What is “Successor Liability” and what are some of the steps you should consider to protect against successor liability in an asset purchase or stock purchase in California? What is the key to structuring an asset purchase contract or stock purchase agreement to protect against successor liability in San Diego Southern California?
3 Most Important Takeaways Regarding Successor Liability in a California M & A Transaction:
- Successor liability is related to existing debts and liabilities associated with the asset(s) within the transaction. Are any of the assets in an M & A transaction encumbered by any form of liability? Will an existing debt or liability be paid off, or transfer with the asset(s) to the new owner?
- In many mergers and acquisitions transactions the buyer agrees to assume existing liabilities or financing. In others, a claim against an asset or the company itself may not be disclosed, or may lie within the ownership of the entity (minority shareholders, members, etc.).
- There are far more asset purchase transactions than mergers or stock purchase acquisitions. While successor liability can exist in either, parties to an asset purchase must be alert to the risks of successor liability just as much or more than in a stock purchase scenario.
What is Successor Liability?
What is successor liability and how can this risk be avoided during an asset purchase or stock purchase? Successor liability involves the transfer of debts and liabilities associated with a business or asset. While this concept usually applies to a stock purchase transaction or the merger of two companies, you must be sure to properly structure an asset purchase agreement to ensure protections against successor liability while providing clear title to the assets you intend to acquire.
There are cases where the buyer agrees to assume liabilities or existing financing associated with an asset in these transactions. In many cases the buyer is exchanging cash or some other asset in exchange for assets in many forms, including but not limited to:
- Real Estate
- Inventory
- Customers
- Facilities
- Equipment
- Vehicles
- Goodwill
- Trade Names, Logos and Other Intellectual Property
Asset Purchases are Much More Common
Asset purchases are much more common than a stock purchase transaction. While these may seem to be more straight forward an asset purchase still carries the risk of successor liability.
Asset purchase transactions help to position your company to attack new markets, geographies, vertical opportunities or expand existing operations. A well structured asset purchase transaction provides your company with new assets while potentially increasing the tax advantages associated with the acquisition. The restructuring of the “basis” associated with the asset allows the buyer to achieve a better Return On Investment or ROI in less time.
Pro-Tip: “Well, first of all, you’ve got to decide, you have to do your own due diligence. You got to look at the physical assets of the company you’re going to do business with as well as the financial assets, the market, the Goodwill and the tech. You’ve got to look at everything, but there are two basic ways companies buy and sell each other: one way is through a stock purchase and the other is through an asset purchase. And also there’s this question of joint venture and merger, but for the basic purchasing and sale of a company, it’s either going to be an asset sale or a stock sale.
The reason one would want to do an asset purchase is because they’re buying the actual assets as they’re being described, and they’re being sold to you in a manner where you don’t have to worry about all the other problems or secrets this corporation and its shareholders may have. An asset purchase will often entail an escrow. You create an escrow for the company and you send out a notice that I bought this company’s assets. And if you’re a creditor, you have 60 days to come and make a claim. Otherwise, after that the buyer will own not only the the equipment, they’ll own, the Goodwill, the name, the IP, everything free and clear. If any creditors claims, when you buy the shares, then you end in a situation where you’re not buying the assets, you’re buying, whatever the shares have power over, and that can be complicated and hard to understand or even know what you’re getting. So from that point of view, and also for the tax advantages of depreciating assets and other things, most people prefer an asset purchase.
So when an asset is encumbered, is it the responsibility of the seller to disclose that? And how do you handle when there are UCCS and encumbrances against an asset. That happens a lot and you provide for what we call carve outs or clauses in the agreement where the money comes in, goes into an escrow account, whether it’s the attorney trust account or an actual commercial escrow company, like Chicago title or first American title. And then you put escrow instructions in and say, ‘okay, when the money comes in, the escrow, officer’s instructed to pay off this creditor or that creditor,’ or you also have a carve out, will say, you’ll enter into a new agreement with the vendors or the creditors to keep doing business with them. So all those types of things are included when you do an asset purchase.
It’s harder to be a buyer. It’s easy to be a seller. A buyer has the harder task because the buyer gives money and the buyer has to verify what it’s getting.” – Dan Watkins, Founding Partner
Ensure Protections Against Successor Liability in Your Business Transactions
The experienced mergers and acquisition attorneys at the Watkins Firm have decades of experience in these transactions. We work to protect our client’s interests while respecting the nuances associated with the art of a successful business transaction. We conduct a thorough due diligence to ensure our clients understand the exact quality, nature and unique identification associated with each asset within the purchase agreement, and that the transaction provides clear title without exposing our clients to unnecessary risk or liability.
The structuring of an asset purchase contract or stock purchase agreement to provide necessary protections against successor liability while ensuring a successful transaction requires experience as well as legal skill. Are you considering an asset purchase or stock purchase in San Diego? We invite you to review our podcast Episode 13 – Mergers and Acquisitions as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
Meet Dan Watkins:
Daniel W. Watkins is a true people person who sincerely listens. He cares about things that occur in other people’s lives. Dan enjoys digging into the facts and finding creative solutions to problems. He is not shy about giving his opinion either.
Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.
Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a seasoned litigator and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.
He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.
THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR
Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.
In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.
