Read about a recent acquisition deal in the printer equipment manufacturing industry where a distributor sued a buyer for alleged pre-closing breach under the “mere continuation successor liability” theory.
M&A Stories
March 08, 2021
Introduction:
In a recent acquisition deal in the printer equipment manufacturing industry, a buyer purchased assets from a seller for cash, which included a distributor agreement. However, the buyer did not assume any liabilities for the seller’s breach of the distributor agreement under the asset purchase agreement. Surprisingly, the federal New Hampshire district court permitted the distributor to sue the buyer for an alleged pre-closing breach under the “mere continuation successor liability” theory. This was partly due to the seller’s president presenting himself as the president of a buyer division.
The Deal:
The buyer acquired assets from the seller, an Illinois-based corporation, through a strategic acquisition for cash. This included a distributor agreement. Notably, the buyer did not take on any responsibility for the seller’s pre-closing breaches related to the distributor agreement.
The Lawsuit:
Following the closing of the deal, the distributor filed a lawsuit against both the buyer and the seller. The distributor claimed that the buyer was liable under the “mere continuation successor liability” theory for defective printers delivered before the closing and those that the seller failed to deliver before the closing.
Court’s Decision:
The buyer argued that it should not be held liable since it had only acquired the seller’s assets for cash and had not assumed any liabilities for the seller’s breach of the distributor agreement. However, the court, referring to Delaware cases, found the distributor’s allegations plausible and accepted the “mere continuation theory of successor liability.”
According to this theory, the buyer could be considered a mere continuation of the seller if certain conditions were met. These included a common identity of officers, directors, or stockholders between the seller and the buyer, and if the buyer was heavily dominated and controlled by the seller to the extent that their separate existence could be disregarded.
The court found the distributor’s arguments persuasive due to several factors: the seller sold almost all of its assets to the buyer; after the closing, the seller’s remaining assets were limited to bank deposits, accounts receivable, and prepaid expenses; the seller’s president continued to communicate with the distributor on the buyer’s behalf, claiming to be the president of a buyer division; the buyer retained all of the seller’s employees after the closing; and, the seller’s president still held the same role and operated from the seller’s building, which was part of the transaction.
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).
Comment:
Most states would not apply mere continuation to an all cash acquisition.
This case raises concerns as the court suggested that “mere continuation” requires the new company to be the same legal entity as the old company. However, in this situation, the buyer operated as a separate legal entity after the closing.
Moreover, the “mere continuation successor liability” theory may be weak in this case since no seller officer, director, or owner held similar positions in the buyer or had an ownership stake in the buyer. The only relevant factor was the seller’s president claiming to be the president of a buyer division.
In hindsight, the buyer should have been cautious about allowing the seller’s president to use the title of a buyer division president. Additionally, it would be prudent for buyers not to assign titles to seller officers, directors, or owners that include words like director, chief executive officer, chairman, secretary, treasurer, or chief financial officer, even if the title applies solely to an unincorporated buyer division.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
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