Corporations may be exposed to the tort and contractual obligations of a predecessor following the purchase of that predecessor’s assets.
The general rule is that a corporation which acquires the assets of another is not liable for the torts or contractual obligations of its predecessor unless:“(1) it expressly or impliedly assumed the predecessor’s tort liability; (2) there was a consolidation or merger of seller and purchaser; (3) the purchasing corporation was a mere continuation of the selling corporation; or (4) the transaction is entered into fraudulently to escape such obligations.” Schumacher v. Richards Shear Co., Inc., 59 N.Y.2d 239, 244 (1983). See also Sweat land v. Park Corp., 181 A.D.2d 243 (4th Dept 1992).
The de facto merger doctrine is an exception to the general rule that an acquiring corporation does not become responsible for the liabilities of the acquired corporation. Fitzgerald v. Fitzgerald, 286 A.D.2d 573 (1st Dept 2001). The doctrine is applied when the acquiring corporation has effectively merged with the acquired corporation rather than purchasing another corporation for the purpose of holding it as a subsidiary. Id. at 574. The “hallmarks of a de facto merger include: continuity of ownership; cessation of ordinary business and dissolution of the acquired corporation as soon as possible; assumption by the successor of the liabilities ordinarily necessary for the uninterrupted continuation of the business of the acquired corporation; and continuity of management, personnel, physical location, assets and general business operation… Not all of these elements are necessary to find a de facto merger. Courts will look to whether the acquiring corporation was seeking to obtain for itself intangible assets such as good will, trademarks, patents, customer lists and the right to use the acquired corporation’s name.” Id. at 574-575. In Burgos v. Pulse Combustion, the First Department affirmed a finding that there were issues of fact with respect to whether there was mere continuation or merger successor liability where the evidence established that the purchaser purchased almost all of the predecessor’s fixed assets and intangibles, that the predecessor corporation ceased to exist soon after the sale, that the purchased corporation assumed a name nearly identical to that of the predecessor corporation, that at least one officer from the predecessor corporation was retained by the purchasing corporation and that the same products were manufactured at the plants transferred under the purchase agreement. 227 A.D. 2d 295 (1st Dept 1996).
There is a separate exception to the rule that an acquiring corporation does not become responsible for the liabilities of an acquired corporation where the purchasing corporation is a mere continuation of the selling corporation. Schumacher, 59 N.Y.2d at 244. In NTL Capital, LLC v. Right Track Recording LLC, the First Department found that the complaint sufficiently pleaded the mere continuation exception to the rule against successor liability by showing that the acquiring company had acquired the purchased company’s “business location, employees, management and goodwill.” 73 A.D.3d 410,411 (1st Dept 2010).
So, when preparing and entering into a business asset transaction the parties should be mindful of de facto merger and mere continuation doctrines.