By Brian Bailey, Esq. Becker Meisel LLC

April 24, 2008 – Even beautifully wrapped packages can hold some unpleasant surprises. That is most certainly the case when purchasers of New Jersey companies learn they are being sued or held responsible for costs (financial and otherwise) arising under previous ownership.

The legal term is "successor liability" and it can mean big trouble for purchasers that have not properly structured the transaction nor done the due diligence to protect themselves from potential problems and a day in court. It is an easy trap to fall into but one that may be avoided with some care and planning. Avoiding successor liability is a matter of a purchaser knowing what needs to be identified and what needs to be steered clear of.

Common Signs of Successor Liability
In the majority of cases, purchasers prefer buying a company’s assets rather than its stock. Generally it is the case that in these types of transactions the buyers are not responsible for the liabilities of the seller. Generally is the key word because there are some interesting and significant exceptions to the presumption against successor liability.

Under the five following scenarios, a purchaser may find itself a legitimate target for successor liability: (1) the purchaser expressly agrees to assume certain debts and liabilities of the selling company, (2) the transaction results in a consolidation or merger of the two companies, (3) the buying company essentially becomes a continuation of the selling company, (4) fraud is employed as the seller attempts to escape responsibility for its debts and liabilities, and (5) in a products liability context, the acquiring company continues to manufacture the same products.

Of the five scenarios, the appearance of a merger and a continuation of the existing business are the two most common pitfalls that can make a purchaser vulnerable to successor liability. Under New Jersey state law, weighing four independent factors helps courts decide the existence of a merger or consolidation. These factors include (1) if there is continuity of the same management and personnel at the same location, (2) how soon after the transaction does the selling company cease operation, (3) whether the purchaser assumes the selling company’s liabilities needed to keep the business running as it had been, and (4) if there is continuity of ownership or shareholders.