Articles

Eric Johnson

Successor Liability: A Key Consideration for Business Acquisition Planning

When one business acquires the assets of another, the question arises of whether the acquiring business will be liable for the legal obligations of business that it acquired. This implicates the question of successor liability, which involves the competing interests of compensating injured parties for harm caused by the acquired business entity and protecting the acquiring entity against liability for harm it did not cause.  Thus, understanding how successor liability works is important for navigating business acquisitions.  This article discusses the doctrine of successor liability under Minnesota law.

Modern successor liability doctrine in Minnesota traces to the 1973 Minnesota Supreme Court case of J.F. Anderson Lumber Co. v. Myers. In that case, a family-owned construction company was found liable to a lumber supplier for work and materials the supplier provided for a home remodel for which the construction company was general contractor.  But, before the money judgment could be entered by the court, the construction company transferred all of its tangible assets, in exchange for consideration (i.e., payment or something else of value), to a new corporation with a different name but the same family owners and the same business purpose (i.e., construction and remodeling).  The owners admitted that the purpose of the transfer was to create a new company to operate their business that lacked the debts of their original company.

The court held that the newly-formed corporation was not liable for the original corporation’s debts, including the judgment in favor of the lumber supplier.  In doing so, the court recognized the “general rule . . . that where one company sells or otherwise transfers all its assets to another company, the purchasing company is not liable for the debts and liabilities of the transferor.”  However, the court also noted four exceptions to the general rule of successor non-liability: “(1) where the purchaser expressly or impliedly agrees to assume such debts; (2) where the transaction amounts to a consolidation or merger of the corporations; (3) where the purchasing corporation is merely a continuation [i.e., a reorganization] of the selling corporation; and (4) where the transaction is entered into fraudulently in order to escape liability for such debts.”  The court held that none of the exceptions applied to the case before it.

Moreover, the court stated, unless a transfer of a business’s assets occurs without adequate consideration, the continuation of the business’s name, management, and practices by a successor entity does not, by itself, warrant successor liability. Similarly, the court recognized that a transfer of a business’s intangible assets to another without adequate consideration could give rise to successor liability. Thus, the court held that the giving value by the transferee business for the transferor’s assets was more important in avoiding successor liability than the degree to which the transferor’s business continued under the transferee.

In 1981, the Minnesota legislature passed Minnesota Statutes section 302A.661, subdivision 4, which seemed to be aimed at eliminating at least two of the exceptions to the general rule of corporate successor non-liability recognized eight years earlier in J.F. Anderson. The statute stated, in relevant part, “The transferee is liable for the debts, obligations, and liabilities of the transferor only to the extent provided in the contract or agreement between the transferee and the transferor or the extent provided by this chapter or other statutes of this state.” This language effectively eliminated the “de facto merger” and “mere continuation” exceptions, but preserved the contractual and statutory bases for successor liability.  In 1992, the legislature passed Minnesota Statutes section 322B.77, subdivision 4, with identical language applicable to LLCs.

In a case following enactment of the 1981 statute, Niccum v. Hydra Tool Corp. (1989), the Minnesota Supreme Court appeared to push back at the legislature by construing the 1981 statute as merely restricting expansion of the exceptions to the general rule of successor non-liability beyond the four J.F. Anderson exceptions. But later, in Johns v. Harborage I, Ltd. (2003), the court held that a corporate transferee was not responsible for the transferor business’s liability to the plaintiff because the transferee “carefully defined the liabilities it would assume” in its contract with the transferor, and the transferor’s liability to the plaintiff was not among them.  (The court did hold, however, that the transferee was liable to the plaintiff under the comparatively relaxed standard for successor liability under Title VII of the federal Civil Rights Act of 1964.) Thus, the court in Johns appeared to confirm, in contrast to the Niccum case, that the 1981 law, in fact, eliminated the “de facto merger” and “mere continuation” exceptions to the general rule of successor non-liability, leaving only the contractual and statutory exceptions intact.

Still, some courts continued to apply the de facto merger and mere continuation exceptions after Johns. Accordingly, in 2006, the legislature amended Minnesota Statutes sections 302A.661, subdivision 4, and 322B.77, subdivision 4 to include the following language:

A disposition of all or substantially all of a [corporation’s or LLC’s] property and assets . . . is not considered to be a merger or a de facto merger . . . The transferee shall not be liable solely because it is deemed to be a continuation of the transferor.

This language makes clear that where a transferee gives adequate value for the transferor’s assets, the only bases for successor liability are (1) if the transferee expressly or impliedly agrees to assume the liability; and (2) as provided in Minnesota Statutes.  (Some courts have continued to apply the “mere continuation” exception where assets are transferred for no value.)

One statute that is consistently recognized as an exception to successor non-liability is the Minnesota Uniform Voidable Transactions Act (known until 2015 as the Minnesota Uniform Fraudulent Transfers Act), which is codified in Minnesota Statutes sections 513.41 through 513.51. Under the MUVTA, a transferee is liable for an obligation incurred by the transferor if the transfer was made “with actual intent to hinder, delay, or defraud creditors.” Because such intent is rarely apparent on the face of a transaction, the legislature has identified certain factors that may be used to determine whether such intent existed, including whether, before the transfer occurred, the transferor had been sued or threatened with suit. The MUVTA also continues the no-adequate-consideration basis for successor liability, imposing liability where the transferor “did not receive reasonably equivalent value for the transfer” and either the transferor’s remaining assets were small or the transferor became insolvent as a result of the transaction.

Today, even if an acquiring/transferee business does not contractually agree to assume any of the transferor’s debts, the MUVTA could impose successor liability. Moreover, even if no tangible assets are transferred, successor liability may be imposed based on the transfer of intangible assets—e.g., customer lists or relationships—for no consideration.

Accordingly, Minnesota businesses that acquire the another business’s assets should be sure to (1) carefully identify in writing the debts and liabilities, if any, of the transferor that the transferee agrees to assume; (2) identify the consideration the transferee provides in exchange for the transferor’s assets; and (3) avoid risky scenarios that may result in imposition of successor liability under the MUVTA. Of course, because every transaction is different, the involvement of legal counsel is highly advisable.

Eric Johnson is an attorney with Fryberger, Buchanan, Smith & Frederick, P.A., practicing in the areas of Business Litigation, Appeals, and Banking/Lending Services.  This article is not intended to provide legal advice.  You should always consult an attorney regarding your specific circumstances.