By Oren Tasini, Esq., Haile, Shaw & Pfaffenberger, P.A
It is generally assumed that in an asset sale the purchaser does not assume the liabilities of the Seller. Although that is usually true, there are a number of important exceptions. A key to avoiding successor liability in an asset sale is to ask the Seller the right questions in due diligence.
One prime example is real estate. Every buy sell involves real estate, often purchased by the seller. Under environmental laws, the purchaser could find itself liable for contamination on purchased real estate even if it predates the purchaser’s ownership.
The government does not care about the agreement between the seller and the purchaser that says the purchaser is not liable for pre-closing contamination; the government will pursue everyone in the chain of title. Federal law requires that the purchaser conduct “all appropriate inquiry”. This requires not only a Phase I examination by a licensed professional, but also that the purchaser review the Seller’s records and interview the current and past owners.
Another area of concern is liability for employee obligations. Again, the standard is less than clear. A purchaser can be liable for unfulfilled obligations of its Seller if it is deemed a successor to the seller, which involves consideration of a number of factors, including whether the purchaser is continuing the business of the seller, with the same employees in the same location, which is often the case.
A related area is seller-issued products, such as tires for life and free oil changes. The seller has presumably made some profit on offering these items. The buyer is not legally obligated to honor them, but is wise to do so and retain the goodwill of the seller’s customers. The buyer needs to have the seller quantify the dollar amount of any future honoring of the seller’s contracts and provide the buyer with a commensurate credit.
There is often tension between the purchaser’s need to conduct due diligence to avoid these liabilities and the seller’s concerns about letting the cat out of the bag to employees and others. Regardless, given the potential for a substantial exposure to unforeseen liabilities, this is a matter on which the purchaser must be insistent.
The best approach is for the seller to advise key employees of a pending sale and incentive them to see through the sale to closing. In my experience, a buy sell quickly becomes public knowledge and trying to deny this fact adds enormous stress to both seller and purchaser and increases the risk of a failed transaction.
As added protection, the purchaser needs to get representations and warranties from the seller and its principal, and an indemnity if such representations and warranties prove to be untrue, such as the failure of the Seller to make all required 401(k) contributions. It is critical that the indemnity be from the seller’s principal because in an asset sale the seller will typically be dissolved after the sale.
If a seller pushes back on due diligence, the purchaser needs to be firm. An indemnity is nice to have, but an ounce of prevention is always worth a pound of cure.
Oren Tasini is a partner at law firm Haile, Shaw & Pfaffenberger, P.A. in North Palm Beach, Fla. He can be reached at (561) 627-8100 or firstname.lastname@example.org.