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Successor Liability

By John H. Matheson. Full text here.

The phrase mergers and acquisitions, or M&A for short, signifies both the business activity of growing (or divesting) corporate operations and the legal rules surrounding that activity. One typical acquisition technique is the purchase of business assets by one company from another. Asset sales transactions have various benefits, one of which is that the purchaser presumptively does not assume any of the seller’s liabilities as part of the purchase transaction.

In some circumstances, however, courts have applied a common law concept called successor liability to hold the purchaser liable for the obligations of the seller. These decisions fundamentally seek to balance two competing and often conflicting policy goals: to provide a necessary remedy to injured parties, often tort claimants, and to provide transactional clarity and certainty for business parties engaged in fundamental corporate transactions.

As it has developed to date, however, successor liability law is so varied and unpredictable that it is not only a trap for the unwary, it is a trap for the very wary as well. Transactional asset-acquisition planning today faces the worst of all possible worlds; uncertainty as to whether successor liability applies, together with an enormous range of potentially applicable monetary liabilities that may be visited on an asset-purchasing entity after the transaction is completed. Potentially deserving claimants are forced to litigate to see if they can convince a court to apply some variation of successor liability theory. Courts effectively are asked to, and sometimes do, rewrite the business deal after the fact and impose a liability allocation regime that the transacting parties would never have negotiated in the first place. Indeed, under the very uncertain current state of the law of successor liability, the potential liability of the purchaser is not limited by the value of what it obtained from the selling company or even the overall value of the seller’s total business. Rather, the purchaser’s total business is at risk.

The Article proposes a simple and efficient statutory solution to the problem of successor liability, providing a remedy to injured claimants while identifying for the business parties certainty as to apportionment of potential liabilities. The solution is to be implemented as a federal statute. The time is ripe to provide clarity and uniformity to guide the actions of parties to potential business transactions as well as those who would seek to pursue remedial claims against them.