Wrong Pockets Clauses

Summary

These are wrong pockets clauses for an acquisition agreement in an M&A transaction structured as either an asset or equity sale. This template includes practical guidance and drafting notes. A wrong pockets clause is a covenant in acquisition agreements used to ensure that funds/receivables, rights or other assets, or liabilities that are discovered or received by one party after closing, which should or would have been or were intended to be transferred to the other party at closing, are so transferred. These assets or liabilities, which can vary from and include cash or cash equivalents, tangible assets like mail, notices, or inventory, intangible assets like intellectual property rights, and liabilities, are described as being in the "wrong pockets." A wrong pockets clause addresses this situation by requiring the holder or recipient of a wrong pocket asset/liability to transfer it to the appropriate party. Wrong pockets clauses are typically found in acquisition agreements for deals structured as asset or equity sales, especially those where the underlying transaction is the sale of a business division or other business that operates as part of a wider group of businesses. While cash and cash equivalents may end up in the wrong pockets in any given deal, the risk that specific assets and liabilities will inadvertently be omitted from the intended transaction is particularly acute in sales of divisions or subsidiaries, where sharing services, resources, and/or facilities is more common. Although wrong pockets clauses are generally unnecessary for merger agreements, as the legal existence of the merged company ceases and the survivor succeeds automatically to all of the disappearing entity's rights, assets, and liabilities, practitioners may wish or need to include one in a merger agreement if the transaction involves a spin-off or restructuring of the target or acquirer that could permit a wrong pockets scenario to occur. Note that while similar in spirit to a further assurances clause, a wrong pockets clause eliminates any ambiguity in the proper ownership or procedure for transferring a wrong pockets asset, and provides greater assurance and certainty (mostly to buyers) that an asset that was paid for and technically covered in the acquisition mechanics will ultimately be included in the acquisition. Note also that a wrong pockets clause does not and should not be deemed to affect legal title to a wrong pockets asset, but merely as correcting a mistake in possession of a wrong pockets asset or liability. This template consists of two separate wrong pockets clauses, one tailored to each of an asset purchase transaction and an equity purchase transaction. Both clauses are non-jurisdictional and neutral with respect to the parties involved, though, you can make each clause more favorable to the buyer or seller by making the changes suggested in the drafting notes. Although a merger-specific clause is not included in this template, you can use the equity purchase-specific clause for a merger agreement that contemplates a spin-off or restructuring with appropriate modifications to the defined terms and wrong pocket assets/liabilities that may be at issue. You should also know that wrong pockets clauses are highly customizable, though not necessarily negotiated extensively. You can use the drafting notes provided in these clauses to help you consider how this clause should be modified to reflect the contours of your transaction and conform it as may be appropriate. For a collection of other clauses and template provisions used in M&A agreements, see M&A Provisions Resource Kit.