Explore the intricacies of buyer liability in all-cash stock deals and the legal battle against successor liability claims. Dive into a case study involving an accident-related claim and Arizona’s laws. Get insights from the court’s key points and analysis. Case reference: Tillman v. Everett, No. CV-19-08231-PCT-JJT.
May 15, 2020
Introduction:
When a buyer purchases the stock of an unrelated company using cash, they usually don’t have to worry about being held responsible for the target company’s debts.
The Deal:
In this case, the buyer bought the stock of the target company using cash.
The Lawsuit:
A person who suffered damages in an accident involving an employee of the target company sued both the target company and the buyer. The plaintiff claimed that the buyer, who acquired the target’s stock, was accountable for the accident-related damages under Arizona’s successor liability rule.
The buyer asked the court to dismiss the plaintiff’s claim through a summary judgment motion. The argument was that the plaintiff couldn’t prove that the buyer should be held liable for any of the target company’s liabilities resulting from the accident.
The plaintiff requested the court to delay a decision on the buyer’s motion, so they could gather more information about the successor liability issue. The court granted the plaintiff more time.
Key Points from the Court:
The court explained that, based on Arizona law, in cases involving the acquisition of assets, the buyer might be responsible for the seller’s debts if the buyer is seen as a continuation of the seller. The court described this as having “substantial similarity in ownership and control between the two corporations” and “insufficient consideration from the new company to the old company” for the assets transferred.
The court noted that the plaintiff alleged that the buyer and the target company shared ownership, executives, employees, or directors. Additionally, the buyer covered salaries and expenses of the target. The court found these claims sufficient to establish commonality in the operation and control of the companies, allowing the plaintiff to gather more information. The plaintiff also claimed that the buyer bought the target’s shares for an amount roughly half of the target’s previous year’s revenue, potentially showing inadequate consideration for the purchase. Therefore, the court ruled that, considering the early stage of the case, the plaintiff could conduct limited discovery to explore the “mere continuation” theory.
Comment:
It’s surprising that the court didn’t dismiss the plaintiff’s claim against the buyer. Successor liability typically applies to specific types of asset acquisitions, not stock acquisitions, especially in cases involving all-cash deals.
Case Reference:
This case is referred to as Tillman v. Everett, No. CV-19-08231-PCT-JJT, United States District Court, D. Arizona, (April 17, 2020).
By John McCauley: I help companies and their lawyers minimize legal risk associated with private business acquisitions.
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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