Excluded assets: Overview, definition, and example
What are excluded assets?
Excluded assets refer to specific assets that are intentionally left out of a transaction, agreement, or contract. These assets are identified and defined in advance and are not included in the transfer or agreement. Excluded assets can be anything from physical property, intellectual property, or financial accounts, to more intangible assets like certain rights, licenses, or goodwill. The exclusion of assets is typically done to protect the parties involved from transferring unwanted or unnecessary assets or liabilities.
For example, in the sale of a business, the seller may choose to exclude certain assets, like intellectual property, real estate, or cash holdings, from the sale while transferring other assets like equipment, inventory, or customer contracts.
Why are excluded assets important?
Excluded assets are important because they help define the boundaries of a transaction or agreement and ensure that the involved parties are clear about what is and isn’t included. By specifying excluded assets, businesses can prevent misunderstandings or disputes about which assets are being transferred or involved in a deal. It also helps in protecting certain assets that the seller may want to retain or deal with separately, such as proprietary intellectual property, ongoing contracts, or cash reserves.
For businesses, clearly identifying and excluding specific assets can help streamline transactions, minimize risk, and maintain control over valuable assets or obligations that should not be transferred.
Understanding excluded assets through an example
Imagine a company sells its manufacturing division to another company. The purchase agreement includes a list of assets to be transferred, such as machinery, inventory, and customer contracts. However, the agreement also specifies certain assets that are excluded from the sale, such as the company’s proprietary software, its office building, and certain intellectual property. These excluded assets remain with the original owner, even though the majority of the division is being sold.
In another example, during the merger of two companies, one company may exclude certain liabilities or contracts from the merger. For instance, a company may choose to exclude any litigation-related liabilities, ensuring that the newly merged entity does not assume responsibility for those potential claims.
An example of an excluded assets clause
Here’s how an excluded assets clause might look in a contract:
“The following assets shall be excluded from this transaction: (i) All intellectual property, including patents, trademarks, and proprietary software; (ii) real estate located at [Insert Location]; (iii) any cash or cash equivalents held in the business’s bank accounts; and (iv) any pending litigation or claims against the business. These assets are not included in the sale and will remain the property of the Seller.”
Conclusion
Excluded assets help define the specific assets that are not part of a transaction, ensuring that both parties are clear about what is being transferred or excluded. By clearly identifying excluded assets, businesses can avoid confusion, limit their exposure to unwanted liabilities, and retain control over assets that are critical to their ongoing operations or future plans.
For businesses, understanding and properly documenting excluded assets is essential for structuring deals and protecting important assets or rights during transactions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.