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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

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, FEBRUARY 21, 2017

• H. Joseph Acosta, Partner, FisherBroyles, Dallas

Joe Sandbank, Esq., Law Office of Joe Sandbank, Rocklin, Calif.

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Successor Liability in Purchase of Business Assets

DISCLAIMER

This presentation contains general information, may be based

• n 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

• ther 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.

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Successor Liability - Defined

“Successor liability” exists when the buyer

• f 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 (7th Cir. 1990) (Posner, J.)

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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.

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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

• wnership interest.

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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

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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

• rdinarily necessary for business

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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

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Environmental Liability



CERCLA – remedial federal statute for hazardous waste



Federal common law applies – 2nd, 3rd, 4rth and 8th Circuits



State common law applies – 1st, 6th and 9th Circuits



Undecided - 5th, 7th and 11th 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)

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Labor Liability

 Golden State Bottling Company (1973) – successor liability

can be imposed for NLRA violations (only Supreme’s case)

 MacMillan (1974) - 6th Circuit expands to Title VII; provides 9

factors (including notice). Later, 6th Circuit relaxes notice requirement to constructive notice.

 Uniform agreement amongst Circuits that successor liability

applies to Title VII

 11th Circuit (2005)– must have privity between successor and

predecessor (e.g., sale or merger) before apply MacMillan. 6th Circuit disagrees (case-by-case).

 7th Circuit (2013) –holds federal standard applies whenever

violation of federal statute on labor relations or employment

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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?

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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

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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

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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.

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Mitigation Techniques Due Diligence

 Review financial records to discover liabilities that are or

should be “on the books.”

 Consider Environmental Site Assessment (ESA).

 Phase I ESA involves review of records, site inspection, and

interviews with owners, occupants, neighbors and local government officials to determine if there is a history of the use

• r disposal of hazardous materials.

 Phase II ESA includes sampling and laboratory testing of soil

and groundwater.

 Review business’s compliance with labor laws and

pension obligations.

 Review history of claims related to product liability and

evaluate risk and options for mitigation.

21

Mitigation Techniques Contract Drafting

 Expressly indicate liabilities not being

assumed – avoid implied assumption of liabilities.

 Structure deal to avoid “substantial continuity”

rule – where applicable

 E.g., seller entity retains certain assets/doesn’t

immediately dissolve, changes to management team and workforce, representations of intent to change products/services, etc.

 Indemnity (require that seller indemnify buyer

from any pre-closing liabilities).

 Indemnity most easily enforced via offset of seller

carry note (make part of consideration seller-carry financing).

22

Mitigation Techniques Insurance

 Representation and Warranty Insurance can provide

coverage where seller’s representations are inaccurate.

 Typical representations are that financial records provided

to the buyer are accurate, no hazardous waste has been disposed of on property, no legal claims are pending, seller is operating in compliance with all laws, etc.

 Require Seller to add Buyer as loss payee to existing

product liability insurance and maintain coverage after closing; obtain new coverage that covers claims arising from sales of products prior to closing.

23

Mitigation Techniques Avoiding Tax Liabilities

 Where applicable, obtain release from

the tax authority to certify that taxes have been paid through closing date.

 Buyer can withhold a sufficient portion of

the purchase price at closing to cover the seller’s estimated tax liability that is subject to successor liability.

24

Mitigation Techniques Bulk Sale Transfer Compliance

 In states with Bulk Sale Transfer laws, buyer gains

immunity from seller’s trade creditor claims by complying procedures for giving notice to creditors and providing opportunity to make claims against the purchase price consideration.

 Utilize business escrow service or attorney to

comply with complex bulk sale procedures.

 Must comply with other successor liability statutes

relating to similar bulk sales to avoid liability.

25

Mitigation Techniques Section 363 Sales

 363(b) and 363(f) of Bankruptcy Code  Sale “free and clear of any interest in . . .

property”

 Sale Order and Notice are important  In re Trans World Airlines, Inc. (2003)  1st (PBBPC) and 2nd (Chrysler) 4th (Leckie)

Circuits agree

 7th Cir. defines “interests” broadly but . . .  6th Cir. disagrees

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THE END

• H. Joseph Acosta

FisherBroyles

joseph.acosta@fisherbroyles.com

Joe Sandbank, Law Office of Joe Sandbank

joe@sandbanklaw.com

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