Explore the intricacies of M&A legal topics with our latest blog post, “Texas Upholds Asset Acquisition Formality: Successor Liability Limited to Assumed Seller Liabilities.” This piece delves into the unique legal landscape of Texas, contrasting its strict adherence to the form of asset transactions with other states’ more flexible approaches. Discover how Texas law shapes the responsibilities of buyers in asset acquisitions, particularly in the context of successor liability and the implications for creditors. By understanding these nuances, M&A professionals can better navigate the complexities of asset acquisitions, especially when dealing with cross-state transactions and bankruptcy sales. Gain valuable insights into the importance of including robust choice of law provisions in acquisition agreements, ensuring that Texas’s favorable laws can provide essential protections for buyers.
M&A Stories
September 24, 2024
In asset acquisitions, many states impose successor liability on buyers based on the substance of the deal—often treating asset purchases as mergers or mere continuations of the seller. Texas, however, adheres strictly to the form of the transaction.
In this case, a creditor sued the buyer of a bankrupt company’s assets, claiming successor liability. The buyer, based outside of Texas, moved to dismiss the claims, arguing that Texas law applied. Under Texas law, a buyer is only responsible for liabilities it expressly assumes, without consideration of whether the acquisition resembles a merger or continuation of the seller.
The creditor argued for Indiana law, which applies a more creditor-friendly approach by examining the substance of the transaction. However, the court found that Texas law governed the case because of the strong connections between the creditor, the seller, and the state of Texas. Since the buyer had not assumed the seller’s liabilities, the court dismissed the creditor’s claims.
Texas is an outlier in this respect. Most states will examine the substance of a deal to determine whether a buyer should be held responsible for seller liabilities as a de facto merger or continuation. In contrast, Texas limits successor liability strictly to those liabilities the buyer explicitly assumes.
For buyers hoping to take advantage of Texas’ pro-buyer laws, it’s critical to include a broad choice of law provision in the acquisition agreement. This provision should ensure that Texas law governs all aspects of the transaction, including contractual issues, tort liabilities, and statutory obligations. Given the potential for significant claims related to torts—such as personal injury or death—addressing these explicitly can protect the buyer from substantial unforeseen liabilities. This strategy can be particularly useful for buyers outside Texas, especially when the seller or business has strong ties to the state.
Additionally, in this case, the buyer benefited from the fact that the assets were purchased out of bankruptcy. Assets acquired through bankruptcy are typically free of unassumed liabilities, further bolstering the court’s decision.
Case Reference: Case Reference: Buy Direct, LLC v. DirectBuy, INC.., Cause No. 2:15-CV-344-JVB-JEM , United States District Court, N.D. Indiana, Hammond Division, (September 6, 2024).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners, management, as well as professionals who share an interest in the complexities of M&A law.
By John McCauley: I write about recenegal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Podcasts https://www.buzzsprout.com/2142689/12339043
Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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