Can A Corporation that Purchased the Assets of Another Corporation Be Held Liable for Contractual Obligations of the Seller Corporation?
The well established general rule of successor liability is that the purchaser of a corporation’s assets is not liable for the debts and obligations of the seller corporation, unless one of the exceptions applies. A successor corporation may be held liable when: 1) the buyer corporation expressly or impliedly agrees to assume such liability; 2) the transaction amounts to a de facto consolidation or merger; 3) the buyer is merely a continuation of the seller corporation; or 4) the transaction is entered into fraudulently for the purpose of escaping liability.
A “de facto merger” exception occurs where it is a merger in fact without an official declaration of such. The indicia of a de facto merger include: 1) the continuation of the previous business activity and corporate personnel, 2) a continuity of shareholders resulting form a sale of assets in exchange for stock, 3) the immediate or rapid dissolution of the predecessor corporation, and 4) the assumption by the purchasing corporation of all liabilities and obligations ordinarily necessary to continue the predecessor’s business operations.
The “mere continuation” exception occurs under the theory that there is the continuation of the corporate entity, not the business operation, after the transaction. One corporation sells its assets to another corporation with the same people owning both corporations. Thus, the acquiring corporation is just a new hat for, or reincarnation of, the acquired corporation. This is actually reorganization. The transaction’s purpose is to escape liabilities of the predecessor corporation, thus inadequacy of consideration is one of the indicia of mere continuation.
“Implied assumption” is also referred to as “equitable assignment.” This does not require any particular form. It exists where there is an intention on one side to assign and an intention on the other to accept. The intent and effect of an equitable assignment can be ascertained from all the language used, the surrounding circumstances, as well as the conduct of the parties. An example of where an implied assumption may be applied is where a purchasing corporation takes possession of the seller’s rented space and proceeds to pay rent to the landlord. With the right set of facts at some point the landlord may be able argue an equitable assignment if the purchasing corporation later attempts to vacate claiming no further liability under the lease.