Avoiding Corporate Successor Liability

A typical merger in an acquisition transaction is the circumstance where a going concern business is being acquired by a competitor or party wishing to enter into the subject business or industry. A typical business purchase can be structured as a stock sale or an asset sale. In a stock sale, the acquiring entity acquires the corporate stock and having done so, essentially becomes the owner for all purposes as to the assets owned by the stock. Along with the assets, the stockholder acquires any and all past liability or responsibility, even responsibility not yet known. In order to eliminate such unknown risks, an asset transaction typically focuses on acquiring only the specifically defined assets such as customer lists, inventory, accounts receivable, equipment, real estate and physical machinery but excludes any debt, liability and the like. In every asset transaction, the goal is to succeed in eliminating any liability from the Seller being transferred to and applying to the acquiring Buyer.

The general rule is that the purchasing of assets by one company, from another company, is not enough to automatically transfer liability from the old company to the new company. However, three exceptions to that general rule do exist:

  1. Implied or Express Assumption. When a company agrees to accept the liability of the previous entity, or when it has made an express written assumption of the liability those obligations pass to the acquiring entity.
  2. Consolidation or Merger of Two Entities. If the transaction is not an acquisition but instead in this scenario two entities merge and legally become one entity, the new entity has all the rights and interests of the previous company and as such, the new entity becomes legally responsible for the liabilities of each of the merged organizations.
  3. Fraudulent Transaction. The law is not sympathetic to acts of fraud or misrepresentation. If a transaction is structured with the intent to defraud, misrepresent or mislead other persons or creditors, there is little case law available that supports that type of conduct.

The attorneys with Duba & Duba, PLLC have extensive business, merger, acquisition, asset purchase and successor business transaction experience. Prior to negotiating or discussing a contemplated asset or business transaction, contact the attorneys of Duba & Duba, PLLC for a consultation and engagement so that business counsel can be provided as to your specific transaction matter.

The topics contained in this article are intended to be general and representative in nature and not specific legal advice for any particular circumstance. Please feel free to contact Duba & Duba, PLLC to inquire about an analysis of your particular facts and circumstances.