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For those representing purchasers of businesses on a regular basis, the key advantages to a sale or purchase of assets are textbook. One such advantage is that an asset purchase allows the purchaser to acquire only certain assets of a selling corporation, and to assume only certain of the seller’s liabilities. This type of transaction is especially attractive when the buyer is acquiring a troubled business or a business presenting an unacceptably high probability of failure. This advantage becomes somewhat elusive in cases where the purchaser acquires all of the selling corporation’s assets. Always a lurking problem in these sales is the question of whether, in the course of acquiring the seller’s assets, the purchaser has also assumed the seller’s liabilities by operation of law or otherwise. If there are recorded or perfected liens against such acquired assets, the purchaser must take the assets subject to whatever debts or claims are secured thereby. Otherwise, a purchaser is generally not liable for the seller’s liabilities in the absence of an agreement to assume such liabilities. For these reasons, the documentation of the asset purchase agreement is critical, and the drafter of the transactional documents must be careful with respect to such issues. EXCEPTIONS TO THE GENERAL RULE OF NONLIABILITY However, notwithstanding the drafter’s careful consideration and prospective risk management, the purchaser of a business may be responsible for the liabilities of the seller under the following exceptions to the general rule of nonliability: (1) the successor liability doctrine and (2) transactions treated as “de facto” mergers. With respect to the former exception, the successor liability doctrine is confined to tort liability of the seller and, within that category, is more specifically confined to the product liability of the selling corporation. Tort liability is generally not transferred when a purchaser acquires all a seller’s assets. However, due to the growing concern regarding a consumer’s right to seek recompense for injuries arising from a defective product, the California Supreme Court has carved out a special exception applicable to defunct corporations whose products cause injury to consumers or other third parties. The de facto merger exception is applied to purchases of corporations where the consideration paid for the seller’s assets consists solely of the purchaser’s stock, the purchaser continues the seller’s business, and the seller’s shareholders become shareholders of the purchaser, with the seller corporation liquidating. The transaction is considered a “de facto merger.” A tenacious litigant, however, may be able to find a way to attach liability to an unsuspecting purchaser even if these exceptions do not exist in the given set of circumstances. IMPLIED ASSUMPTION OF LIABILITY A purchaser may be lulled into a false sense of security if it has retained fastidious corporate counsel, it has ensured that its transaction is not and does not appear to be a de facto merger, and it has not purchased a company subject to the successor liability doctrine. These exceptions do not represent the exclusive means by which an acquiring company may find itself held liable for the liabilities of an acquired company. In several instances, third parties and other disgruntled litigants have found ways to attach liability to a purchaser even if neither of the classic exceptions to the general rule that an acquiring corporation does not assume the liabilities of the seller applies. Many frustrated litigants seeking redress for a seller’s corporation’s liabilities find their solution against the purchaser, most often during the course of litigation. In cases where these frustrated plaintiffs cannot establish a de facto merger against a successor or purchasing corporation, or the purchased concern is not a business engaged in the vertical chain of product sales, plaintiffs often seek recourse in the implied assumption exception. In these cases, the plaintiffs seek to show that the purchaser, by its conduct, impliedly assumed the liabilities of the seller. The implied assumption claim is based on the legal theory of an implied-in-fact contract. Such implied contracts are found where, even in the absence of a written contract, the existence and terms of a binding contractual relationship are manifested by the parties’ conduct. Thus, even though a promise may not be stated in oral or written words, the promise or contract may be inferred in whole or in part from the parties’ conduct, and the parties may be estopped from denying the implied contractual obligations. These obligations are especially imputed where one party has led another party to justifiably rely on and perform on the implied contract. In this manner, purchasers often destroy the very protections their counsel constructed in expressly limiting assumption of certain contractual obligations of the seller in the purchase and sale documentation of the transaction. For instance, it is common to find assumptions of third-party contracts where the purchaser’s counsel includes a provision in the transactional documents expressly limiting the purchaser’s assumption of the benefits and obligations of the seller’s third-party contracts to those incurred only after the date of the purchase of the seller’s assets. Purchasers stray from these protections where they fail to notify the third-party contractor of the limited assumption of such liabilities, the seller dissolves or liquidates, and the purchaser nevertheless continues to operate with the third party under the exact same terms, provisions and course of dealing as its predecessor, the seller. In such cases, courts are likely to find that it would be inequitable to allow the purchaser to accept the benefits of the third-party contract without the burdens thereof. The purchaser may also be found, by the purchaser’s own conduct and tacit acceptance, to have impliedly assumed not only the benefits of the third-party contract, but also the burdens of that contract. THIRD-PARTY NOTIFICATION In these instances, it is important to the purchaser, even when including language in the purchase and sale documents explicitly limiting its assumption of the seller’s contracts and liabilities, that the purchaser clearly and explicitly informs the third party of the purchaser’s limited assumption of the seller’s liabilities, or clearly communicates an asset acquisition agreement disclaimer to the third party in writing. The purchaser should also obtain in writing a confirmation of the terms and provisions of the third-party contract. It may be necessary, and in many cases the only practical solution may be for the purchaser to enter into an entirely new agreement with the third party. Otherwise, the purchaser runs the risk that the seller’s agreement governs the purchaser’s relationship with the third party. There are lessons to be learned from the implied assumption litigation cases on all sides. An asset acquisition should be carefully structured so that the purchaser is protected from the liabilities of the selling corporation. However, beyond the documentation of the purchase and sale transaction, the purchaser should avoid conduct that would give rise to an implied assumption of the very liabilities that were “stripped away” in the transactional documents. It is never acceptable to mislead third parties by the purchaser’s acts of commission or omission. Additionally, a third party that has allowed an assignment of one of its contracts and finds that it is doing business with a new entity, whether it be a reorganized corporation or a purchaser corporation, should take immediate steps to clarify that new entity’s position with respect to that third party and the third-party contract. Even though an acquiring company may be careful to document its purchase of a selling business’ assets, it should ensure that the transaction does not appear to be an attempt to avoid the creditors of the seller, or avoid purchasing any assets of a seller engaged in product distribution. The acquiring company may be blindsided as to threats of litigation for impliedly assumed liabilities of the seller’s third-party contracts. A purchaser of a corporation can avoid costly, unexpected liability and litigation if it continues to remain carefully counseled and diligent concerning its conduct with third parties, especially those third parties with whom the selling corporation had previously contracted and with whom the purchaser intends to continue to do business. Gary A. Wexler is a partner and Sharyn G. Alcaraz is an associate with Los Angeles’ Reish Luftman McDaniel & Reicher. Mr. Wexler focuses on litigation and Ms. Alcaraz on corporate matters.

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