When Is The Purchaser Of A Business Assets Liable For The Seller’s Liabilities?
The issue of successor corporation liability has been the subject of many cases in California. When it comes to purchasing an existing corporation’s assets, you can never be too sure of the issues that will arise once the sale date passes and the agreement is complete. A corporate successor is a corporation that takes on the burdens of the previous corporation through merger, acquisition, stock purchase, asset purchase, or through other ways of succession.
The California law on corporate successor liability states that in asset purchase agreement, the purchaser doesn’t assume the seller’s liabilities unless there is: 1) an express or implied agreement of assumption, 2) a transaction amounting to a consolidation or merger of the two corporations, 3) a mere continuation of the purchasing corporation of the seller, or 4) a transfer of assets to the purchaser for the fraudulent purpose of escaping liability for the seller’s debts.
The first exception is self-explanatory. As for the second exception regarding consolidation and merger, courts have imposed liability when there is an inadequate purchase price so that the surviving entity cannot meet its obligations or where the consideration is the stock of the seller which is given back to the seller’s shareholder.
As for the third exception of a mere continuation of a corporation, courts have imposed liability upon showing of either no adequate consideration was given to the seller for meeting its obligation to debtors or one or more persons were officers or directors of both corporations. The courts also consider the following factors: holding the same trade name, customers, personnel, products and design as the predecessor, and no indication of any change of ownership.
The fourth exception for fraudulent purposes is applied when the seller attempts to avoid debts by transferring money to another person or company, and it arises when a corporation purchases the majority assets of the seller for inadequate consideration. Whether or not the parties had actual intent to defraud, the transaction may still be held fraudulent to the creditors of the selling corporation.