If you are considering buying another company’s assets, one important consideration is: what liabilities of the seller will I be taking on? This question generally only arises in an asset purchase, as a stock purchase will typically result in liability on the part of the successor company.
Whether a company that purchases the assets of another company can be held responsible for the seller’s pre-transfer obligations is the crux of the successor liability issue. In Illinois, the general rule is that a company that purchases the assets of another company is NOT responsible for the debts or liabilities of the selling company. However, several exceptions to this general rule exist.
Illinois case law recognizes four exceptions to the general rule of non-liability: (1) where there is an express or implied agreement of assumption; (2) where the transaction amounts to a consolidation or merger of the purchaser or seller corporation; (3) where the purchaser is merely a continuation of the seller; or (4) where the transaction is for the fraudulent purpose of escaping liability for the seller’s obligations. As the third exception is the most common and the most concerning for many businesses, this article will focus only on that exception in detail.
When considering the third exception, continuation of the seller, a court will focus on whether the purchaser company is merely a continuation or reincarnation of the selling company, or whether the purchaser maintains the same or similar management or ownership, but is merely wearing “different clothes”.
The test used most often is whether there is a continuation of the corporate entity of the seller – not whether there is a continuation of the seller’s business operation; meaning a court considers the ownership and management of the purchasing company compared to the ownership and management of the selling company, rather than merely asking if the purchasing company sells the same products or provides the same services as that of the predecessor. Courts emphasize whether the officers, directors and stock ownership of the purchasing company are similar to that of the selling company as the key element of a determining whether there is continuation. Absent continuity of stock ownership, courts typically determine that a finding of continuation is not warranted. Continuity of middle management employees absent a showing of common ownership has been previously decided by the courts not to be enough to establish a continuation.
Because of the viability of a purchasing company can hinge on whether that company is responsible for debts and/or liabilities of a seller, carefully structured transfers are prudently worded purchasing documents are necessary. While Illinois courts have provided much guidance regarding successor liability of purchasing companies, the analysis is often fact specific. A business owner would be wise to seek the guidance of an experienced attorney before commencing the purchase of the assets of any company.
Be aware this is a brief discussion of one aspect of successor liability as treated under Illinois law, and each circumstance can dictate different results. In some situations, companies should also consider implications under federal law. For example, the US Court of Appeals for the 7th Circuit recently decided that, despite language in a purchase agreement specifically stating the purchaser was not assuming the liabilities of the seller, absent a compelling reason to rule otherwise successor liability is appropriate in suits to enforce federal labor or employment laws.
If you have questions regarding successor liability or any other laws that may affect your business, or would like to schedule a free initial consultation, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.
Waltz, Palmer & Dawson, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Litigation and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, Guardianship, Divorce and Family Law.
This article constitutes attorney advertising. The material is for informational purposes only and does not constitute legal advice.
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