When Acquiring a Company: Does the Buyer Assume the Selling Company’s Liabilities?

The decision on whether a buyer assumes the liabilities of the selling company following an acquisition depends on the type of acquisition and the specific terms negotiated between parties. This article explores the key scenarios, requirements, and nuances involved in such acquisitions.

The Various Scenarios of Company Acquisitions

Companies face different scenarios when acquiring another company, each with varying implications for liability. Here are the main acquisition methods and their impact on the assumption of liabilities:

Asset Purchase

In an asset purchase, the acquiring company buys specific assets of the selling company. The buyer does not typically assume the liabilities unless explicitly agreed to do so. In this case, the selling company retains its liabilities, including pending debts, infringements, and any other obligations.

Key Points: The acquiring company only takes assets, not obligations unless agreed. Due diligence is crucial for assessing liabilities. Expressly negotiated terms can limit exposure to liabilities.

Stock Purchase

In a stock purchase, the acquiring company buys the shares of the selling company. This structure generally ensures that the buyer assumes all liabilities of the selling company. The selling company continues to exist as a legal entity, and thus the liabilities continue.

Key Points: The acquiring company buys shares, not assets. The buyer typically assumes all liabilities, including debts and obligations. Special protections and negotiations are necessary.

Mergers

In a merger, the companies combine into a single entity, and the surviving company usually assumes all assets and liabilities of the dissolved company. This process combines the legal entities into one, sharing both benefits and responsibilities.

Key Points: Both companies merge into a single entity. The surviving company assumes all assets and liabilities. Terms and conditions are critical for ensuring fair distribution.

Negotiated Terms and Due Diligence

Regardless of the acquisition structure, the specifics can vary based on the negotiation between the buyer and seller. The acquiring company often conducts due diligence to assess liabilities and may negotiate terms to limit exposure to certain liabilities. Important points to consider:

Due Diligence: Extensive scrutiny of the financial and legal status of the selling company. Negotiation Terms: Agreements can be customized to protect the buyer's interests. Technical Exceptions: Specific liabilities may be excluded or included based on legal agreements and negotiations.

Notices, Creditors, and Legal Obligations

Notices and proper handling of liabilities are critical in asset purchases. According to legal requirements, the buyer may need to request that the seller give proper notice to creditors in the asset purchase agreement. Failing to notify creditors can lead to legal challenges or overturning of a stock purchase in court.

Important Considerations: Notice to Creditors: Failure to notify creditors can nullify a stock purchase agreement. Legal Responsibility: Even if liabilities are expressly excluded, a good lawyer might still make the buyer responsible for product liability claims. Due Diligence: Ensures all liabilities are assessed and agreed upon before the acquisition.

In summary, the assumption of liabilities in an acquisition is highly dependent on the type of transaction, specific terms, and requirements defined during the negotiation phase. Each scenario presents unique considerations and opportunities, making it essential for companies to carefully navigate these processes to protect their interests and mitigate risks.