What happens when a company sells its assets?

When a company sells its assets, the seller typically enters into an asset purchase and sales agreement with a buyer. The typical asset purchase agreement contains representations, warranties, covenants, and indemnifications. Like most legal documents, there is no “one-size-fits-all” form asset purchase agreement.

At a minimum, the written asset purchase agreement should identify the specific assets that are being sold, the amount and form of consideration to be paid, and the time when the assets and the consideration are to be exchanged. The asset purchase agreement should also address how the seller and the buyer intend to pay the liabilities, debts, and obligations associated with the assets being transferred.

Successor Liability in Asset Sales

In general, when a person or company buys the assets of a business, the purchaser is not liable for the pre-existing debts and liabilities of the seller. However, the buyer may be liable for the seller’s debts if any of the following circumstances exist: (1) the buyer expressly or impliedly assumes the seller’s liabilities; (2) the buyer merges or consolidates with the seller; (3) the buyer is a “mere continuation” of the seller; (4) the buyer engages in fraud; (5) the buyer or the seller fail to warn the seller’s creditors; or (6) the seller or the buyer distribute products out of state. There are also specific statutes in tax, bankruptcy, or environmental laws that impose liability for the seller’s debts on the buyer unless specific steps are taken.

Express or Implied Assumption of Seller’s Liabilities

If the asset purchase agreement states that the buyer will assume or will be responsible for the seller’s debts, this is called an express assumption of liabilities.

If the agreement is ambiguous or is silent about the seller’s debts, or if there is no written asset purchase agreement, a court will look at the parties’ conduct to measure whether the buyer “impliedly” agreed to assume the seller’s debts. The court’s conclusion will depend on the buyer’s intent. No Colorado case has directly addressed this issue, but the courts in other states have relied on the following facts to determine the buyer’s intent: (1) discounted purchase price; (2) lack of consideration; (3) assumption of most of the seller’s debts by the buyer; and (4) the buyer’s payment of the insurance premiums for liabilities from the seller’s products that were made before the date of sale.

It is important for a buyer to clearly state in the asset purchase agreement that the seller will continue to be responsible for all of its liabilities, whether accrued, prospective, actual, or potential, unless the buyer specifically agrees to treat a specific debt differently. The agreement should list the seller’s debts and liabilities as precisely as possible and, for those liabilities that are undetermined (or undeterminable) at the time of sale, the agreement should provide clear guidance for allocating responsibility between the buyer and the seller.

Merger and Consolidation

An buyer may be held liable for a seller’s debts if a court concludes that the sale is a merger or consolidation between the parties. A court may conclude that a sale is a merger or consolidation even if the buyer and the seller believe that a sale really did take place. In order to avoid having a court treat a sale as a merger or as a consolidation, the buyer should deal with the seller in an arm’s length relationship, especially after the seller has transferred the assets to the buyer.

A buyer wishing to protect itself from being deemed to have merged or consolidated with the seller may wish to ask the seller to wait for a specified period of time after the sale before dissolving its business entity. The buyer should also avoid making insurance payments on or otherwise assuming existing contractual obligations with respect to the assets.

Buyer as “Mere Continuation” of Seller

The gravamen of the “mere continuation” theory imposing liability on the buyer for the seller’s debts is the continuation of the entity rather than continuation of the business operation. To avoid bearing the burden of the seller’s debts, the buyer should ensure that it and the seller maintain independent and separate corporate identities and existence before, during, and after the sale.

Fraud

A buyer will be liable for a seller’s debts if a court determines that the parties fraudulently arranged the sale so that the seller could escape its debts. To avoid even a hint that a sale was fraudulently arranged, the consideration given for the assets should bear a reasonable relationship to their fair market value.

Failure to Warn

In some situations, a buyer has a duty to warn consumers of the seller’s products about defects in the products that come to the attention of the buyer after the sale. In the case where the seller was a manufacturer, the buyer should include in the asset purchase agreement some appropriate representations, warranties, and indemnifications by the seller with regard to the quality of the products that the seller manufactured.

Distribution of Products Outside Colorado

In some states simply continuing the seller’s business, even though the buyer purchased only assets from the seller, is enough for the buyer to be held liable for the seller’s debts. In some states the buyer is liable for the seller’s debts if the buyer purchased the manufacturing assets of a “product line” and continues to produce the line. If the seller’s business involves manufacturing products, the buyer pay special attention to the states where the seller distributes the products.

Dissenters’ Rights in Asset Sales

Under Colorado law, shareholders who believe that they will not receive “fair value” for their shareholder interest in a sale of all or substantially all of a corporation’s assets may exercise dissenters’ rights. The substantive and procedural requirements for exercising these dissenters’ rights are essentially the same as those for minority shareholders exercising dissenters’ rights in a merger transaction.