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Successor Liability in the Purchase of a Business: Express or Implied Assumption of Obligations (Part 1 of 8)

When purchasing a business, buyers often prefer that the transaction be structured as an asset purchase rather than a stock purchase.  In a stock purchase, the buyer purchases the target company as an entity, and therefore assumes the seller’s liabilities, since the company being acquired retains all of its liabilities as a matter of law.  By restructuring the transaction as an asset purchase rather than a stock purchase, a buyer is provided with a much greater level of protection against liability for the target company’s obligations.

The law in most jurisdictions has traditionally held that when one company sells all of its assets to another, the buyer does not become liable for the debts and liabilities of the selling company.  This is still true to a large extent, and we frequently recommend structuring a transaction as an asset purchase in order to protect the buyer from the liabilities of the business being acquired.

However, over the past several years, the theory of successor liability has evolved and expanded as a result of a series of clashes between the policy in favor of allowing a company to sell its assets in an unrestricted manner, balanced against other policies, such as providing a source of relief for injured parties or other claimants.  As a result, in some cases, a purchaser of assets may be held liable for certain liabilities of the seller.  Whether or not an entity buying the assets of another may be held liable for the liabilities of the seller is highly fact specific, and may depend upon the type of liability at issue, the jurisdiction in which the claim is made, and other factors which the courts may take into account in balancing these conflicting policies.

In this eight part series, we review exceptions to the general rule that a purchaser of the assets of a business is not responsible for liabilities incurred by the seller prior to the sale.

Part One: Express or Implied Assumption of Obligations

Successor liability may exist when there is an express assumption of obligations of the seller by the buyer.  If an express assumption exists, it will normally be found in the Asset Purchase Agreement itself, usually in the descriptions of included and excluded assets or in the indemnity clause.  An Asset Purchase Agreement that contains an express disclaimer of successor liability is typically sufficient to satisfy the court that there is no such express assumption of liability, even in cases where the buyer knew of the existence of claims against the selling company or where money was set aside to cover warranty claims for products sold prior to the sale.  In order to provide the buyer with the maximum protection, the Asset Purchase Agreement should include express language to make it clear that the buyer is not assuming any liabilities, including but not limited to trade liabilities, tax liabilities, products liability claims, environmental claims, employee benefit claims, and employment law claims.  The Asset Purchase Agreement should also provide that the assets being purchased do not include existing contractual debts or liabilities except those specifically identified, and that the seller will indemnify the buyer from any and all liabilities related to seller’s operations prior to closing.

Implied assumption of liability can occur when the buyer makes certain representations to the seller or third parties regarding the buyer’s intentions with regard to continuing the seller’s business.  If the buyer makes representations to the seller’s existing customers or vendors and these parties rely on those representations, the buyer may become liable for the seller’s obligations.  Because of this, the buyer should not make any type of representation to the seller’s customers or vendors unless the buyer intends to be bound by these representations.

(Watch for Part 2:  De Facto Merger…)

If you have questions about how to structure the purchase or sale of a business, please contact KDDK attorney Jeffrey K. Helfrich at jhelfrich@KDDK.com or (812) 423-3183, or contact any member of the KDDK Business Law Practice Team.

About the Author

Jeffrey K. Helfrich

Jeff Helfrich is a business attorney with more than 30 years’ experience whose practice includes mergers and acquisitions, real estate, commercial finance, business organizations, and healthcare law. Jeff represents businesses locally and nationwide in a variety of general business matters, including the formation of new businesses, the purchase and sale of businesses, the negotiation of business and real estate contracts, and resolving shareholder disputes. Jeff has also represented banks as well as commercial borrowers in the negotiation, preparation and review of loan documentation.