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M&A Attorney – Successor Liability in Asset Purchase

When an M&A attorney helps his or her client structure the purchase of a business, it is common for the purchaser to want to structure the transaction as an asset purchase. There are several good reasons for this, such as obtaining a step up in tax basis, amortizing acquired goodwill, and the most universal reason – to avoid the liabilities of the selling entity.

Even when the assets of a target entity are acquired, there are situations where the liabilities of the target carry over and become the responsibility of the purchaser. This is referred to as successor liability. Successor liability arises most often in the areas of products liability, environmental liability, labor relations, bankruptcy, and tax. These areas of business law have targeted rules for certain situations where public policy warrant the purchaser taking responsibility for certain seller liabilities. This short article does not address each of the above specific areas of potential successor liability but instead focuses on where the business laws of North Carolina provide that a purchasing entity is responsible for the general liabilities of a selling entity.

In a sale of assets in North Carolina, a purchaser is normally not responsible for the liabilities of the seller. North Carolina courts however will apply successor liability under four traditional circumstances. These four circumstances include the following: (1) fraudulent transfer, (2) express or implied assumption of liability, (3) de facto merger, and (4) the mere continuation doctrine.

Fraudulent Transfer

Where there is a fraudulent transfer North Carolina courts may find successor liability is appropriate. A fraudulent transfer includes situations where the consideration paid was grossly inadequate, as well as circumstances indicating a purpose to avoid the claims of creditors. These types of transfers occur mostly between related parties.

Express or Implied Assumption of Liability

Where a purchaser expressly assumes the liability of a target company, the purchaser will be responsible for those liabilities. But, even where a purchaser implicitly assumes the liabilities of a target company, the purchaser may be responsible. This could occur where a purchaser takes on an obligation beyond the limits of the sale of assets agreement.

De Facto Merger and Mere Continuation Doctrine

The de facto merger and mere continuation doctrines are similar in nature. North Carolina appellate courts however have yet to hold a decision based solely on the de facto merger doctrine or the mere continuation doctrine. States that have generally rely on several factors including continuity of ownership, personnel, management, assets, and location. When ownership, personnel, management, assets, and location continue substantially unchanged, it looks as though a merger has occurred. When an actual merger occurs, target liabilities carry over to the acquiring entity by operation of law. To keep businesses that are essentially merging, from avoiding liabilities, the de facto merger doctrine exists.

If you are evaluating the potential acquisition of a business, contact an M&A attorney to help determine which liabilities may be subject to successor liability.

Erik Lincoln is a founding member of Lincoln. In addition to being an attorney he is also a CPA. Erik has consistently been recognized as one of the top attorneys in North Carolina, by Business North Carolina.