breach of contract case

...now browsing by tag

 
 

So You Signed a Non-Solicitation/Non-Complete/Non-Disclosure Agreement, Now What??

Monday, February 24th, 2020

Business clients often confuse the above terms, each of which protect business owners from a different type of harm.  I will summarize the three types of agreements below.

Non-compete agreement:

A covenant not-to-compete is an agreement whereby a party agrees not to compete against another party: 1) in a specific line of business; 2) for a definite period of time; 3) in a limited geographic area.

A non-compete agreement is usually found as part of a broader contract, such as an employment agreement or franchise agreement, and will take effect upon termination of the contract.   Maryland courts allow a covenant not-to-compete to be enforced provided it is “reasonable” in the activity it restricts, as well as in its geographic scope and duration.   A typical non-compete looks something like the following:

“Employee hereby agrees that for a period of one year following the date of termination of this Agreement for any reason, Employee shall be prohibited from acting, directly or indirectly, as an owner, manager, operator, consultant or employee of any business or business activity that is in the business of providing services similar to or competitive with Company.”

Non-disclosure agreement:

A non-disclosure, or confidentiality, agreement (“NDA”), is an agreement whereby a party pledges not to disclose the confidential and proprietary information of another party.  NDA’s are commonly used to protect confidential information not generally made available to the public such as trade secrets, customer lists, business and marketing plans and strategy, and financial information, so that such information does not fall into the hands of competitors or even the public at large.  NDA’s can be found in many employment and independent contractor agreements, as well as agreements where businesses are performing due diligence on one another prior to some type of relationship commencing.

Unlike the situation where covenants not-to-compete must be reasonable in all areas, non-disclosure agreements will be enforced by Maryland courts unless the person or company that is alleged to have violated the NDA is able to show that it learned of the confidential information from an independent, outside source.  Whatsmore, an NDA need not contain any geographic or time restrictions in order to be valid and enforceable.

A typical NDA will look like this:

“Employee acknowledges that Company may, in the course of Employee’s employment, provide Employee access to Company’s trade secrets, customer lists, business and marketing plans, financial information, and other confidential information related to the business of Company, including access to Company’s Employment Manual (the “Manual”).  Employee agrees to retain all such information as confidential and may not use such confidential information on his or her own behalf or disclose such confidential information to any third party during or at any time after the term of Employee’s employment.”

Non-solicitation agreement:

A non-solicitation agreement is an agreement whereby a party pledges not to solicit the clients and customers of another party.  Non-solicitation agreements are generally found in employment and independent contractor agreements, as well as vendor arrangements where one party is granted access to the clients list of another party.

Like an NDA, a non-solicitation agreement need not contain any geographic or time restrictions in order to be valid and enforceable in Maryland.  A common form of non-solicitation agreement follows:

“Employee hereby agrees that for a period of one year following the date of termination of this Agreement for any reason, Employee shall be prohibited from soliciting business from, or performing services for, or inducing or attempting to induce, any customer or client of Company, its subsidiaries or affiliates, to cease doing business with Company, or in any way interfering with the relationship between Company and any customer or client of Company.”

Many business contracts will contain one or more of the above agreements.  It is therefore important to be able to distinguish among them, and draft contracts that are specific to your business needs.  Contact a business lawyer for advice.

 

Post Judgment Oral Examination of a Judgment Debtor

Monday, October 29th, 2018

Following up on my earlier blog posts that included post-judgment interrogatories and requests for documents, a judgment holder can also request that the debtor appear before a court-appointed examiner and answer questions under oath from the judgment holder’s counsel.  Failure of the Debtor to appear for the exam or answer the questions truthfully could lead to imprisonment of the Debtor.

Here is a sample of some of the questions I ask in an oral examination:

Background

  1. Please provide your full name, including aliases.
  2. What is your soc Sec No.
  3. What is your Driver’s License Number.
  4. What is your date of birth.
  5. How many children do you have?
  6. What are the names of your children and their ages?
  7. Provide your children’s social security numbers.
  8. What is your current home telephone.
  9. What is your current cell phone numbers?
  10. Provide all email addresses you have used during the past 3 years?
  11. Provide the name, address and phone number for your 3 closest relatives not living with you?

Residence

  1. What is your current residence as of this morning?
  2. Do you own or rent?
  3. Are you current on your mortgage payments?
  4. Name all other real property owned by you or your spouse jointly or individually.
  5. Name all other real property rented by you or your spouse jointly or individually.
  6. [If renting, give name/address/phone number of the estate agent/landlord.]
  7. Have you recently moved?
  8. Name all addresses where you and/or your spouse have slept over the past 90 days.
  9. Provide all of your previous addresses utilized by you or your spouse over the past 7 years.
  10. Is your current residence up for sale?
  11. How much are you asking for it?
  12. How much is owed on it?
  13. Are you planning on moving?
  14. Are you in the process of purchasing or renting a new residence?
  15. If so, what will be your new address?
  16. How much did the new house cost?
  17. Provide the names of all persons currently living in the same location with you. 

Vehicles

  1. Name all motor vehicles owned by you or your spouse.
  2. Owned or leased?
  3. Year/make/model/condition?  Registration number?  License plate number?
  4. Are the vehicles owned outright or are they financed?
  5. If so by whom?
  6. Are you in the process of buying a motor vehicle?
  7. What are the vehicles worth today?
  1. List the automobiles purchased by you or your spouse within the past 7 years.
  2. Do you or your spouse own a boat? If so, follow up.

I also ask detailed questions about current employment and employment history, bank accounts, general financial questions dealing with stocks and other investments, IRAs, retirement, life insurance, wages and income, tax returns, and any other sources of income or assets.

 

Post Judgment Request for Documents

Monday, October 29th, 2018

Following up on my earlier blog post that included post-judgment Interrogatories, whereby a judgment holder can require a debtor to answer certain questions about the debtor’s assets and wages, a judgment holder can also request that the debtor turn over documents.

Here is a sample of some of the documents I request.

  1. Defendant’s federal and state income tax returns for the years ____, ____, and ____, including any Schedules thereto, whether such returns were individually filed or jointly filed.
  2. For all automobiles which Defendant has any ownership interest, exercise control or possession or have any financial responsibility for, provide the following documents for each vehicle:
    1. Copies of the official vehicle Titles;
    2. Copies of the Vehicle Registration document;
    3. Any documents showing the Tag number;
    4. Any documents showing the VIN number;
    5. Copies of loan statements for past 12 months;
    6. Copies of records indicating payments made during the last 12 months; and,
    7. Copies of all loan agreements and notes.
  3. All documents concerning payments, loans, exchanges, sales, distributions or transfers of cash or assets (including automobiles, boats, jewelry, electronics, etc.) with value of $2,000 or greater made by Defendant since __________ through the present.
  4. All documents and bank account statements from any financial institution where Defendant has, or had within the past 3 years, an account.
  5. All documents and brokerage account statements from any bank, financial institution, or brokerage firm, where Defendant has, or had within the past 3 years, a brokerage or stock account.
  6. For any real estate owned by Defendant either individually or jointly with another person or entity at any time since __________, provide all documents related thereto, including any rental/lease agreements, rental receipts, deeds, purchase contracts, mortgage contracts, mortgage notes, and mortgage statements.
  7. For any income earned by Defendant during the past 3 years, provide copies of documents related thereto, including pay stubs, checks, receipts, statements, work orders, bank documents, including deposit slips and wire transfers, related to any payment to Defendant.
  8. For any business entity, corporation, company, partnership, (“Entity”) for which Defendant has or had an ownership interest or management control at any time during the past 3 years, provide all documents concerning any bank or investment account of the Entity, all documents concerning any loans or disbursement made by the Entity to Defendant or one of your family members, and all financial statements including general ledgers, accounts receivable, accounts payable, income statements, balance sheets and profit and loss statements concerning the Entity.
  9. For any Entity for which Defendant has or had an ownership interest or management control at any time during the past 3 years, provide copies of the Articles of Incorporation or Organization, By Laws, Shareholder Agreement, Operating Agreement, Partnership Agreement and Minutes of any Board or Shareholder meetings.
  10. Provide all documents concerning any financial agreements, transactions or loans made between Defendant and any other individuals or entities during the past 3 years.

 

Subcontracting Agreements / Master Agreements

Friday, October 26th, 2018

How do business owners handle subcontracting agreements when the subcontractor may work on several different projects for several different clients of the Contractor, simultaneously or over a period of years?  The answer is to tweak the standard Subcontractor Agreement to make it a “master” agreement, so that it covers not just the first project, but future projects as well.  Here is some language I add:

WHEREAS, Contractor and Subcontractor (the “Parties”) agree that for mutually agreed upon Clients, Contractor may choose to utilize Subcontractor with respect to certain Services specifically set forth herein and in any Statement of Work attached to this Agreement;

WHEREAS, Contractor and Subcontractor desire to enter into a master agreement that sets forth the terms and conditions pursuant to which Contractor and Subcontractor shall, for mutually agreed upon Clients, provide certain Services to one or more of Contractor’s clients;

Statement of Work.  The parties will memorialize the Subcontractor work in the attached Statement of Work (a “Statement of Work” or “SOW”) that is entered into between the parties and is incorporated into and made a part of this Agreement.  Contractor may issue a purchase order (“Purchase Order”) with the mutually agreed upon and signed Statement of Work attached for all work to be performed by Subcontractor under this Agreement.  A SOW, if and only to the extent then followed by a Purchase Order, constitutes the only authorization for Subcontractor to take any action that will result in any expense to Contractor.  Any SOW shall be substantially in the form of the representative SOW attached as Exhibit A to this Agreement and shall reference this Agreement and shall specify: (a) the overall project description and Subcontractor’s requirements for the services; (b) the services to be performed, including materials to be provided, by Subcontractor; (c) the charges or billing rates and payment milestones for the services performed by Subcontractor; (d) the location(s) where the services are to be performed;  (e) the acceptance criteria and warranty provisions for such work; (f) anticipated start and finish dates; and (g) any other information and/or associated terms and conditions that may be required by the circumstances of a particular Statement of Work.

Collecting on a Judgment in Maryland – Post Judgment Interrogatories

Friday, October 26th, 2018

A common misconception that many business owners have about litigating a dispute is the belief that just because a party wins at trial, the money won in the judgment automatically is transferred to the winner.  Usually, that is far from the case.  While it is never easy to go to trial and win a money judgment against another party, sometimes winning is actually easier than collecting on the money judgment won.  A judgment is simply a piece of paper from the Court stating who won and who lost.  However, if the losing party is not financially ready and willing to pay you, a judgment holder has to be prepared to continue to work. Maryland law permits a judgment holder to take certain steps to collect.  One of these steps is the use of post-judgment interrogatories, which are questions the winner may ask of the losing party, known as the debtor, about the amount and location of his/her/its wages, assets, bank accounts and property.  Here is a sample of some of the questions I ask.  Once the amount and location of the debtor’s assets are revealed, an experienced collections attorney will be able to pursue the amounts you are owed.

  1. Provide the address and fair market value of all real estate owned by Defendant either individually or jointly with another person or entity.
  2. Provide Defendant’s federal and state income tax returns for the years x, y and z, including any Schedules thereto, whether such returns were filed individually or jointly.
  3. Detail Defendant’s net worth, including all such assets owned jointly.
  4. Provide the year, make, model, mileage, blue book value, and VIN number of all vehicles owned by Defendant.
  5. Detail the name and address of each financial institution where Defendant has an account, including the routing number and the account number for each.
  6. Detail the balances for each account detailed in your response to Interrogatory #5.
  7. Provide Defendant’s bank statements for each account specified in your response to Interrogatories #5 from x through the present.
  8. Detail all other assets owned by Defendant not yet mentioned and the fair market value for each.
  9. Detail whether Defendant has disposed of or transferred any asset within the last 180 days. If yes, give the name and address of each person or entity who received any asset and describe each asset.
  10. Detail any ownership interest Defendant has in any corporation, partnership, or limited liability company. In so doing, identify the name of the corporation, partnership, or limited liability company, the state of incorporation or organization, the amount or percentage of the ownership interest, and the fair market value of the ownership interest.
  11. For any corporation, partnership or limited liability company named in your response to Interrogatory #10, provide any shareholder, partnership or operating agreement to which Defendant is a party.
  12. Detail all income, wages, or other compensation of any kind received by Defendant within the last 180 days.

Sample Confessed Judgment Note for Commercial Use

Thursday, October 23rd, 2014

CONFESSED JUDGMENT NOTE

[SAMPLE]

 Amount –

Date –

            The undersigned __________________________ (hereinafter referred to as “Maker”) hereby promises to pay ________________________________(“______________”), located at [Address], the sum of ___________________ ($_______________) to resolve a dispute over monies owed to ______________________ related to _________________________________.

 NOW, THEREFORE, in consideration of the foregoing, the covenants and agreements contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Maker hereby agrees as follows:

 1.   Payment by Maker Upon Execution of this Note. Maker agrees to pay the sum of $_________________ to ____________________ upon execution of this Note.

 2.   Balance of Sum to be Paid by Maker. Maker agrees to pay the balance owed of the Sum in the amount of $_______________ on or before _________________ (the “Due Date”).  

 3.   Default. Maker shall be in default of this Note should Maker fail to make any payment due to ______________ under this Note, or fail to pay in full all amounts owed under this Note, on or before the Due Date. Upon default, the Entire Sum owed to ______________ of $__________________ shall be then immediately due and payable by Maker, less any amounts previously paid by Maker to _______________ in settlement of this matter.

 4.     Prepayment. Maker may prepay the principal amount outstanding in whole or in part at any time without penalty. 

5.  Confession of Judgment. Should Maker default under this Note, Maker appoints _______________________ as its duly authorized attorney-in-fact with authority, in its name, place, and stead, to confess judgment in the office of the clerk of any Court of any city or county in the state of ____________________ against Maker, in the amount of the $________________, less any amounts previously paid by Maker to _________________ in settlement of this matter.

 6.  Waiver. Maker waives presentment and demand of payment. The failure of ______________________ to exercise any of its rights hereunder in any instance shall not constitute a waiver thereof in that or any other instance. Any notice to Maker shall be given by mailing such notice by first class mail, postage prepaid, addressed to Maker at ____________________________________, or to such other address as Maker may designate by written notice to _____________________. Notice of non-payment is not required by the terms of this Note.

 7.  Costs and Expenses. Maker shall pay __________________ for all costs and expenses, including, but not limited to filing fees, investigative costs and reasonable pre- and post-judgment attorney fees, incurred by __________________ in enforcing and collecting this Note.

 8.  Obligations and Benefits. The obligations and benefits of this Note shall be binding upon and inure to the benefit of the Maker, _____________________ and their respective heirs, successors and assigns.

MAKER

____________________________             

By: _________________________

Title: ________________________

Date: ________________________

 

Time Limits and NDA/Confidentiality Agreements

Friday, June 8th, 2012

It is common for companies to share confidential information with a third party in order to achieve an operational objective, where the third party may be a prospective joint venturer, an acquirer, an investor or even a client.  Prior to disclosing such confidential information, however, these same companies usually require the execution of a confidentiality/non-disclosure agreement by the other party.

This blog has previously discussed issues surrounding confidentiality/non-disclosure agreements.  Today’s topic however is specific: the time limits, if any, that should be considered in such agreements.

Most companies if given a choice would prefer to include in their  NDA/confidentiality agreements a perpetual term, which essentially means that the confidential information can never be disclosed by the third party except in limited circumstances.  Often times however, this desire is diluted in the course of negotiations, leading to a final agreement containing just a limited time for confidentiality, ie, for example, 2, 5 or even 10 years. 

Unbeknownst to such parties, agreeing to this watered-down time limit may lead to substantial future risks with regard to confidential information.  An example is the California case of Silicon Image, Inc. v. Analogk Semiconductor, Inc.   In furtherance of its goal to protect its confidential information, Silicon Image took numerous prudent steps to protect its trade secrets, including: i) requiring its own employees, customers and business partners to sign confidentiality agreements; ii) maintaining a key card access system and by requiring visitors to sign in to protect its trade secrets; iii) protecting computer systems through network security and access control; iv) labeling confidential proprietary information and watermarking all information disclosed outside the company with the name of the individual receiving the information; and, v) providing training sessions to employees on its trade secret protection program.

Yet in spite of its strict adherence to the protection of its confidential information, Silicon Image decided to limit the term of its confidentiality agreements to a set number of years, instead of a perpetual term, due to the fact that that’s what other high-tech companies were doing, and due to the fact that many partners, investors and other third parties pushed back and refused to execute non-disclosure agreements containing a perpetual duration of confidentiality.

Despite its best practices described above, Silicon allowed itself to frequently enter into confidentiality agreements with terms of 2 to 4 years, which proved to be a serious error when the time came for Silicon to seek a preliminary injunction in California Court against a competitor it alleged misappropriated its confidential information.

In denying Silicon’s request for a preliminary injunction, the Court analyzed whether Silicon Image made reasonable efforts to protect its confidential information.  One of the key factors the Court focused on was whether or not the non-disclosure agreements between Silicon Image and its customers and distributors provided adequate protection.  Unfortunately for Silicon, the Court concluded that reasonable steps to protect trade secrets were not shown by Silicon, pointing particularly to the time limits included in its confidentiality agreements.

The Court held that “one who claims that he has a trade secret must exercise eternal vigilance,” requiring all persons to whom a trade secret becomes known to acknowledge and promise to respect the secrecy in a written agreement.  A time limit contained in an NDA demonstrated to the Court that Silicon’s own expectations of maintaining its trade secrets were time limited and, thus, a failure to demonstrate “eternal vigilance” over its trade secrets. 

As a result, Silicon lost a serious case in its attempt to protect its confidential information.  The moral of this story is a simple one.  Companies who include time limits in their confidentiality agreements do so at their peril.  In order to avoid the Silicon Image outcome, it is prudent to stand firm and refuse to include a set time limit for the receiving party’s obligations to maintain the confidential information.  The best practices are for the trade secret owner to insist that the obligation to maintain confidentiality survive as long as the information disclosed qualifies as a trade secret under the requirements of applicable law.

The Legal Standard for Fraud in Maryland

Wednesday, March 7th, 2012

To prevail on a claim of fraudulent misrepresentation in Maryland, a plaintiff must establish, by the heightened evidentiary standard of clear and convincing evidence:

“(1) that the defendant made a false representation to the plaintiff, (2) that its falsity was either known to the defendant or that the representation was made with reckless indifference as to its truth, (3) that the misrepresentation was made for the purpose of defrauding the plaintiff, (4) that the plaintiff relied on the misrepresentation and had the right to rely on it, and (5) that the plaintiff suffered compensable injury resulting from the misrepresentation.”  VF Corp. v. Wrexham Aviation Corp., 350 Md. 693, 703 (1998), quoting Nails v. S&R, 334 Md. 398, 415 (1994).

The defendant must actually be aware of the falsity, or atleast the potential for falsity.  The requirement concerning knowledge of the falsity or reckless indifference as to the truth of the representation means either the defendant’s actual knowledge that the representation was false or the defendant’s awareness that he does not know whether the representation is true or false. Ellerin v. Fairfax Savings, 337 Md. at 231, 652 A.2d at 1124.  

Negligence or misjudgment, “‘however gross,'” does not satisfy the knowledge element. Ellerin, 337 Md. at 232, 652 A.2d at 1125, quoting Cahill v. Applegarth, 98 Md. 493, 502, 56 A. 794, 796 (1904). See also VF Corporation and Blue Bell, Inc. v. Wrexham Aviation Corp., 350 Md. 693 (1998).

A defendant must have the intent, the scienter, to cheat another: “It is well recognized under Maryland law that an action for fraud cannot be supported … without any design to impose upon or cheat another.”  VF Corp. v. Wrexham Aviation Corp., 350 Md. 693, 703 (1998).  

The complaining party though, must have reasonably relied on the defendant’s representations.  To determine whether one party’s reliance upon the allegedly fraudulent statements of another party is reasonable, a court looks to all the facts and circumstances present in the particular case.  “In determining whether reliance is reasonable, a court is required to view the act in its setting….” Parker v. Columbia Bank, 91 Md. App. At 361-362. 

The One of the most important circumstances in this regard is the plaintiff’s background and experience.  For example, a complaining person who is knowledgeable in the commercial real estate realm could not be said to have reasonably relied on another’s false representations in that realm, as the complainant would have the requisite knowledge and resources to determine whether such statements were true in the first place.

 

 

Foreign LLCs and Corporations That Transact Business in Maryland But Fail to Register in Maryland Cannot File Suit Here

Wednesday, March 7th, 2012

          Before transacting interstate or foreign business in Maryland, a foreign limited liability company (“LLC”) shall register to transact business with the State Department of Assessments and Taxation (“SDAT”) in accordance with Md. Corp. & Ass’ns. Code Ann. § 4A-1002:

“(a) Requirement. — Before doing any interstate, intrastate, or foreign business in this State, a foreign limited liability company shall register with the Department.”

           Under § 4A-1002, a foreign LLC is required to complete an application setting forth, among other information, its name, state of organization, business purpose, and resident agent, and pay a filing fee to SDAT.

          Md. Corp. & Ass’ns. Code Ann. § 4A-1007 states that any foreign limited liability company that fails to register with the SDAT in accordance with § 4A-1002 is barred from maintaining a lawsuit in any court of this State, as follows:

“(a) Barred from maintaining suit. — If a foreign limited liability company is doing or has done any intrastate, interstate, or foreign business in this State without complying with the requirements of this subtitle, the foreign limited liability company and any person claiming under it may not maintain suit in any court of this State, unless the limited liability company shows to the satisfaction of the court that:

   (1) The foreign limited liability company or the person claiming under it has paid the penalty specified in subsection (d)(1) of this section; and

   (2) (i) The foreign limited liability company or a successor to it has complied with the requirements of this title; or

     (ii) The foreign limited liability company and any foreign limited liability company successor to it are no longer doing intrastate, interstate, or foreign business in this State.”  

In essence, Md. Corp. & Ass’ns. Code Ann. § 4A-1007 bars a foreign LLC from acting as a plaintiff in any Maryland state or federal court if the LLC is doing or has done “any intrastate, interstate, or foreign business” in Maryland without registering or qualifying with SDAT. 

Foreign corporations face nearly identical Maryland statutes.  See Md. Corp. & Ass’ns. Code Ann. §§ 7-202,  and 7-301, respectively. 

The Maryland Court of Appeals stated the following in Yangming Marine Transport Corporation v. Revon Products U.S.A., Inc., 311 Md. 496 (1988):

“As pointed out above, under § 7-301, a foreign corporation that has not complied with § 7-202 or § 7-203 is barred from suing in Maryland if the corporation “is doing . . . any intrastate, interstate, or foreign business in this State.”  …. Instead, we have held that § 7-301 embodies a test for determining whether a foreign corporation is “doing business” in Maryland. See G.E.M., Inc. v. Plough, Inc., 228 Md. 484, 486, 180 A.2d 478, 480 (1962). Under this test, § 7-301 bars an unqualified or unregistered foreign corporation from suing in Maryland courts only if the corporation is doing such a substantial amount of localized business in this State that the corporation could be deemed “present” here. See, e.g., S.A.S. Personnel Consult. v. Pat-Pan, 286 Md. 335, 339-340, 407 A.2d 1139, 1142 (1979); G.E.M., Inc. v. Plough Inc., supra, 228 Md. at 488-489, 180 A.2d at 480-481.

 

 

Legal Differences Between a Stock Purchase and an Asset Purchase

Tuesday, February 8th, 2011

A Stock Purchase refers to the sale and purchase of an ownership interest in an entity like a corporation, partnership or limited liability company. The Seller sells, and the Buyer purchases, all or part of the outstanding shares of stock in a corporation, or all or part of the membership interest in an LLC or partnership, as well as all of the existing assets and liabilities of the entity. This includes the name and goodwill of the business, which oftentimes can be valuable. The existing entity itself does not change. Rather, the owners of the stock or membership interest in the entity change from Seller to Buyer, while the entity itself continues uninterrupted.

In a Stock Purchase, unless agreed otherwise, the Seller is absolved of any obligations or liabilities stemming from its prior ownership interest in the entity, as the Purchaser becomes the owner of not only the assets of the entity, but likewise the debts and obligations as well. For this reason a Seller will generally prefer a Stock Purchase over an Asset Purchase, as a Stock Purchase allows the Seller to walk away from the business without the fear of future debts, liabilities or obligations of the business. For the Purchaser of stock in such a transaction, I cannot stress how important it is to perform the maximum amount of due diligence it can, in order the possibility of assuming any unintended or unknown liabilities and obligations, since such liabilities should have or could have been known.

Unlike a Stock Purchase, an Asset Purchase involves, as the name implies, the purchase and sale of only the assets of a particular business, without the purchase or sale of any stock or other ownership interest in the company. The Purchaser buys, and the Seller sells, only the specific assets identified in the governing document, named the Asset Purchase Agreement. Any assets not included in the Asset Purchase Agreement remain the property of Seller. The Buyer must create a new entity that will own the purchased Assets, or use an already existing entity for the transaction.

The Seller of assets retains ownership of the shares of the stock or other membership interest in the business, and as a result the Seller also retains any existing or future obligations and liabilities of such business, except those specifically transferred to the Buyer as part of the sale. For this reason a Purchaser will normally prefer an Asset Purchase to a Stock Purchase. This way, the Buyer obtains only the specific assets which it desired to purchase, and which debts, obligations and liabilities it is assuming, if any.

An additional cost that may be necessary in an Asset Purchase is the need to possibly transfer ownership of certain assets used in or by the business, and/or assign leases and other third party contracts to which Seller was a party.

There are many tax issues that must be addressed when deciding between a Stock Purchase an Asset Purchase. I advise my clients to see the advice of an accountant for such issues.