Books and Records
What are Books and Records? Sometimes the Buyer needs access to pre-Closing information about the Business or the Seller needs similar post-Closing information. The need may arise because the two parties are in dispute and the relevant information is under the other side’s control, or it may result from a third-party claim or government inquiry (among other reasons). To address these situations ahead of time and in a fair manner, both sides agree on when access will be granted to the other’s books and records, and the length of time those records must be kept.
The Middle Ground: Here, both parties agree to keep copies of the Business’s pre-Closing Books and Records for a set period of time and to provide the other side with reasonable access to them. The parties may agree to provide access only under certain circumstances, such as if a claim is brought against either party in relation to the Business, or they can use a more general standard and allow access for any reasonable purpose. The amount of time the pre-transaction Books and Records are kept is typically based on the Seller’s past practices, and the other party is afforded access for an agreed-upon number of years. The right of access does not extend to situations in which granting such access would violate the law.
Purpose: This provision may never be utilized, but it is included nonetheless as a way to assist both sides in the event of a future claim (i.e. as a risk management tool). Memory is incredibly fallible and having to rely on it years down the road in the midst of a dispute is not a situation in which the Buyer or Seller wants to find itself. However, the risk being protected against is minute and each party is more likely to consult its own copies as opposed to those of the other side should the need arise (unless, perhaps, the claim is being brought by the other side). Thus, the provision does little more than provide a redundant fail-safe option that will likely never be used. That fact, in addition to the reciprocal nature of the covenant, means it will likely be included in the Agreement without any explicit discussion.
Buyer Preference: None.
Seller Preference: None.
Differences in a Stock Sale Transaction Structure: The only difference in this term in a stock sale is that the retention period for the Business’s Tax Records is based on statutory time limitations rather than the Seller’s past practices. Since the Buyer is assuming the tax liabilities of the Seller, it will want to retain those records for as long as a tax-related claim can be brought against the Business.
