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Corporate successor liability in a 100 words or less
This is my site Written by CPorterEsq on February 2, 2011 – 2:09 pm

A few days ago a potential client approached me to help her buy a business. One of her chief concerns, with good reason, was liability for the business’s past actions. She wanted to make sure that the mistakes of her predecessors didn’t result in problems for her or the business later. Since this is a common worry among people buying businesses, I wanted to outline the basics of corporate successor liability in Washington. If you’re thinking of buying a business, this is for you!

The basic rule

Generally, when one business sells or otherwise transfers all or some of its assets to another person or business, the latter is not liable for the debts and liabilities of the transferor. There are four important exceptions, however, when the purchasing entity might be legally responsible:

  1. there is an agreement, express or implied, to assume other company’s debts or obligations;
  2. circumstances warrant a finding that there has been a consolidation or merger of the companies;
  3. the transaction works a fraud on creditors of the seller; or
  4. the purchasing company is a mere continuation of selling company.

Test your circumstances

An attorney can help you determine whether any of the above exceptions apply to your specific situation. In the mean time, consider the following questions. Being able to answer “no” to each one is important to minimize the risk of liability:

  • Will you agree to assume the liabilities of the transferor?
  • Will the transfer be part of a statutory merger as described under RCW 23B.11? If so, will you use company stock to pay for the assets of the seller?
  • Could the amount you pay for the company’s assets be considered inadequate?
  • Will any of the owners of the selling company continue as a co-owner with you?
  • Is there a possibility that the sale of the company’s assets will hinder or delay collection by the company’s creditors?
  • Will you continue to offer the same product or services using the same brand or trademarks? Will you use the distribution channels or sell to the same customer base?

 

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