Successor Liability in Distressed M&A Transactions: Mitigation Strategies

Description

Current market conditions present distressed investing opportunities, but distressed M&A transactions bring an increased risk for successor liability claims. Counsel must be aware of the risks associated with acquiring distressed debt or assets and the steps a buyer should take to mitigate that risk.

In an asset acquisition, the buyer is generally not responsible for the seller's liabilities, but there are exceptions to this general rule. The buyer may remain liable for the seller's obligations if the buyer assumes the liabilities; the transaction is deemed to constitute a merger; the buyer is, effectively, a mere continuation of the seller; or the transaction is deemed to be a fraudulent transfer. Courts have also found successor liability when the buyer continues the product line of the seller or public policy demands it.

Buyers can mitigate the risk of successor liability by placing the acquired assets in a single purpose entity. Due diligence is also critical and may include areas of concern such as product liability, environmental or employment claims, and tax liabilities. The purchase agreement should clearly delineate assumed and excluded liabilities and include indemnification and escrow provisions, if possible, to cover outstanding obligations. Finally, insurance must be continued or tailored to cover the seller for outstanding claims.

Listen as our authoritative panel discusses the successor liability risks associated with acquiring distressed debt or investing in distressed assets, as well as strategies counsel can adopt to minimize liability for the buyer.