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.
Transcript
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 SalesMitigating Risk Through Due Diligence, Contractual Provisions, Reps and Warranties Insurance, and More
Joe Sandbank, Law Office of Joe Sandbank, Rocklin, Calif.
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Successor Liability in Purchase of
Business Assets
DISCLAIMERThis 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.
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Successor Liability - Defined
“Successor liability” exists when the buyer of a business is liable for obligations
incurred by the business seller.
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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.)
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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.
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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.
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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
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De Facto Merger� Arnold Graphics Indus. V. Independent
� 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
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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)
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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
� 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
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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?
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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
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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.
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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.
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Mitigation TechniquesContract 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).
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Mitigation TechniquesInsurance
� 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.
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Mitigation TechniquesAvoiding 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.
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Mitigation TechniquesBulk 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.
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Mitigation TechniquesSection 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)
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Tell us how we did!Look for our 'Thank You' email (which you should receive within 24 hours) for details and a link to the program survey and attendance attestation.
Please join us for our next conference, “M&A Letters of Intent: Buyer and Seller Strategies for Drafting and Negotiating Preliminary Deal Terms,” scheduled on Tuesday, December 1, 2015 at 1pm EST.
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