Presenting a live 90-minute webinar with interactive Q&A Avoiding Corporate Successor Liability in Asset Purchases Mitigating Risk Exposure Through Due Diligence, Contractual Provisions, Reps and Warranties Insurance, and More TUESDAY, FEBRUARY 21, 2017 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: H. Joseph Acosta, Partner, FisherBroyles , Dallas Joe Sandbank, Esq., Law Office of Joe Sandbank , Rocklin, Calif. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Successor Liability in Purchase of Business Assets
DISCLAIMER This presentation contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This presentation does not constitute legal, tax, audit, business, financial, investment or any other professional advice, and you should consult a qualified professional advisor before taking any action based on the information provided herein. No attorney-client relationship is intended or created. Legal advice requires a full discussion and appreciation of the specific facts and circumstances of your situation . The Speakers and their respective law firms, including FisherBroyles, LLP, and partners are not responsible for any loss resulting from or relating to reliance on this presentation by any person. 6
Successor Liability - Defined “Successor liability” exists when the buyer of a business is liable for obligations incurred by the business seller. 7
A Century “This doctrine [of no successor liability] is so familiar that it is surprising that any other case can be supposed to exist.” Fogg v. Blair , 133 U.S. 534, 538 (1890) “ The issue of successor liability is dreadfully tangled, reflecting the difficulty of striking the right balance between the competing interests at stake.” Upholsters’ Int’l Union Pension Fund v. Artistic Furniture of Pontiac , 920 F.2d 1323, 1325 (7 th Cir. 1990) (Posner, J.) 8
Stock Sale vs. Asset Sale In purchase of a business by acquiring the common stock of a corporation, partnership interests in a partnership, or membership interests in a limited liability company, the buyer “steps into the shoes” of the seller as the owner of the entity. The entity continues to own the business assets, and the entity continues to be responsible for its obligations. 9
Stock Sale vs. Asset Sale To avoid unknown, undisclosed, or contingent liabilities of the business entity, buyers often choose to purchase the business assets, instead of the ownership interest. 10
GENERAL RULE General Rule – when a company sells or transfers all its assets to another corporation, the latter is not liable for the debts and liabilities of transferor. Exceptions: ○ successor expressly or impliedly assumes; ○ de factor merger or consolidation; ○ successor is “mere continuation “ of predecessor; ○ transaction is fraudulent; or ○ substantial continuity test (some jurisdictions) – same employees, supervisors, facilities, product, name, business, continuity of assets, representations 11
De Facto Merger Arnold Graphics Indus. V. Independent Agent Ctr. , 775 F.2d 38 (2d Cir. 1985) Continuation of enterprise – management, personnel, location, assets, business operations Continuity of shareholders Dissolution of seller Assumption by purchaser of obligations ordinarily necessary for business 12
Broader Exceptions “Mere Continuation” – not require continuity of shareholders Product Lines – not require continuity of shareholders, management or employees Recharacterization of transactions are based on equitable principles 13
Environmental Liability CERCLA – remedial federal statute for hazardous waste Federal common law applies – 2 nd , 3 rd , 4rth and 8 th Circuits State common law applies – 1 st , 6 th and 9 th Circuits Undecided - 5 th , 7 th and 11 th Circuits ( lower courts leaning) O’Melveny & Meyers v. Fed. Deposit Ins. Corp. , 512 U.S. 79, 81 (1994) – federal common law should be restricted US v. Kimbell Foods, Inc. 44 U.S. 715 (1979) – create FCL when (a) federal program needs uniformity, (b) state law frustrates goals, but (c) consider disruption of commercial relationships based on state law United States v. Bestfoods , 524 U.S. 51, 62 (1998) (PCV case) – CERCLA not override settled areas of state corporate law 14
Products Liability Restatement of Torts (1997) – traditional approach (1997), 4 exceptions Less restrictive (12 states: CA, AL,AS, MI, OH, SC, NJ, NM, PA, WA, CT, MS) versus more restrictive (19 states: NY, KY, AK, NH,CO, FL, IL, MD, OK, VA, VT, WI, WV, TX, MN, IO, MD, NE, NC) Continuity of enterprise - successor is sufficiently similar to the predecessor Product Line Approach – continue sale of product line; no asset sale required (e.g., CA, PA, NJ, WA) Delaware law – lots of protections to asset purchasers COL – favors location of hazardous waste under significant relationship test (not absolute) 15
Labor Liability Golden State Bottling Company (1973) – successor liability can be imposed for NLRA violations (only Supreme’s case) MacMillan (1974) - 6 th Circuit expands to Title VII; provides 9 factors (including notice). Later, 6 th Circuit relaxes notice requirement to constructive notice. Uniform agreement amongst Circuits that successor liability applies to Title VII 11 th Circuit (2005) – must have privity between successor and predecessor ( e.g. , sale or merger) before apply MacMillan. 6 th Circuit disagrees (case-by-case). 7 th Circuit (2013) – holds federal standard applies whenever violation of federal statute on labor relations or employment 16
Pension Liability Artistic Furniture (1990) – extends Golden State to delinquent contributions under pension fund Einhorn (2011) – delinquent contributions in multi- employer pension plans (upholds federal interests in ERISA) ERISA unique – congressional intent to develop federal common law Question 1 – withdrawal penalties in multi- employer plans? Question 2 – what happens with competing federal interests? 17
Fraud on Creditors Fraud taints any transaction UFTA, adopted by most states, allows avoidance for actual (intent) or constructive fraud; plus money judgment for value of assets or claim (whichever is less) Successor liability (fraud) utilizes badges of fraud used in UFTA cases, but does not cap liability 18
Bulk Sales Certain States adopt bulk sale laws (Article 6 of UCC) – places burden on buyer ○ Threshold amount/certain businesses ○ Buyer provides notice to creditors of sale ○ Creditors submit claims in writing by deadline ○ Buyer or escrow agent withholds sufficient purchase price to pay claims ○ Seller can dispute claims – reserves ○ Distribution priority scheme ○ Immunity to buyer who complies Not Exclusive Remedy 19
Tax Liabilities In some states, certain tax liabilities of seller may be enforced against a buyer. E.G., In California, unpaid Sales and Use Tax, taxes payable to the California Employment Development Department, and taxes required to be withheld by the California Franchise Tax Board may all be imposed on a buyer of business assets. 20
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