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Successor Liability in the Purchase of a Business: Mere Continuation of Predecessor (Part 3 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 Three: Mere Continuation of Predecessor

The mere continuation theory is very similar to the de facto merger theory discussed previously in that liability is imposed when the successor corporation is merely a continuation or reincarnation of the predecessor under a different name, but with the same officers, directors or shareholders.   If the current owners and management of a business attempt to avoid liability associated with the business by setting  up a new corporation to buy the assets of the business, the new entity may remain liable for the liabilities of the selling entity under this theory.  This is a very limited exception and is not applicable in instances where an outside entity with different ownership is purchasing the assets of the predecessor corporation.

(Read Part 2: De Facto Merger…)

(Watch for Part 4: Continuity of Enterprise…)

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.