Explore the intricate legalities of asset purchases in M&A through a cautionary tale. Delve into the Alabama Teachers Credit Union v. Design Build Concepts case, highlighting successor liability nuances, business continuity, and the impact of labeling transactions. Learn valuable insights for buyers navigating potential legal implications in M&A deals.
M&A Stories
August 18, 2018
In a notable M&A case, a buyer faced successor liability after acquiring a construction business, highlighting the intricate legalities of asset purchases.
Back on April 17, 2003, an Alabama credit union collaborated with a Georgia-based construction company to build in Gadsden, Alabama. Despite the completion certificate in March 2006, persistent issues like roof leaks unveiled construction defects.
On August 3, 2007, the buyer acquired the seller’s assets and assumed selected liabilities through an asset purchase agreement. The buyer reassured the credit union of continued service, initially framing the deal as a merger. Post-acquisition, water intrusion issues persisted, revealing the seller’s defective design. Legal action followed in November 2016, invoking Alabama’s successor liability rule.
The court acknowledged the general principle that buyers aren’t typically liable for pre-purchase business liabilities. However, exceptions applied under Alabama law, emphasizing the buyer’s responsibility due to business continuity, key personnel retention, and even the use of the seller’s name. Despite the seller’s liquidation three years later, the buyer assumed necessary liabilities, presenting itself as the effective continuation of the seller.
While other states might not impose liability under similar circumstances, without the seller or its owners also receiving buyer equity, the court dismissed the credit union’s suit, citing Alabama’s statute of limitations.
This case emphasizes the need to grasp successor liability nuances in M&A transactions, serving as a cautionary tale for buyers navigating potential legal implications. Additionally, the buyer’s labeling of the transaction as a merger rather than an asset purchase didn’t work in its favor.
Case Reference:
Alabama Teachers Credit Union v. Design Build Concepts, Inc., Case No. 4:16-cv-2027-KOB, United States District Court, N.D. Alabama, Middle Division, (August 10, 2018).
By John McCauley: I help people start, grow, buy and sell their businesses.
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