity; and (ii) to provide the purchaser with a remedy (a claim for breach of warranty) if the warranty statements prove to be inaccurate and the value of the shares or assets acquired is consequently reduced.
Warranty insurance is a form of insurance taken out to provide coverage in respect of liabilities under (a) warranties in the acquisition agreement, (b) covenants to pay within the tax covenant, and/or (c) other specific contractual indemnities. There are two principal types of warranty insurance: seller warranty insurance and purchaser warranty insurance. Seller warranty insurance is insurance taken out by the seller in respect of its liability under the warranties and/or indemnities. This type of cover offers the seller a method of protecting some or all of its sale proceeds from the risk of future claims. Purchaser warranty insurance is taken out by the purchaser, with no direct involvement from the seller. A purchaser policy provides for a payment to the purchaser in the event that the seller is in breach of a warranty or an indemnity given in the sale and purchase agreement.

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