An asset buyer in an all-cash acquisition of business may have impliedly assumed a vendor contract or may be responsible for the seller’s vendor contract under New Jersey’s successor liability rules.
M&A Stories
January 21, 2022
Introduction:
When an asset buyer acquires a business with all cash, they may inadvertently become responsible for certain contracts of the seller, even if those contracts were not explicitly assumed during the acquisition. Such a scenario arose in a case involving an asset buyer of a dog chew business in New Jersey.
The Deal:
In 2015, a buyer purchased a dog chew business from a seller. Before the sale, the seller had a contract with a marketing vendor since 1998, which the buyer did not formally assume. After the acquisition, the buyer expressed uncertainty about continuing the relationship with the vendor, while the vendor claimed the buyer wanted to continue.
The Dispute:
The buyer paid the vendor commissions according to the existing contract initially but later proposed changes to the terms. The vendor disagreed, leading to a termination of the relationship in 2017. The vendor sued the buyer for full payment under the contract, claiming the buyer had either implicitly assumed or could be subject to the contract based on New Jersey’s successor liability rules.
The Lawsuit:
Initially, the trial court ruled in favor of the buyer, stating they were not subject to the seller’s marketing contract. However, the vendor appealed, and the appellate court reversed the decision, sending the case back for further litigation. The court determined that a fact finder in a trial should decide whether the buyer impliedly assumed the vendor contract based on their post-closing conduct. Additionally, the court raised the possibility that the buyer might still be subject to the contract under New Jersey’s “de facto merger” or “mere continuation” successor liability rules.
This case is referred to as Whitecap Marketing, Inc. V. IMS Trading, Corp., No. A-3461-19, Superior Court of New Jersey, Appellate Division, (Argued October 28, 2021. December 29, 2021)
Conclusion:
This case, known as Whitecap Marketing, Inc. V. IMS Trading, Corp., highlights the potential challenges faced by asset buyers in New Jersey when it comes to assuming vendor contracts during all-cash acquisitions. Unlike most other states, New Jersey’s rules extend successor liability to all-cash deals, making it crucial for buyers to carefully assess their post-closing actions to avoid potential legal disputes.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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