asset acquisitions - Jackson Walker LLP

Appendix CSUCCESSOR LIABILITYI. IntroductionIn a stock purchase or merger, the entity that the buyer is acquiring will retain all of itsliabilities as a matter of law, and the buyer will have the risk of the assertion of such liabilitiesagainst the entity post-closing. In an asset deal, however, the purchase agreement will delve in greatdetail into what liabilities of the seller will remain with the seller post-closing, and what liabilities ofthe seller will be assumed by the buyer. In such context, it would not be unusual for representativesof the buyer to assume that the contract governed how the seller’s liabilities would be dividedbetween the seller and the buyer, and that, where the contract specifies that a liability is to beretained by the seller and not assumed by the buyer, the buyer need not worry about the matter.While such an assumption might have been reasonable at one time, it no longer is. Buyer and itscounsel need to consider from the beginning of a transaction that, as a matter of law, andnotwithstanding any allocation of a seller’s liabilities contained in an asset purchase agreement, thebuyer may, under certain circumstances, find itself responsible for liabilities of the seller - eventhough these liabilities were explicitly retained by the seller in the agreement. The purpose of thisdiscussion is to advise the reader as to the different legal theories by which a purchaser of assets mayfind itself liable for the liabilities of a seller, as well as to provide practical advice as to what, incertain circumstances, might be done to lessen the risk.II.Background: The General Rule of Successor LiabilityUntil about 25 years ago, the general (and well-settled) rule of successor liability was that“where one company sells or transfers all of its assets to another, the second entity does not becomeliable for the debts and liabilities” of the transferor. 1 This rule was derived in the corporate world ofcontracts between commercial equals, where both parties were knowledgeable and had access tosophisticated advice. Two justifications historically have been given for the rule. First, it “accordswith the fundamental principle of justice and fairness, under which the law imposes responsibilityfor one’s own acts and not for the totally independent acts of others.” 2 The second justification isbased on the bona fide purchaser doctrine, which holds that a purchaser who gives adequateconsideration and who has no knowledge of claims against the item purchased, buys the item free ofthose claims. 3More recently, however, the theory of successor liability has evolved and expanded as theresult of a series of clashes between conflicting policies. This is a recurring theme throughout thesuccessor liability cases, as the benefits attendant to a corporation’s being able to sell its assets in anunrestricted manner are balanced against other policies, such as the availability of other remedies to123Polius v. Clark Equipment Co., 802 F.2d 75, 77 (3d Cir. 1986) (citing 15 Fletcher, Cyclopedia of the Lawof Private Corporations, §7122 (Perm. Ed. 1983); Chicago Truck Drivers, Helpers and Warehouse WorkersUnion Pension Fund v. Tasemkin, Inc., 59 F.3d 48 (7th Cir. 1995).Leannais v. Cincinnati, Inc., 565 F.2d 437, 439 (7 th Cir. 1977).Note, “Products Liability and Successor Corporations”, 13 U.C. Davis L. Rev. 1000, 1005-06 (1980).Appendix C – Page 12525936v1