Generally, a buyer of an e-commerce business wants to buy the target company free and clear of any liabilities that the target might have (other than those that the buyer is expressly and voluntarily willing to assume). The term “liabilities” includes any debt or legal liability that most people would think of, including mortgage debt on real property, UCC encumbrances on inventory and physical assets, financial and investor loans, court judgments, etc. However, “liabilities” can also include a long list of contingent and unknown-at-the-time-of-the-sale debts and liabilities, including:
- Future product liability or environmental judgment
- Taxes like unpaid employee withholding taxes, real estate taxes, business sales taxes, etc.
- Fines for labor law, health, building, and other safety code violations
- Judgments for lawsuits
- Claims by unknown creditors for undisclosed debts
- Union claims for unpaid contributions
For buyers, the first legal tip for avoiding these types of problems is to structure the purchase as an asset sale (rather than buying the business as a whole). Even this will not always succeed since there is a legal doctrine called “successor liability.” This doctrine allows creditors to “look past” the asset sale structure and claim that the buyer is really the successor of the target e-commerce business. From there, the creditors argue that the buyer can be held liable for the seller’s debts in question. Generally, the creditors must prove one or more of the following:
- That the buyer impliedly assumed the debt or debts in question
- The transaction was a “de facto” merger of the companies or that the buyer is/was a “mere continuation” of the target company
- That the asset transfer was fraudulent and intended to defraud creditors
Often, the key set of facts in successor liability litigation is whether the buyer essentially continued the same operations as the seller. Among the facts considered by courts include continuity of employees (particularly upper management employees), business locations, contact information like websites and phone numbers, product/service lines, sales channels, use of same bank/financial accounts, and more.
From this, the second legal tip for avoiding successor liability is to engage businesses in strategies that minimize these factors used by courts. That is, there should be a different business location, new phone numbers, revised websites, new managerial employees, etc. Where possible, it would also be helpful if the seller’s business did not immediately cease operating but continued to operate – in some respect – beyond the consummation of the asset sale.
In addition, much can be done in the Purchase Agreement. The Purchase Agreement should have these types of provisions:
- Explicit statement that the transaction is an Asset Purchase
- Explicit statement that the buyer is NOT assuming liability for any debt not listed
- Indemnity and hold-harmless provisions where the seller agrees to defend any case and pay any judgment
- Reps and warranties whereby the seller expressly warrants that there are no debts or liabilities other than those stated in the Purchase Agreement
- Hold-backs of some portion of the sales proceeds for a certain term — maybe one year — to cover defense and payment costs of any claims related to debts/liabilities that arise after the consummation
- Seller purchase of insurance for unknown and/or contingent successor liability claims
- And more
Contact the Business Attorneys at Revision Legal
For more information, contact the experienced Business Lawyers at Revision Legal. You can contact us through the form on this page or call (855) 473-8474.
