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Successor Liability in Asset Acquisition Transactions

ABA Business Law Section Memo

ABA Business Law Section M&A Committee: M&A Lawyers' Library

February 22, 2019

A frequently cited advantage of an asset purchase transaction over a merger or stock purchase is the flexibility that the parties have in an asset purchase to agree, as between themselves, on which debts and liabilities of seller will be assumed by buyer and which will be retained by seller. This flexibility is based on the long-standing common law principle that a buyer of the assets of a business does not thereby become liable for the debts and liabilities of the seller that were not expressly assumed by the buyer. This is commonly referred to as the “rule of non-liability.”

The rule is subject to a number of exceptions, however, the scope of which has expanded dramatically over the past 25 years. These exceptions have expanded to the point where transaction planners can no longer predict the outcome of a successor liability claim with confidence or rely upon the structure of the transaction alone to shield the buyer from the liabilities of the seller, both known and unknown, that are not expressly assumed by the buyer. The rise in the number of successor liability claims and the lack of predictability dictate that due diligence and pre-transaction planning with respect to seller’s retained liabilities be as comprehensive in an asset purchase as they are in any other transaction structure. This is especially true where the transaction involves all or substantially all of seller’s business assets, some or all of seller’s equity owners continue as owners of buyer, and/or seller will be dissolved after the transaction and thus will be unable to respond to claims of its creditors.

John Lawrence, a partner in Shipman & Goodwin’s Business and Finance Practice Group, has co-authored an extensive Memorandum on successor liability for the M&A Lawyer’s Library maintained by the M&A Committee of the ABA Business Law Section. The Memorandum presents an analytical framework for assessing and minimizing successor liability risk in asset purchase transactions. The suggested approach does not rely on predicting which law will govern successor liability claims in any given transaction or how a court might weigh the many factors that typically influence judicial decisions on successor liability claims. Rather, the Memorandum identifies specific areas of successor liability risk and describes the pre-transaction planning needed to minimize some elements of risk. It also summarizes various types of general and specialized insurance products to address identifiable successor liability risks.

The goal of the Memorandum is to make M&A practitioners and their clients aware of the wide variety of successor liability risks in asset purchase transactions and to provide practical guidance on how to plan for and navigate this difficult area.

To read the full memorandum, click here.

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