Scope of Successor Liability

Question 1

Merger

Answer 1

• Target disappears; Bidder survives
• Target’s assets and liabilities transfer over to Bidder by operation of law
• Put differently, Bidder succeeds to Target’s assets and liabilities
  
  • Impact: A former Target creditor is now a creditor of Bidder, and the creditor may go after all Bidder assets in seeking payment

Question 2

Stock Purchase

Answer 2

• Target survives; Bidder survives
• Target’s assets and liabilities remain the assets and liabilities of Target (as subsidiary of Bidder)
• Bidder does NOT succeed to Target’s assets and liabilities
  
  • Impact: A former creditor of Target remains a creditor of Target, and the creditor may go after all Target assets in seeking payment

Question 3

Occasional Problems with Mergers and Stock Purchase

Answer 3

1. Transfer of leasehold interests
2. Transfer of intellectual property rights
3. Tort claims “existing” at the time of the transaction (Merger or Stock Purchase)
   
   • Known Claims
   • Long-Tail (unknown) Claims
     
     • More dangerous to bidder in a merger context b/c it has succeeded to all assets and liabilities
     • Why is long tail tort claim problematic?
       
       1. Don’t know whether it’s going to exist
       2. Don’t know how much money
       3. Don’t know who will bring the claim
     • Delaware’s solution to long tail claims?
       
       1. Company must set money aside when it dissolves in case someone sues
4. Tort claims generally survive the merger or stock purchase (relative to Target’s assets)
5. Strategies available to address this concern:
   
   • Representations and warranties
   • Indemnification provisions
   • Structuring transaction as an asset purchase

Question 4

Just because mergers happen by operation of __________ does not mean there is a _________.

Answer 4

• Law
• Transfer of Assets

Question 5

The general rule of asset acquisitions is that there is _____

Answer 5

No successor liability

Question 6

Exceptions to general rule of no successor liability:

Answer 6

1. Buyer expressly or impliedly agreed to assume such debts
2. The transaction amounts to a de facto
3. The buying corporation is a “mere continuation” of the selling corporation, or
   
   • When purchasing corporation is merely a continuation or reincarnation of the selling corporation
     
     • Common identity of the officers, directors, and stock holders in target and bidder
4. The transaction is entere into fraudulently to escape liability for such debts.

Question 7

Classic sign of de facto merger

Answer 7

1. Continuity of business enterprise
   
   • no alternation of entity itself
2. Shareholder continuity
   
   • bidder paying for acquired assets with shares of its own stock
3. Target ceases business operations, liquidates, and dissolves
4. Bidder assumes liabilities and obligations

Question 8

Tort Creditors - **CA Products Line Exception - **

Answer 8

A corporation that purchases a manufacturing business and continues to produce the seller’s line of products assumes strict liability in tort for defects in units of the same product line previously manufactured and distributed by the seller.