A corporate successor is a corporation that assumes the burdens of a previous corporation through merger, acquisition, or other means of succession. As a general rule, a successor entity is not liable for the debts, acts, liabilities, or obligations of its predecessor.
However, there are several commonly upheld exceptions to the general rule of successor liability, and these exceptions can differ slightly from state to state.
Common General Exceptions to Successor Liability
The Agreement Exception
The successor expressly or impliedly assumes obligations of the predecessor. If a purchase agreement does not affirmatively state that the purchaser is not assuming any debts, acts, liabilities, or obligations of the predecessor, the successor may be liable.
The De Facto Merger Exception
The transaction is really a consolidation or a merger. The de facto merger exception is often triggered by the presence of three or more of the following four factors:
- There is a continuation of the enterprise – The physical location, assets, operations, management, employees, branding and/or clients are the same (or substantially similar) between the seller and the purchaser.
- There is a continuity of shareholders – Ownership between the seller and the purchaser are substantially the same.
- There is a cessation of operations – The selling company has ceased its operations or dissolves shortly after a sale of substantially all of its assets.
- There is an assumption of obligations – The purchaser either expressly or impliedly assumed the liabilities of the seller which can include customers, contractors, vendor agreements, leases, specific assets that were acquired, phone numbers, websites and domain names, intellectual property, etc.
The Mere Continuation Exception
The successor may be liable if the successor and the predecessor have common stockholders, officers, directors and employees. Business relationships and how as the public views the successor in relation to the predecessor, are also important considerations.
The Fraudulent Transaction Exception
The successor can be liable for the debts and obligations of the selling company if it’s determined the asset sale was made in an attempt to escape the debts and obligations and prejudice potential creditors.
The Product Liability Exception
In some jurisdictions the successor, who acquires all, or substantially all, of the assets of another company and undertakes essentially the same manufacturing operation, may be liable for injuries caused by products that were issued by its predecessor.
Limiting Successor Liability
In order for a successor to limit its liability proper due diligence as well as a well-crafted asset purchase agreement are necessary. The asset purchase agreement should be clearly delineate to what extent the buyer would assume liability under different circumstances as well as a resolution mechanism for liabilities not stipulated in the agreement.
Contacting a New Orleans Commercial Litigation Attorney
Successor liability laws differ from state to state. For example, the product liability exception has not been adopted in Louisiana. If you have questions regarding any aspect of successor liability, you should contact a New Orleans commercial litigation attorney who has successor liability litigation experience. The Moeller Firm has experience in representing clients in successor liability litigation.