One of the primary reasons buyers structure acquisitions as asset purchases rather than stock purchases is to avoid inheriting the seller's liabilities. However, this protection is not absolute. Under the doctrine of successor liability, courts may hold an asset purchaser liable for the seller's debts in certain circumstances.
The General Rule: No Successor Liability
Under the general rule, when a corporation sells its assets to another corporation, the purchaser is not liable for the seller's debts. This rule reflects the fundamental distinction between an asset purchase (buying specific assets) and a stock purchase (buying the entity itself).
Exceptions to the General Rule
1. Express Assumption
If the purchase agreement explicitly states the buyer assumes certain liabilities, the buyer is liable for those — but only those expressly assumed.
2. De Facto Merger
If the transaction is, in substance, a merger, courts may treat it as such and impose liability. Indicators include: seller dissolves after the transaction, seller's shareholders receive buyer stock, buyer continues seller's business with same management, and the transaction is a single integrated deal.
3. Mere Continuation
When the buyer is essentially a continuation of the seller — same management, location, operations, and ownership.
4. Fraudulent Transaction
If the sale was undertaken to defraud creditors — e.g., selling to an insider for below-market value to avoid paying creditors.
5. Product Line Exception
Some jurisdictions impose liability when a buyer acquires a seller's product line and continues manufacturing the same products, for product liability claims.
6. Statutory Exceptions
Certain statutes impose successor liability regardless of structure: tax liabilities (many states require tax clearance), environmental liabilities (CERCLA), employment liabilities (unpaid wages, workers' comp), and labor law (successor employer obligations under NLRA).
Protecting Against Successor Liability
Due Diligence
Thorough due diligence identifies potential liabilities and assesses the risk that exceptions might apply.
Transaction Structure
Structure to avoid de facto merger characteristics: cash purchase price (not buyer stock), seller does not immediately dissolve, genuinely an asset sale.
Indemnification Provisions
Robust indemnification where the seller agrees to indemnify for liabilities not expressly assumed. Include scope, survival period, caps, and escrow arrangements.
Specific Assumptions and Exclusions
Clearly specify which liabilities are assumed and which are not. Ambiguity can lead to courts finding the buyer assumed more than intended.
Compliance with Statutory Requirements
Obtain tax clearance letters where required, conduct environmental due diligence, and structure to qualify for safe harbors like the bona fide prospective purchaser defense under CERCLA.
Frequently Asked Questions
If we structure as an asset purchase, are we safe from all seller liabilities? No. The exceptions described above can impose liability. The key is careful structuring, thorough due diligence, and strong indemnification.
What is a tax clearance letter? A document from the state confirming the seller has no outstanding tax liabilities. Some states require buyers to obtain one before closing.
Can we be liable for environmental contamination we didn't cause? Yes, under CERCLA. But the bona fide prospective purchaser defense provides protection for buyers who conduct proper environmental due diligence.
What if the seller disputes the indemnification claim? Pursue legal action against the seller. Escrow or holdback arrangements provide a source of funds without chasing the seller.
Protect Your Transaction
The business lawyers at Poulson Law have considerable experience in mergers and acquisitions. Contact our Cooperstown office at 607-547-1195.
