torstai 10. syyskuuta 2015


Recent collateral related issues

I have often heard buyers say that the purchase of business is like a visit to a hard ware store. The buyer will acquire only those assets and liabilities which the agreement specifies as being included in the sale; So true, yet it is important that the assets and liabilities are accurately defined. One often sees agreements contain a list of assets which are excluded from the transfer. There is not much point in including cash in hand or on deposit in the sale since this would simply involve the buyer paying an equivalent sum as part of the purchase price. Debtors and creditors are in most cases left with the seller. In addition, the seller may wish to retain certain assets for which it will continue to have use after completion

A schedule of the items of plant and machinery, including vehicles, which are part of the sale should always be attached to the acquisition agreement. A buyer who wishes to purchase all of these assets of the business may seek to protect itself by providing that plant and machinery  ‘used in the business’ are to be transferred,  including those items listed in the schedule. Thus items forgotten from the schedule by mistake will, all the same, be included in the sale. The buyer will naturally assume risk on the plant and machinery when the acquisition agreement becomes effective and should take insurance cover from this date, even if completion is delayed.


The buyer will usually seek to include the following warranties as to the state of the items of plant and
 machinery listed in the schedule:

(a)    they are adequate for (and not surplus to) the needs of the actuall  business.

(b)   they are in a acceptable condition and in satisfactory working order;

(c)    they are not dangerous, obsolete or in need of replacement;

(d)   they have been properly and regularly maintained;

The seller should think twice before accepting these warranties and consider trying to restrict any liability to major defects. Also, in relation to (d), as it will have no control over how the buyer carries on the business after completion, it may wish to add the word ’as carried  on by the seller prior to the agreement’.  

Recent collateral related pitfalls

I have recently been involved in two asset deals with similar kinds of problems.  The buyer should be very careful if the plant or the machinery is physically located on a real estate that is pledged to the bank. If there is a mortgage on a real estate the mortgage  also includes a house built on it and sometimes even the machinery. Such appurtenances (e.g. machinery) may cause some concern, in particular when they have not been contractually specified, or only have limited effect on third parties. If a specific piece of property is deemed to be an element or appurtenance of the real estate, it legally belongs to the estate and cannot be separated from it, regardless of ownership. The opposite legal conclusion is reached, when the object is deemed to be a piece of movable property and therefore not a part of the real estate.   There is a whole doctrine based on the fact whether the machineryt can be easily moved or removed from the property and whether an initial physical relationship between the machinery and the real estate has been established.

This problem raises in the acquisitions of small businesses where the buyer may have doubts about the seller’s solidity and fear its insolvence. My experience of today’s  banking is not very encouraging; banks tend to be less inclined to abstain from their theoretical rights to the machinery; not so much due to their  wish to maintain a stronger  collateral position in a possible insolvency situation but rather due to the lack of staff to deal with small business specific problems. Thus I only see two options to solve these situations: the buyer either gets a statement from the  bank or engages a qualified  Finnish lawyer who analyzes the risk. I was newly involved in a situation where the buyer’s foreign lawyer chose not to use Finnish council and caused a deal break situation in the sales process. Fortunately we managed to convince the bank and got a pledge where the bank abstained from any potential right to the machinery. This time the bank turned out to be flexible.

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