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Is The Buyer of a Business Liable?

One of the primary reasons that the purchase and sale of a business is often structured as an asset purchase rather than a stock purchase is that, as a general rule, in an asset purchase the buyer is not responsible for the obligations of the seller.

There are four widely recognized exceptions to this general rule where:

1. The buyer agrees to assume obligations;
2. The transaction amounts to a consolidation or de facto merger;
3. The buyer is a mere continuation”of the seller; or 
4. The transaction is a fraudulent transfer, which is made for less than adequate consideration with the intent to defraud creditors. Some Courts have also offered exceptions to the general rule for product liability claims.

A contractual assumption of obligations, or a fraudulent transfer of assets is easier to spot, but the other exception are worth further consideration.

De facto Merger

In determining whether a transaction amounts to a de facto merger most courts require that:

1. There is continuity of management, personnel, physical location, assets, and general business operations.
2. There is a continuity of shareholders, which can results from the purchase price including shares of the buyer’s stock.
3. The seller ceases its ordinary business operations, liquidates and dissolves soon after the transaction.
4. The Buyer contractually assumes the obligations of the Seller that are necessary for the uninterrupted continuity of normal business operations.

Mere Continuation

The mere continuation exception applies when:

1. The officers and directors of the buyer and the seller are similar, and
2. Stock was transferred between the buyer and the seller as a result of the asset purchase.

Product Liability Claims

Courts have loosened the standards of these exceptions in the area of product liability claims to hold a buyer of business assets responsible for product liability claims arising from products manufactured by the seller, if the buyer continued to manufacture those same products after the transaction. 

Recommendations to Buyer

1. Review and evaluate the specific facts in your case with counsel.
2. Avoid including stock in the purchase price when possible, particularly if management is to remain essentially the same.
3. In the case of product liability claims, secure appropriate insurance to include goods manufactured by the seller, or a collateralized indemnity of the seller.

For more information on buying or selling a business, please contact Krista P. Harper, Esq. at kph@curtinheefner.com or 267-898-0570.

Krista P. Harper is a Partner in Curtin & Heefner LLP’s Business & Real Estate Sections. Curtin & Heefner LLP is a regional law firm with offices in Morrisville and Doylestown, Pennsylvania and Lawrenceville, New Jersey. The firm engages in the practice of law in various areas including Adoption, Business, Municipal and Tax Free Financing, Real Estate, Employment & Public Sector, Environmental, Estate, Trusts & Tax, Commercial Services, and Litigation including Personal Injury.