Avoiding Successor Liability in Asset Acquisitions
It is a fundamental principle, and an attractive characteristic, of asset acquisitions that the buyer can choose the assets they want to purchase and leave behind unwanted liabilities. This general rule of non-liability for successor entities, however, is by no means absolute. Rather, the rule of non-liability has been increasingly challenged in court and the scope of the rule’s exceptions has grown dramatically in recent years.
In general, there are four traditional judicially-created exceptions to the rule of non-liability, which courts discuss in nearly all successor liability cases:
- The buyer expressly or impliedly assumes the seller’s liability;
- The transaction, in substance, constitutes a merger or consolidation of the buyer and seller (also known as the de facto merger doctrine);
- The buyer is a mere continuation of the seller; and
- The transaction is entered into in order to fraudulently escape liability.
The cases in which these exceptions are discussed involve various types of claims, including involving tort claims, contractual claims, strict liability claims, and statutory and regulatory claims. In addition to the four traditional exceptions, buyers must be aware of various additional judicial exceptions applied only to particular types of claims as well as statutory and regulatory liability arising under federal and state law.
As mentioned, the scope of the exceptions to the rule of non-liability has expanded substantially in recent years. Further, exceptions tend to be quite fact-specific and states take widely varied approaches in applying such exceptions. Accordingly, buyers can no longer rely strictly on the asset acquisition structure to protect against successor liability, and it has become increasingly difficult to predict the outcome of successor liability claims that arise.
With such a changing landscape of successor liability, buyers can no longer simply rely on the asset acquisition transaction structure alone to avoid unwanted liabilities of sellers. Rather, it has become increasingly important to take adequate steps to identify and manage successor liability risks arising in each transaction. This includes undertaking rigorous due diligence review to uncover and understand sellers’ actual and potential liabilities in advance, and carefully drafting the purchase agreement to minimize the risk that the buyer will assume any unwanted liabilities. To further protect against unwanted liabilities that may be unintentionally assumed however, buyers can protect themselves by including protective provisions and adequate remedies in the transaction documents, such as strong representations and warranties and tailored indemnification language, as well as maintaining appropriate insurance coverage, among other protective measures.