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.

Successor Liability Doctrine: The Legal Mechanics

Successor liability is a judge-made doctrine that courts apply when a buyer of business assets should be treated as a legal successor to the seller’s obligations, notwithstanding the asset sale structure. The doctrine originated in product liability law — specifically the problem that injured consumers could not recover against a seller who had disposed of all its assets and dissolved — and has expanded into other liability contexts including employment law, environmental law, tax obligations, and consumer protection claims.

The traditional four-exception rule, followed in most states, holds that an asset purchaser assumes the seller’s liabilities if: (1) the buyer expressly or impliedly assumed the liability; (2) the transaction was a de facto merger; (3) the buyer is a mere continuation of the seller; or (4) the transaction was entered into fraudulently to escape liability. The “mere continuation” exception is the one most often invoked in e-commerce asset sales because it focuses on operational continuity — whether, to the outside world, the business simply continued under new ownership without meaningful change.

The De Facto Merger Test in E-Commerce Transactions

Courts applying the de facto merger doctrine look at whether the transaction had the practical effect of a merger even though it was structured as an asset sale. The factors courts consider include: (1) continuity of ownership — did the seller receive equity in the buyer as part of the purchase price; (2) immediate cessation of the seller’s ordinary business; (3) assumption of liabilities necessary for the uninterrupted operation of the business; and (4) acquisition of the personnel, location, and assets necessary to operate the acquired business.

In e-commerce transactions, the de facto merger test presents particular risk when the buyer acquires the seller’s domain name and website (consumer-facing continuity), customer email list and communications channels, social media accounts (identity continuity), and key management or operational personnel (organizational continuity). A transaction that checks all of those boxes looks, to consumers and creditors, exactly like the same business operating under new ownership — precisely the circumstance courts have found sufficient to impose successor liability.

Domain Names, Social Media Handles, and the Continuity Problem

E-commerce buyers want the seller’s digital identity assets — domain names, social media handles, existing Google search rankings, customer reviews — because those assets drive traffic and revenue. However, acquiring those assets creates the continuity of identity that is a key factor in successor liability analysis. There is no perfect solution to this tension, but several strategies can reduce the risk:

• Operate under a rebranded domain and social media presence as soon as commercially feasible after closing, redirecting from the old domain rather than simply continuing to use it as the primary identity
• Discontinue the seller’s specific email addresses and contact channels, replacing them with new contact information associated with the buyer’s brand
• Require the seller to continue maintaining a web presence — even minimal — for a period after closing, so that the seller’s business is not immediately extinguished upon consummation of the asset sale
• Transition customer-facing branding as quickly as possible so that by the time any creditor claim arises, the new brand identity is clearly distinct from the former seller’s

Tax Liabilities: A Special Successor Liability Risk

Sales tax and use tax liabilities deserve specific attention in e-commerce asset sales. Following the Supreme Court’s 2018 decision in South Dakota v. Wayfair, 585 U.S. 162 (2018), e-commerce businesses have economic nexus obligations in states where they exceed applicable sales thresholds. A seller that has not properly collected and remitted sales tax in states where it had economic nexus carries a tax liability that can be substantial.

Most states have “bulk sales” statutes or successor liability provisions in their tax codes that expose asset purchasers to the seller’s unpaid tax liabilities if the buyer did not obtain a tax clearance certificate before closing. A tax clearance certificate — issued by the state tax authority — confirms that the seller has no outstanding tax liability as of the certificate date. Buyers in e-commerce asset sales should require tax clearance certificates from every state where the seller had significant sales before closing. Failure to do so can result in the buyer receiving a tax deficiency notice years after closing for liabilities that accrued under the seller’s operations.

The Role of Reps, Warranties, and Escrow

Even with careful transaction structuring, the risk of post-closing successor liability claims cannot be eliminated entirely. The purchase agreement’s indemnification, representation, and warranty provisions are the buyer’s primary contractual protection against that residual risk. Key provisions include:

• An explicit representation that the seller has no knowledge of any threatened or pending claims, liabilities, or regulatory inquiries that have not been disclosed to the buyer
• A broad indemnification covering all liabilities arising from the seller’s pre-closing operations, including liabilities that arise after closing from pre-closing events
• An escrow or holdback of a portion of the purchase price — typically 10% to 15% — held in escrow for 12 to 24 months as a fund from which the buyer can be indemnified for post-closing claims
• Representations and warranties insurance, which provides the buyer with a direct insurance claim against a third-party insurer if the seller’s representations prove false — useful when the seller will not have sufficient assets post-closing to fund indemnification obligations

Successor liability in e-commerce asset sales is one of the most financially significant risks in digital business acquisitions. Buyers who fail to structure around it may find that the e-commerce brand they purchased comes with a legacy liability bill that wipes out their expected return. Contact the business acquisition attorneys at Revision Legal through the form on this page or call (855) 473-8474.