Asset Purchase Agreement (APA) — English Law Drafting Reference

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Drafting reference for English-law asset purchase agreements — asset vs share purchase, TUPE 2006, VATA TOGC, warranties, tax deed, earn-outs.

The asset purchase agreement (APA) is the principal definitive document for a sale of business or assets. The buyer acquires identified assets (and, sometimes, assumes identified liabilities) of the seller; the seller remains in existence as a legal entity post-completion. The asset purchase is to be distinguished from the share purchase (where the buyer acquires the equity of the target company and inherits its assets and liabilities by operation of corporate ownership) and from the scheme of arrangement (a statutory process under Companies Act 2006 Pt 26 / 26A used principally for public-company acquisitions).

The asset structure is purchaser-friendly on liability: the buyer takes only what it identifies and assumes only liabilities it agrees to assume; pre-existing tax exposures, pension deficits, litigation, and unknown contingent liabilities remain with the seller. The seller is less favoured tax-wise: profit on sale is realised at the corporate level and (typically) is subject to corporation tax; subsequent distribution to shareholders is then subject to a second layer of tax. This page is the English-law drafting reference for the contract type. Cross-reference heads of terms for the pre-contractual stage, master services agreement for any contract-by-contract assignment regime, and standard clauses for the boilerplate.

Asset vs. share purchase — strategic distinction

The choice between asset and share structure has substantial commercial and tax consequences:

  • Liability inheritance — share buyer inherits all liabilities (known and unknown); asset buyer inherits only what is identified and assumed.
  • Tax treatment — share sale gives seller individuals a single layer of CGT (with possible Business Asset Disposal Relief — formerly Entrepreneurs’ Relief — at 14% on first £1m, increasing post-2024); asset sale results in double tax (corporation tax + extraction tax).
  • Contracts — share sale: the company’s contracts continue unchanged (subject to any change-of-control provisions); asset sale: each contract must be assigned (with consent if anti-assignment clause applies) or novated.
  • Employees — share sale: employment continues unchanged with the company; asset sale: TUPE 2006 automatic transfer (see below).
  • Tax losses — share sale: target’s tax losses transfer with the company (subject to anti-avoidance — Major Change in the Nature or Conduct of Trade test under CTA 2010 Pt 14); asset sale: losses generally stay with the selling company.
  • VAT — asset sale may qualify as TOGC (see below).

A hybrid structure — using a holding company with intra-group transfers — is sometimes used to engineer pre-completion separations.

Identified assets

The asset clause lists everything being transferred. The list is the buyer’s principal protection against transferring less than expected. Typical asset categories:

  • Goodwill — the established business name, customer connections, reputation, going-concern value.
  • Intellectual property — registered (patents, trade marks, registered designs) and unregistered (copyright, database rights, design rights, know-how, trade secrets).
  • Contracts — customer contracts, supplier contracts, employee contracts (transferred under TUPE), leases.
  • Premises — freehold and leasehold (with landlord consent for leases).
  • Plant and equipment — fixtures, fittings, machinery, vehicles.
  • Stock-in-trade — raw materials, work in progress, finished goods.
  • Book debts — trade receivables (often sold at face value less specific bad debts, or excluded from sale and retained by seller).
  • Cash and equivalents — typically excluded; seller retains.
  • Tax assets — input VAT recoverable, deferred tax assets — generally excluded; treated separately.
  • Records and books — including those the buyer needs to continue the business.

Excluded assets and excluded liabilities

The drafting symmetrical to identified assets is excluded assets and excluded liabilities — what stays with the seller:

  • Excluded assets typically: cash on hand, intercompany balances, tax refunds for pre-completion periods, certain insurance policies, pension scheme assets (defined-benefit schemes typically excluded), seller’s brand to the extent not licensed to the business.
  • Excluded liabilities typically: all pre-completion liabilities not specifically assumed; pre-completion taxes; pre-completion litigation; defined-benefit pension scheme liabilities; environmental liabilities for pre-completion contamination (unless specifically assumed).

The drafting answer to the inevitable boundary disputes is detailed schedules listing each material item and an “everything not listed stays with seller” sweep.

VAT — Transfer of a Going Concern (TOGC)

The Value Added Tax Act 1994 s.49 (operating with VAT Regulations 1995 SI 1995/2518 Reg 5; case-law principles) provides that a transfer of a going concern is not a supply for VAT purposes — i.e. no VAT is charged. The conditions broadly:

  • The assets transferred constitute a business or part of a business capable of separate operation.
  • The buyer uses the assets to carry on the same kind of business.
  • Where part of a business is transferred, the part is capable of separate operation.
  • The buyer is (or becomes) VAT-registered at the date of transfer.
  • For certain land, the buyer makes the option to tax notification (and notifies the seller before completion).

TOGC treatment is commercially important — it avoids the cash-flow cost of VAT (which would otherwise be charged by the seller and recovered by the buyer via input tax) and the SDLT-on-VAT issue (SDLT is charged on the VAT-inclusive consideration for real property).

The drafting answer is express TOGC warranties from the seller (that the conditions are satisfied) and tax indemnification if HMRC subsequently determines that TOGC did not apply (and VAT is therefore due).

Apportionment of consideration

The total consideration must be apportioned across the assets sold for several tax purposes:

  • SDLT (Stamp Duty Land Tax) — payable on land and buildings; apportionment determines the SDLT base.
  • Capital allowances — buyer’s capital allowances claim on plant and machinery and certain integral features depends on apportionment.
  • Tax base for the buyer — apportionment sets the buyer’s tax cost in each asset for future CGT / corporation-tax purposes.
  • Goodwill — typically zero capital allowances post-2015 (FA 2015 abolished goodwill relief for corporates).

The apportionment is the parties’ commercial agreement but must be on a “just and reasonable” basis under CTA 2009 s.1303 and Anning v Smith [1985] STC 49 type principles. HMRC may challenge artificially weighted apportionment.

Warranties

The warranties are the buyer’s principal protection against undisclosed problems. They fall into two categories:

  • Fundamental warranties — title to the assets; capacity to enter into the agreement; no insolvency event. Usually absolute (uncapped, perpetual).
  • Business warranties — financial information (accounts, management accounts); operating performance; contracts (existence, validity, no defaults); IP (ownership, validity, no infringement); employees (no unrecorded liabilities); tax (covered also by separate Tax Deed); property (title, condition, leases); litigation (none threatened or pending); compliance with law; data protection; insurance.

The key authority is Bottin International Investments Ltd v Venson Public Transport Ltd [2004] EWHC 3030 (Comm) (Mann J) — fundamental warranties (title, capacity) are absolute and the seller cannot use disclosure of facts to qualify them.

Disclosure letter

The disclosure letter accompanies the APA and qualifies the business warranties. It has two parts:

  • General disclosure — matters of public record (Companies House, IPO, Land Registry, court records); commonly accessed registers; the data room. The general disclosure typically operates against all business warranties.
  • Specific disclosure — itemised matters disclosed against specific warranties.

The buyer’s position is to limit the disclosure letter’s effect (e.g. fair-disclosure standard — disclosure must be “fair and reasonable” and provide enough detail for the buyer to make an informed judgement). The seller’s position is broad disclosure to maximise warranty cover. The well-drafted APA defines the fair disclosure standard (typically with reference to disclosure that is “fair” with sufficient particularity to “enable the Buyer to identify the matter and reasonably to assess its effect on the Group”).

Limitations on warranties

The warranties are subject to a hierarchy of limitations:

  • Financial cap — typically a percentage of the purchase price (often 100% for fundamental warranties; 25–50% for business warranties).
  • De minimis — single-claim threshold (typically £10,000–£50,000) — claims under this amount are not made.
  • Basket / threshold — aggregate threshold (typically £50,000–£250,000) — no claim until basket reached, then either “tipping basket” (full claim payable) or “deductible” (only excess over basket payable).
  • Time limits — general business warranties typically 12–24 months from completion; tax warranties 4–7 years (mirroring tax assessment windows); fundamental warranties usually unlimited (or longer-tail).
  • Knowledge qualifications — some business warranties qualified by seller’s knowledge (actual / constructive / after due enquiry).
  • No double recovery — single recovery only across multiple warranty/indemnity heads.

Tax Deed of Covenant

The Tax Deed (sometimes called “tax indemnity” or “tax covenant”) is a separate but companion document that addresses tax exposure. Structure:

  • Covenant — seller covenants to pay the buyer (£-for-£) any pre-completion tax liability (and certain post-completion tax liabilities attributable to pre-completion events).
  • Limitations — financial caps, time limits, de minimis, exceptions.
  • Conduct of claims — procedure for HMRC enquiries.

The Tax Deed is typically structured as a separate deed to obtain the 12-year Limitation Act 1980 s.8 limitation period for tax claims (vs. 6 years for simple contract under s.5).

TUPE 2006 — automatic transfer of employees

The Transfer of Undertakings (Protection of Employment) Regulations 2006 (SI 2006/246) automatically transfer the contracts of employment of employees assigned to the transferring business or part of a business. The Regulations transpose Council Directive 2001/23/EC and are retained EU law.

Key consequences:

  • Automatic transfer of contracts. Employee contracts transfer with the business; the employees become employees of the buyer on the same terms (Reg 4(1)-(2)).
  • Continuity of service — preserved (Reg 4).
  • Information and consultation — the seller (and, in respect of measures it envisages, the buyer) must inform and consult the affected employees (or, if recognised, the trade union or other recognised representatives) in good time before the transfer (Regs 13-14). Failure attracts financial penalties (up to 13 weeks’ pay per affected employee).
  • No dismissal for reason of transfer — dismissals for reason of the transfer itself are automatically unfair, save where there is an “ETO” (economic, technical, organisational) reason involving changes in the workforce (Reg 7).
  • Changes to terms — restrictions on post-transfer variation of employee terms for reason of the transfer.
  • Pension — defined-benefit pension rights generally do not transfer under TUPE; defined-contribution arrangements may.

The APA addresses TUPE through:

  • Identification of transferring employees — schedule listing the employees in scope.
  • Information and consultation timetable — to comply with Regs 13-14.
  • Warranties — employment-related (no undisclosed liabilities, no pending tribunal claims, accurate listing of contracts).
  • Indemnities — covering pre-completion employee liabilities and any liabilities arising from non-compliance with TUPE information/consultation.

Property — transfer of premises

Freehold premises transfer by Land Registration Act 2002 registered transfer (TR1 form) and completion of registration at HM Land Registry. SDLT payable on consideration apportioned to the property (FA 2003 Pt 4).

Leasehold premises transfer subject to the landlord’s consent under most modern leases. The buyer takes a sub-lease (under-letting) or an assignment of the lease. Land Registry registration via AP1/TR1.

IP transfers — perfecting the transfer

IP transfers require asset-specific formalities:

  • Patents — assignment in writing signed by assignor (Patents Act 1977 s.30); registration with the Intellectual Property Office (Form PF21).
  • Registered trade marks — assignment in writing signed by assignor (Trade Marks Act 1994 s.24); registration with IPO (Form TM16).
  • Copyright — assignment in writing signed by assignor (CDPA 1988 s.90(3)); no registration system.
  • Registered designs — assignment in writing; IPO registration.
  • Domain names — registry-specific transfer process.

Customer and supplier contracts — assignment, novation, consent

Each material contract must be transferred to the buyer:

  • Assignment — buyer takes the benefit (rights to performance, payment). Common-law assignment effective without counterparty consent unless contract restricts. Linden Gardens Trust v Lenesta Sludge [1994] 1 AC 85 confirms anti-assignment clauses enforceable.
  • Novation — replaces the seller with the buyer as party; requires counterparty consent (it is a fresh contract).
  • Sub-contract — seller remains party but sub-contracts performance to buyer; less commonly used post-completion.

Anti-assignment / change-of-control clauses in target contracts typically require the seller to use reasonable endeavours to obtain consents prior to or at completion; if consents are not forthcoming, the parties agree a back-stop arrangement (typically, seller-as-front contracts pass-through to buyer).

Restrictive covenants on the vendor

The vendor (former owner) is typically restricted from competing with the sold business post-completion. Two principal restraints:

  • Non-compete — vendor will not carry on a competing business for a specified period in a specified area.
  • Non-solicit — vendor will not solicit specified customers, suppliers, or employees of the sold business.

The classic authority on enforceability is Office Angels Ltd v Rainer-Thomas [1991] IRLR 214 (CA), confirmed and refined in Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67 (in the LD context, but with broader restraint-of-trade discussion). The restraint must:

  • Protect a legitimate proprietary interest (the business goodwill the buyer paid for).
  • Be reasonable in scope, duration, and geographic area.
  • Not be wider than necessary to protect the legitimate interest.

Vendor restraints are generally enforced more readily than employee restraints — courts recognise the buyer’s legitimate interest in protecting the goodwill it paid for. Typical durations: 2–5 years for non-compete; 1–3 years for non-solicit.

The Tillman v Egon Zehnder [2019] UKSC 32 severance principles apply where individual clauses are overdrawn.

Earn-outs

An earn-out is deferred consideration calculated by reference to post-completion performance. Typical structure:

  • Defined performance metric (revenue, EBITDA, profit before tax).
  • Measurement period (typically 1–3 years).
  • Calculation methodology (accounting principles to be applied).
  • Treatment of post-completion changes (acquisitions, disposals, changes in accounting policy).
  • Maximum payable; minimum payable.

The seller’s protection is operational autonomy during the earn-out period — the buyer cannot operate the business in a way that artificially depresses earn-out metrics. The leading authority is Watson v Watchfinder.co.uk Ltd [2017] EWHC 1275 (Comm) — the court implied a duty of good faith on the buyer in operating the business to enable the earn-out conditions to be met, in the context where the earn-out condition required board approval.

Completion mechanics — locked-box vs. completion accounts

Two principal mechanics for setting the final consideration:

  • Locked-box — price is fixed by reference to a “Locked Box” date (typically a recent management accounts date); seller indemnifies for leakage between Locked-Box and completion. No completion-accounts process; certainty for both parties.
  • Completion accounts — price is provisional; completion accounts prepared post-completion (typically 30–90 days) adjusted for working capital, debt, cash. Allows precise final price but introduces post-completion dispute risk.

W&I (warranty and indemnity) insurance is increasingly common — it covers buyer for breach of warranties, allowing seller to obtain a clean exit and shifting risk to insurer.

Sample APA structure

  1. Parties and recitals.
  2. Definitions.
  3. Sale and purchase — identified assets, excluded assets, assumed liabilities, excluded liabilities.
  4. Consideration — total; apportionment schedule; TOGC; SDLT mechanic.
  5. Completion mechanic — locked-box or completion accounts; escrow; deliverables.
  6. Conditions to completion — regulatory clearances; landlord consents; material consents; employee consultation timetable.
  7. Pre-completion conduct of business — restrictions on seller; access for buyer; insurance.
  8. Warranties — fundamental and business.
  9. Limitations on warranties — caps, baskets, de minimis, time limits, knowledge qualifications.
  10. Tax Deed — separate deed with covenant, limitations, conduct of claims.
  11. Disclosure letter — general and specific, with fair-disclosure standard.
  12. Employees and TUPE — list; consultation; warranties; indemnities.
  13. Property — freehold and leasehold transfers.
  14. IP transfers — assignments with full title guarantee; further-assurance obligation.
  15. Customer/supplier contracts — assignment/novation; consents; back-stop pass-through.
  16. Restrictive covenants — non-compete; non-solicit; severance under Tillman.
  17. Earn-out — metrics, calculation, conduct, good-faith implication per Watson v Watchfinder.
  18. Indemnities — pre-completion liabilities; tax (in Tax Deed); employment.
  19. Insurance — W&I; transitional cover; runoff cover.
  20. Standard boilerplate — entire agreement, NOM, notices, force majeure, governing law (English), jurisdiction (exclusive English).
  21. Execution as a deed — for the longer 12-year limitation period (Limitation Act 1980 s.8).

Bibliography

Statutes (legislation.gov.uk)

Case law (bailii.org / supremecourt.uk)

  • Bottin International Investments Ltd v Venson Public Transport Ltd [2004] EWHC 3030 (Comm) (fundamental warranties absolute)
  • Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 (anti-assignment)
  • Office Angels Ltd v Rainer-Thomas [1991] IRLR 214 (restraint of trade — restrictive covenants on vendor)
  • Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67 (restraint and penalty)
  • Tillman v Egon Zehnder Ltd [2019] UKSC 32 (severance / blue-pencil test)
  • Watson v Watchfinder.co.uk Ltd [2017] EWHC 1275 (Comm) (earn-out — good faith)

Cross-references

Disclaimer: This content is informational, not legal advice. Last verified: 2026-05-11. Always consult a solicitor admitted to practise in England and Wales for binding decisions.