Corporate Successor Liability in Asset Purchases
Asset purchases are often the preferred acquisition structure for deal attorneys because they generally allow for a clear separation of liability between buyer and seller, unlike stock acquisitions or merger transactions. In asset purchases, the buyer usually only assumes the seller's liabilities that the parties expressly agree upon in the asset purchase agreement.
Buyers' counsel can take several measures to mitigate the risk of successor liability with asset purchases, including conducting thorough due diligence, negotiating strong contract provisions, obtaining reps and warranties insurance, and using purchase price adjustments/holdbacks. In the bankruptcy context, assets can be purchased "free and clear" of competing claims and liability under Section 363 of the Bankruptcy Code.
The panel provided guidance to M&A counsel for mitigating the risk of successor liability with asset purchases. The panel also discussed the circumstances in which successor liability claims may arise and describe how due diligence, contractual provisions in the asset purchase agreements, and reps and warranties insurance can be effective techniques to mitigate risk exposure.
They reviewed these and other high priority issues:
- The circumstances under which asset buyers may be held liable as successors for claims made against prior owners
- Considerations for counsel when assessing whether to advise a client to proceed with an asset purchase instead of a stock acquisition or merger transaction
- Best practices for deal counsel to mitigate the risk of successor liability when negotiating an asset purchase agreement