Explore the complexities of successor liability in M&A asset acquisitions and how to protect your interests. Learn from a real case scenario and key takeaways.
M&A Stories
April 17, 2019
Introduction:
In the world of M&A, asset purchases can be an attractive option for buyers seeking to avoid the legal baggage of a seller’s liabilities. However, there’s a catch: successor liabilities. These are legal obligations that buyers inherit, even if they didn’t explicitly agree to them in the purchase agreement. In this case, we explore a situation where a law firm’s asset purchase led to unexpected consequences.
The Scenario:
In 2015, a struggling law firm with only one remaining office faced financial ruin, with a $1.3 million line of credit and assets worth only $26,000. Another debt collection law firm saw an opportunity and acquired the firm’s assets for $15,000. The buyer took on the seller’s employees and continued the operations.
The Lawsuit:
Unbeknownst to the buyer, a former employee of the seller had accused the firm of sexual harassment and retaliation in 2014, well before the acquisition. She filed complaints with federal and state agencies. After the purchase, she sued the buyer, invoking successor liability. She argued that because the buyer continued the seller’s operations and knew or should have known about the claim, it was responsible for the liability.
The Verdict:
The court ruled in favor of the buyer, stating that it was unaware of the sexual harassment claim, and no red flags existed during due diligence. Moreover, considering the low purchase price of $15,000, expecting the buyer to uncover such liabilities was deemed unreasonable.
Key Takeaways:
1. Due Diligence: While due diligence is crucial, it must be proportionate to the deal’s size and complexity.
2. Successor Liability: This doctrine aims to protect buyers but can vary by jurisdiction. Know the laws in your area.
3. Preserving Purchase Price: Buyers can safeguard against potential liabilities by holding back part of the purchase price or using an escrow.
4. Indemnification: Consider obtaining indemnification from the seller, especially if the seller has a strong financial standing.
Conclusion
Successor liability can be a legal quagmire, but it’s not insurmountable. This case underscores the importance of informed decision-making in M&A transactions. Buyers should be diligent, but fairness and equity also play a significant role in determining liability. Protecting your interests requires a delicate balance of legal knowledge and practicality.
Case Reference:
Kratz v. Richard J. Boudreau & Associates, LLC, Case No. 15-cv-232-SM, United States District Court, D. New Hampshire, (March 22, 2019)
By John McCauley: I help businesses minimize risk when buying or selling a company.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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