This post was originally posted on the “State Bar of Wisconsin Business Law Section Blog” and was written by Attorney J. William Boucher.
Many business attorneys will recognize the WB-17 Offer to Purchase – Business Without Real Estate Interest form developed by the Wisconsin Department of Regulation and Licensing. The WB-17 is popular because of its pre-printed nature, and thus apparent fairness, and its familiarity to attorneys, agents and business owners alike, especially in smaller sale-of-business transactions. Even though it is a pre-printed form, the WB-17 can be modified by addendum. There are several important revisions that buyers and sellers should consider.
Although it is more common that a buyer of assets submits the initial draft of a purchase agreement, the WB-17 is more pro-seller than a typical buyer’s first draft. Buyers should consider addressing the following issues:
- Parties to the Contract. The WB-17 is worded to be a transaction between the buyer and a business selling assets. Therefore, shareholders, members, or other owners of the seller aren’t automatically parties to the transaction as defined at lines 6-12. Buyer’s counsel should be aware of this, as it affects the buyer’s remedies for any post-closing claims regarding the sale. Upon consummating the sale and distributing net sales proceeds to its owners, the seller may not have any remaining assets. Any claim made by the buyer against the seller post-closing may be an empty remedy. For example, if the seller is a corporation, the buyer’s remedies against the shareholders of the corporation for claims under the WB-17 would be limited to amounts distributed to the shareholders in liquidation of the corporation (Wis. Stat. § 180.1408(2)). Unless the buyer is able to pierce the corporate veil of liability protection of the seller, this would be a difficult hurdle to overcome.
- Definition of Purchased Assets. The buyer would normally agree to purchase all assets of the seller, other than those specifically excluded by the seller. The WB-17, on the other hand, requires the buyer to list all the assets it is buying. As a consequence, any asset inadvertently omitted by the buyer will remain an asset of the seller.
- Excluded Liabilities. The WB-17 does not address assumed or excluded liabilities. The buyer will want to clarify that is not assuming any liabilities of the seller, other than any liabilities specifically assumed by the buyer in the agreement.
- Working Capital Adjustment. A working capital adjustment to the purchase price (or other purchase price adjustments) would protect the buyer from actions taken by the seller before closing that were outside the ordinary course of business, such as accelerating the collection of accounts receivable. The buyer and the seller would agree on a target working capital amount at closing, and the purchase price would be adjusted up or down based on a post-closing calculation of the actual working capital of the seller as of the closing.
- Qualifications of Seller’s Representations. Detailed at lines 91-102, all of the representations of seller in the WB-17 are qualified by the seller’s knowledge. There is no breach of a representation unless the seller had knowledge of the misrepresentation. It is uncommon in a negotiated sale-of-business transaction for all representations to be qualified by knowledge, especially fundamental representations about the business. While the definition of Conditions Affecting the Business at lines 322-377 ostensibly provides protection for the buyer, adding clarity to the application of the knowledge qualifiers should be considered.
- Additional Seller Representations. The buyer should strongly consider adding seller representations about the business that are not specified in the WB-17. There are some glaring omissions, including the lack of any representations regarding taxes, title to the assets, customers and suppliers, contracts, and due authorization. The buyer may also want to strengthen the seller’s financial statement representation to provide that the financial statements fairly present the operations of the business or, if appropriate, were prepared in accordance with GAAP.
- In lines 91-102 of the WB-17, the seller makes representations about Conditions Affecting the Business. Buyers may want those seller representations to also be warranties of the seller for several reasons. Elements of a cause of action for a warranty claim differ from those of a misrepresentation claim and may not require, for example, reasonable reliance by the buyer on the warranty. In addition, the calculation of damages available under a warranty claim may in some instances be greater than the damages available under a misrepresentation claim.
- The WB-17 does not contain an indemnification provision. Indemnification provisions are very important, especially to the buyer, for several reasons: (i) they allow the indemnified party to recover attorney fees; (ii) they expand the right to pursue claims against the seller to directors, officers, shareholders, employees, members, etc.; and (iii) they provide a mechanism for handling any third-party claims, including notice, and control of the defense .
- Contingencies and Right to Cure. Other provisions that deserve review are the financing and appraisal contingencies at lines 394-471, and a seller’s right to cure at lines 472-479. While important for real estate deals or other deferred sign and close transactions, these provisions don’t serve much of a purpose for asset purchase agreements that utilize a simultaneous sign and close.
- Non-Compete and Non-Disclosure. The WB-17 does not contain any language regarding non-competition or non-disclosure of confidential information by the seller or its owners. These issues could be addressed by separate agreements or an addendum, but identifying these issues and discussing the possible risks is paramount.
Even though the WB-17 is generally more favorable to sellers, several topics still deserve sellers’ attention.
- Caps and Baskets. The seller should consider adding language via an addendum to limit claims brought pursuant to the seller’s representations at lines 91-102. While it mainly depends on the size and complexity of the deal, the concepts of caps and baskets limit the amount of recoverable damages. A cap provides a maximum amount that is recoverable from the seller, while a basket requires damages to reach a certain threshold before the buyer is able to recover any damages.
- Survival Period. The WB-17 does not limit or state a survival period for the seller’s representations. As a result, claims for breach of any representation could be made within the statute of limitations (six years in Wisconsin for contract claims). In a negotiated asset purchase agreement, the general survival period for representations is typically much shorter (e.g., 18-24 months), although a longer survival period is common for fundamental representations about the business.
- Exclusive Remedy. Another method to reduce the seller’s exposure to potential claims is to add an exclusive remedy provision, which would limit the buyer’s remedies for breach of the seller’s representations to remedies specified in the agreement.
- Non-Reliance on Other Representations. The seller should modify the WB-17 to confirm that the buyer is not relying on any representations or warranties made outside of the four corners of the WB-17. This would limit the buyer’s ability to pursue a claim based on any statement made outside of the WB-17.
- Specific Performance. Line 217 of the WB-17 states that the buyer may sue for specific performance if the seller defaults. The seller should strike this provision to eliminate the possibility of a forced sale in the event of a dispute.
The WB-17 Offer to Purchase – Business Without Real Estate Interest form contains many standard terms and conditions for the purchase and sale of assets of business and is a useful document for small sale-of-business transactions. Nonetheless, sellers and especially buyers should consider modifying the WB-17 to suit their particular needs in a transaction.
J. William Boucher, University of Wisconsin Law School 2015, is an attorney with O’Neil Cannon Hollman DeJong and Laing in Milwaukee where he concentrates his practice on entity formation and organization, mergers and acquisitions and general business law.