As your business grows, you may have the chance to acquire smaller, less profitable businesses as part of your growth strategy. In most cases, the acquiring entity or newly formed entity intends to purchase only the assets, and not debts and obligations, of the other company. This is an efficient way to expand operations and increase revenue, but if you aren’t careful, it could lead to unwanted liability related to the business dealings of the company being acquired.
The legal theory of “successor liability” allows the court to hold an acquiring entity, or newly formed entity, liable for the debts of the acquired entity if: (a) the new entity expressly assumed the liabilities of the old entity; (b) the formation of the new entity was entered into to defraud the creditors of the old entity; or (c) the circumstances attending the creation of the new company and its succession to the business and property of the old company are such that the new company was merely a continuation of the old company. In Hollowell v. Orleans Regional Hospital, LLC, the court listed eight factors that are used to determine if a new company is a mere continuation of an older company:
1. retention of the same employees;
2. retention of the same supervisory personnel;
3. retention of the same production facility in the same physical location;
4. production of the same product;
5. retention of the same name;
6. continuity of assets;
7. continuity of general business operations; and
8. whether the successor holds itself out as the continuation of the previous enterprise.
The court also pointed out that a finding of fraud is not a prerequisite to establishing successor liability, meaning that the acquiring company could face liability simply by not ensuring that adequate legal measures are taken to distinguish the old company from the new company.
Successor liability was applied in Hollowell to hold a successor company liable based on the fact that it received an assignment of the former entity’s hospital license, medicaid provider numbers, and managed care contracts. The assignments to the new LLC allowed the former entity to avoid an estimated $200,000.00 in liabilities; the new entity hired most of the employees and some of the supervisory personnel from the former entity; and the two entities operated out of the same physical location and used the same phone number. The court ruled that, based on the evidence presented, there was a legally sufficient basis for the jury to find successor liability under Louisiana law.
It’s important for any business considering acquisitions as a growth strategy to be aware of the theory of “successor liability.” By properly structuring the transaction, you can ensure that your business acquires only those assets it intends to acquire and addresses the outstanding debts and obligations of the old company so they don’t become an unexpected problem as your business continues to grow.
The legal theory of “successor liability” allows the court to hold an acquiring entity, or newly formed entity, liable for the debts of the acquired entity if: (a) the new entity expressly assumed the liabilities of the old entity; (b) the formation of the new entity was entered into to defraud the creditors of the old entity; or (c) the circumstances attending the creation of the new company and its succession to the business and property of the old company are such that the new company was merely a continuation of the old company. In Hollowell v. Orleans Regional Hospital, LLC, the court listed eight factors that are used to determine if a new company is a mere continuation of an older company:
1. retention of the same employees;
2. retention of the same supervisory personnel;
3. retention of the same production facility in the same physical location;
4. production of the same product;
5. retention of the same name;
6. continuity of assets;
7. continuity of general business operations; and
8. whether the successor holds itself out as the continuation of the previous enterprise.
The court also pointed out that a finding of fraud is not a prerequisite to establishing successor liability, meaning that the acquiring company could face liability simply by not ensuring that adequate legal measures are taken to distinguish the old company from the new company.
Successor liability was applied in Hollowell to hold a successor company liable based on the fact that it received an assignment of the former entity’s hospital license, medicaid provider numbers, and managed care contracts. The assignments to the new LLC allowed the former entity to avoid an estimated $200,000.00 in liabilities; the new entity hired most of the employees and some of the supervisory personnel from the former entity; and the two entities operated out of the same physical location and used the same phone number. The court ruled that, based on the evidence presented, there was a legally sufficient basis for the jury to find successor liability under Louisiana law.
It’s important for any business considering acquisitions as a growth strategy to be aware of the theory of “successor liability.” By properly structuring the transaction, you can ensure that your business acquires only those assets it intends to acquire and addresses the outstanding debts and obligations of the old company so they don’t become an unexpected problem as your business continues to grow.
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