Buyer purchased assets of seller for cash including a distributor agreement. Buyer did not assume any liability for seller’s breach of the distributor agreement. The court nevertheless permitted distributor to sue the buyer for breach of the distributor agreement for an alleged pre-closing breach, under a mere continuation successor liability theory, in part because seller’s president held himself out as president of a buyer division.
March 08, 2021
There is a risk that a seller creditor may sue the cash buyer of a seller’s business assets for a liability that the buyer did not assume under the asset purchase agreement under a successor liability theory.
This deal was a strategic acquisition in the printer equipment manufacturing industry. The buyer purchased the assets of the seller, an Illinois based Delaware corporation, for cash. This included a distributor agreement. However, the buyer did not assume any liabilities for seller’s pre-closing breach of a specific distributor agreement.
After the closing the distributor sued the buyer and seller for defective printers delivered before the closing and also for printers that the seller failed to deliver before the closing. The distributor claimed that the buyer was liable to the distributor under the mere continuation successor liability theory.
The buyer argued that it could not be liable because it only acquired the seller assets for cash and did not assume any seller liabilities for seller’s breach of the distributor agreement under the asset purchase agreement. The court, citing Delaware cases said: “The court concludes that the proposed amended complaint plausibly alleges a mere continuation theory of successor liability. ‘Mere continuation requires that that the new company be the same legal entity as the old company.’ … ‘The test is not the continuation of the business operation; rather, it is the continuation of the corporate entity.’ … ‘The `primary elements’ of being the same legal entity . . . include `the common identity of the officers, directors, or stockholders of the predecessor and successor corporations, and the existence of only one corporation at the completion of the transfer.’ … ‘(I)mposition of successor liability is appropriate only where the new entity is so dominated and controlled by the old company that separate existence must be disregarded.’”
The court found these allegations in the distributor’s complaint sufficient for a mere continuation successor liability claim: “Here, it is undisputed that … (seller) … sold virtually all of its assets pursuant to the Asset Agreement … After the Asset Agreement’s execution, … (seller’s) … only assets consisted of bank deposits, accounts receivable, and prepaid expenses. … (The seller’s president) … sent correspondence to … (the distributor) … on … (the seller’s) … letterhead following the Asset Agreement’s execution, and represented that he was the President of … (a buyer division) … In addition, the proposed amended complaint alleges that … (the buyer continued) … to employ all of … (the seller’s) … employees, and with … (the seller’s president) … continuing both to fill the same role as … (the seller’s president) … and to work from … (the seller’s) … building (which … (the seller) … sold in the Asset Agreement).”
This case is referred to as Fujifilm North America Corporation v. M&R Printing Equipment, Inc., Civil No. 20-cv-492-LM, United States District Court, D. New Hampshire, (February 24, 2021).
This case is disturbing because the court said: “Mere continuation requires that that the new company be the same legal entity as the old company.” That was clearly not the case here, as after the closing, the business was operated by a buyer legal entity. The seller Delaware corporation did not operate the business after the closing.
Mere continuation successor liability is weak in this case also because no seller officer, director or owner served as an officer or director of buyer or owned an interest in buyer. The only arguable fact was that the seller president told the distributor that he was now the president of a buyer division.
In 20/20 hindsight, the buyer should not have permitted the seller president to call himself president of a buyer division. Also, a buyer should not give a seller officer, director or owner a title that includes any of these words: director, chief executive officer, chairman, secretary, treasurer or chief financial officer; even if it only applies to an unincorporated buyer division.
By John McCauley: I help people manage M&A legal risks.
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