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Ahead of the Curve Auto Supplier Blog

May 10, 2012

Who is Responsible for the Liabilities of an Acquired Company?

 At a time when many auto suppliers are now buying up the assets of other suppliers, it is important for the buyer to know whether any of the seller's liabilities are being assumed along with those assets.  Some buyers may believe they have sufficiently disclaimed some or all of the seller's liabilities in the parties’ sale agreement, only to later find out - usually by way of a lawsuit for those believed-to-be-disclaimed liabilities - that they did not. In Michigan, as well as in the majority of states, the buyer is generally not responsible for the seller's liabilities, absent certain exceptions.  These exceptions include when (1) The buyer agrees (expressly or implicitly) to assume certain liabilities of the seller in the sale agreement; (2) The sale amounts to a consolidation or merger or otherwise results in a new entity which is a mere continuation of the seller’s company; and (3)  The sale is fraudulent in nature. Whether a buyer is liable for the particular liabilities of a company it previously acquired will likely depend on whether any of these exceptions apply. To determine this, there are two primary things to consider. The first is to review the language in the sale agreement and see if it delineates whether or not that liability was assumed or disclaimed by the buyer.  Secondly, it is also necessary to consider whether the sale results in such a continuation of the seller’s company that, in essence, it amounts to a merger or otherwise results in a mere continuation of the acquired business enterprise by the buyer. Prudent buyers (and sellers) are structuring their sale agreements with these exceptions in mind.  And, by doing so, they may avoid the unexpected exposure several years from now for the seller’s company, which by then may be a nonexistent, asset-less company.  

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