A company is responsible under the federal CERCLA or superfund law, and often state law for cleaning up property it contaminates by hazardous waste disposal. However, the buyer of the assets of the responsible company is generally not liable for remediating the contaminated property unless the buyer assumes seller’s environmental liability in the asset purchase agreement.
But the buyer may be liable for seller liabilities the buyer did not assume under certain federal and state laws generally referred to as successor liability laws. And one of those laws applies to an asset deal which lawyers call a de facto merger.
Basically, a de facto merger is an asset deal where the asset buyer continues the seller’s operations, with seller’s assets and seller’s employees; but usually only when the seller or the seller’s owners end up with an ownership interest in the buyer; and the seller ceases business operations after the closing.
Under those circumstances the buyer may be held liable for seller’s environmental cleanup obligations.
This deal involved a 100 hundred year old Dayton, Ohio paper mill. The seller had operated the mill for 20 years. Its operations contaminated the property with hazardous waste.
The buyer purchased most of the equipment and other assets of the paper mill from the seller for cash in 1991. It assumed no environmental liabilities.
The buyer hired the seller’s non-management employees and operated the papermill with the purchased assets. It did not purchase the real estate (the paper mill facility) or one of the paper machines. It also did not hire seller’s senior management or any of the family members that owned the seller.
The current owner sued the buyer in an Ohio federal district court to recover cleanup costs for the seller’s contamination of the paper mill. The buyer said that it was not responsible for seller’s clean up obligations because the buyer did not assume any of seller’s environmental liabilities in the asset purchase agreement.
The current owner claimed that the buyer was liable for the cleanup costs because its purchase of the seller’s assets amounted to a de facto merger within the meaning of the successor liability law. The buyer argued that its purchase of the seller’s assets was not a de facto merger because neither seller nor the seller’s owners received buyer stock in the deal. It was an all-cash transaction.
The court agreed with the buyer and ruled that the buyer had no responsibility for seller’s clean up obligation because the transaction was not a de facto merger.
This case is referred to Garrett Day, LLC v. International Paper Co., Case No. 3:15-cv-36, United States District Court, S.D. Ohio, Western Division, (March 25, 2019)
The court said that buyer’s continuation of the operations of the seller with seller’s non-management employees and most of seller’s assets made this asset deal look like a de facto merger. However, the court also said that it is a “sine qua non of a de facto merger” that the purchase price includes buyer stock in the deal. Translation: very unlikely that a court would find a de facto merger in an all cash asset deal.
By John McCauley: I help businesses minimize risk when buying or selling a company.
Telephone: 714 273-6291
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