Successor Liability in Asset Purchases
Written By Adam Yohanan
When you buy a business through an asset purchase agreement (APA), you often think you’re leaving behind the seller’s liabilities.
But the law isn’t that simple. Courts in every significant jurisdiction recognize situations where a buyer can be held liable as a successor for liabilities they didn’t assume in the APA.
The General Rule
Buyers in an APA are not liable for the seller’s debts unless they expressly assume them. However, U.S. courts have carved out exceptions that vary by state. In most states, the buyers in an APA are subject to successor liability under the “mere continuation” exception.
The “Mere Continuation” Exception
Mere continuation is the idea that, even if the buyer didn’t assume liabilities on paper, if the post-closing entity is essentially the pre-closing seller wearing new clothes, the buyer will inherit the seller’s liabilities.
To determine if the APA transaction is a “mere continuation" and thus subject to successor liability, courts weigh factors such as:
Same owners or management
Same workforce, location, and assets
Same customers and trade name
Quick dissolution of seller after closing.
No single factor is decisive, and courts consider the totality of circumstances.
State Law Comparison
Delaware
Delaware courts are unlikely to impose successor liability under the mere continuation exception. In Delaware, “mere continuation” usually requires a common identity of ownership between seller and buyer. Without continuity of shareholders or control, Delaware buyers are generally safe from successor liability.
New York
New York opens the door wider than Delaware. Even without shareholder continuity, if the buyer continues the business in essentially the same way and the seller dissolves, the successor liability risk increases.
California
California gives courts broad discretion to impose successor liability when fairness demands it. Its courts focus less on formalities and more on equitable considerations, i.e., fairness to creditors.
California has recognized successor liability in cases where the buyer kept operations intact, customers wouldn’t notice a change, and leaving creditors unpaid would be inequitable. This makes CA a riskier state for APA buyers than DE or NY.
Pro Tip: Consider Delaware over New York and California, if possible, in deals where successor liability risk is a concern. These considerations are relevant in transactions where the seller has significant liabilities that the buyer is not assuming under the asset purchase agreement.
Adam Yohanan is a transactional business lawyer with extensive experience representing companies, investors, and entrepreneurs in a wide range of high stakes business transactions.
Adam handles the small and large transactions in the life of a businesses, including mergers & acquisitions, entity formations, partnerships and joint ventures, investing and fundraising, commercial contracts, and dissolutions. His office can be reached at 212-859-5041.
