The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
Presenting a live 90-minute webinar with interactive Q&A
Avoiding Corporate Successor
Liability in Asset Sales Mitigating Risk Through Due Diligence, Contractual Provisions,
Reps and Warranties Insurance, and More
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
THURSDAY, NOVEMBER 19, 2015
H. Joseph Acosta, Partner, FisherBroyles, Dallas
Joe Sandbank, Law Office of Joe Sandbank, Rocklin, Calif.
Tips for Optimal Quality
Sound Quality
If you are listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, you may listen via the phone: dial
1-888-450-9970 and enter your PIN when prompted. Otherwise, please
send us a chat or e-mail [email protected] immediately so we can
address the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
FOR LIVE EVENT ONLY
Continuing Education Credits
In order for us to process your continuing education credit, you must confirm your
participation in this webinar by completing and submitting the Attendance
Affirmation/Evaluation after the webinar.
A link to the Attendance Affirmation/Evaluation will be in the thank you email
that you will receive immediately following the program.
For additional information about continuing education, call us at 1-800-926-7926
ext. 35.
FOR LIVE EVENT ONLY
Program Materials
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the ^ symbol next to “Conference Materials” in the middle of the left-
hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see a
PDF of the slides for today's program.
• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
FOR LIVE EVENT ONLY
Successor Liability
in Purchase of
Business Assets
DISCLAIMER
This presentation contains general information, may be based
on authorities that are subject to change, and is not a substitute
for professional advice or services. This presentation does not
constitute legal, tax, audit, business, financial, investment or any
other professional advice, and you should consult a qualified
professional advisor before taking any action based on the
information provided herein. No attorney-client relationship is
intended or created. Legal advice requires a full discussion and
appreciation of the specific facts and circumstances of your
situation. The Speakers and their respective law firms, including
FisherBroyles, LLP, and partners are not responsible for any loss
resulting from or relating to reliance on this presentation by any
person.
6
Successor Liability - Defined
“Successor liability” exists when the buyer
of a business is liable for obligations
incurred by the business seller.
7
A Century
“This doctrine [of no successor liability] is so familiar that it is
surprising that any other case can be supposed to exist.”
Fogg v. Blair, 133 U.S. 534, 538 (1890)
“The issue of successor liability is dreadfully tangled,
reflecting the difficulty of striking the right balance
between the competing interests at stake.”
Upholsters’ Int’l Union Pension Fund v. Artistic Furniture of
Pontiac, 920 F.2d 1323, 1325 (7th Cir. 1990) (Posner, J.)
8
Stock Sale vs. Asset Sale
In purchase of a business by acquiring the
common stock of a corporation, partnership
interests in a partnership, or membership
interests in a limited liability company, the
buyer “steps into the shoes” of the seller as
the owner of the entity.
The entity continues to own the business
assets, and the entity continues to be
responsible for its obligations.
9
Stock Sale vs. Asset Sale
To avoid unknown, undisclosed, or
contingent liabilities of the business
entity, buyers often choose to purchase
the business assets, instead of the
ownership interest.
10
GENERAL RULE
General Rule – when a company sells or transfers all its
assets to another corporation, the latter is not liable for the
debts and liabilities of transferor.
Exceptions:
○ successor expressly or impliedly assumes;
○ de factor merger or consolidation;
○ successor is “mere continuation “ of predecessor;
○ transaction is fraudulent; or
○ substantial continuity test (some jurisdictions) – same
employees, supervisors, facilities, product, name,
business, continuity of assets, representations
11
De Facto Merger
Arnold Graphics Indus. V. Independent
Agent Ctr., 775 F.2d 38 (2d Cir. 1985)
Continuation of enterprise – management,
personnel, location, assets, business operations
Continuity of shareholders
Dissolution of seller
Assumption by purchaser of obligations
ordinarily necessary for business
12
Broader Exceptions
“Mere Continuation” – not require
continuity of shareholders
Product Lines – not require continuity of
shareholders, management or
employees
Recharacterization of transactions are
based on equitable principles
13
Environmental Liability
CERCLA – remedial federal statute for hazardous waste
Federal common law applies – 2nd, 3rd, 4rth and 8th Circuits
State common law applies – 1st, 6th and 9th Circuits
Undecided - 5th, 7th and 11th Circuits ( lower courts leaning)
O’Melveny & Meyers v. Fed. Deposit Ins. Corp., 512 U.S. 79, 81
(1994) – federal common law should be restricted
US v. Kimbell Foods, Inc. 44 U.S. 715 (1979) – create FCL when
(a) federal program needs uniformity, (b) state law frustrates goals,
but (c) consider disruption of commercial relationships based on
state law
United States v. Bestfoods, 524 U.S. 51, 62 (1998) (PCV case) –
CERCLA not override settled areas of state corporate law
14
Products Liability
Restatement of Torts (1997) – traditional approach (1997), 4
exceptions
Less restrictive (12 states: CA, AL,AS, MI, OH, SC, NJ, NM,
PA, WA, CT, MS) versus more restrictive (19 states: NY, KY,
AK, NH,CO, FL, IL, MD, OK, VA, VT, WI, WV, TX, MN, IO,
MD, NE, NC)
Continuity of enterprise - successor is sufficiently similar to
the predecessor
Product Line Approach – continue sale of product line; no
asset sale required (e.g., CA, PA, NJ, WA)
Delaware law – lots of protections to asset purchasers
COL – favors location of hazardous waste under significant
relationship test (not absolute)
15
Labor Liability
Golden State Bottling Company (1973) – successor liability
can be imposed for NLRA violations (only Supreme’s case)
MacMillan (1974) - 6th Circuit expands to Title VII; provides 9
factors (including notice). Later, 6th Circuit relaxes notice
requirement to constructive notice.
Uniform agreement amongst Circuits that successor liability
applies to Title VII
11th Circuit (2005)– must have privity between successor and
predecessor (e.g., sale or merger) before apply MacMillan.
6th Circuit disagrees (case-by-case).
7th Circuit (2013) –holds federal standard applies whenever
violation of federal statute on labor relations or employment
16
Pension Liability
Artistic Furniture (1990) – extends Golden State to
delinquent contributions under pension fund
Einhorn (2011) – delinquent contributions in multi-
employer pension plans (upholds federal interests
in ERISA)
ERISA unique – congressional intent to develop
federal common law
Question 1– withdrawal penalties in multi-
employer plans?
Question 2 – what happens with competing federal
interests? 17
Fraud on Creditors
Fraud taints any transaction
UFTA, adopted by most states, allows
avoidance for actual (intent) or constructive
fraud; plus money judgment for value of
assets or claim (whichever is less)
Successor liability (fraud) utilizes badges of
fraud used in UFTA cases, but does not
cap liability
18
Bulk Sales
Certain States adopt bulk sale laws (Article 6 of
UCC) – places burden on buyer
○ Threshold amount/certain businesses
○ Buyer provides notice to creditors of sale
○ Creditors submit claims in writing by deadline
○ Buyer or escrow agent withholds sufficient purchase
price to pay claims
○ Seller can dispute claims – reserves
○ Distribution priority scheme
○ Immunity to buyer who complies
Not Exclusive Remedy
19
Tax Liabilities
In some states, certain tax liabilities of seller may be enforced against a buyer.
E.G., In California, unpaid Sales and Use Tax, taxes payable to the California Employment Development Department, and taxes required to be withheld by the California Franchise Tax Board may all be imposed on a buyer of business assets.
20
Mitigation Techniques
Due Diligence
Review financial records to discover liabilities that are or should be “on the books.”
Consider Environmental Site Assessment (ESA). Phase I ESA involves review of records, site inspection, and
interviews with owners, occupants, neighbors and local government officials to determine if there is a history of the use or disposal of hazardous materials.
Phase II ESA includes sampling and laboratory testing of soil and groundwater.
Review business’s compliance with labor laws and pension obligations.
Review history of claims related to product liability and evaluate risk and options for mitigation.
21
Mitigation Techniques
Contract Drafting Expressly indicate liabilities not being
assumed – avoid implied assumption of liabilities.
Structure deal to avoid “substantial continuity” rule – where applicable E.g., seller entity retains certain assets/doesn’t
immediately dissolve, changes to management team and workforce, representations of intent to change products/services, etc.
Indemnity (require that seller indemnify buyer from any pre-closing liabilities). Indemnity most easily enforced via offset of seller
carry note (make part of consideration seller-carry financing).
22
Mitigation Techniques
Insurance
Representation and Warranty Insurance can provide coverage where seller’s representations are inaccurate. Typical representations are that financial records provided
to the buyer are accurate, no hazardous waste has been disposed of on property, no legal claims are pending, seller is operating in compliance with all laws, etc.
Require Seller to add Buyer as loss payee to existing product liability insurance and maintain coverage after closing; obtain new coverage that covers claims arising from sales of products prior to closing.
23
Mitigation Techniques
Avoiding Tax Liabilities
Where applicable, obtain release from
the tax authority to certify that taxes
have been paid through closing date.
Buyer can withhold a sufficient portion of
the purchase price at closing to cover
the seller’s estimated tax liability that is
subject to successor liability.
24
Mitigation Techniques
Bulk Sale Transfer Compliance
In states with Bulk Sale Transfer laws, buyer gains
immunity from seller’s trade creditor claims by
complying procedures for giving notice to creditors
and providing opportunity to make claims against
the purchase price consideration.
Utilize business escrow service or attorney to
comply with complex bulk sale procedures.
Must comply with other successor liability statutes
relating to similar bulk sales to avoid liability.
25
Mitigation Techniques
Section 363 Sales
363(b) and 363(f) of Bankruptcy Code
Sale “free and clear of any interest in . . .
property”
Sale Order and Notice are important
In re Trans World Airlines, Inc. (2003)
1st (PBBPC) and 2nd (Chrysler) 4th (Leckie)
Circuits agree
7th Cir. defines “interests” broadly but . . .
6th Cir. disagrees
26
THE END
H. Joseph Acosta
FisherBroyles
Joe Sandbank,
Law Office of Joe Sandbank
27