Understanding Successor Liability in Texas
As a general matter, companies that acquire the assets of another company are not liable for the seller company’s debts. However, there are many different exceptions to this rule. Through a legal doctrine known as successor liability, there are certain circumstances in which creditors are able to seek recovery against the purchaser of assets even when that purchaser was not intending to take on any liabilities from the selling party.
In fact, the Internal Revenue Service (IRS) may even rely on this state law doctrine (successor liability) to go after federal tax liability that was owed by the original corporation or LLC from the purchasing company. Businesses must always be careful when acquiring assets. It is imperative that firms protect their interests from downside risks. Here, our Dallas, TX business acquisitions attorneys highlight important points to know about successor liability in Texas.
When can Successors be Held Liable in Texas?
Successor liability claims arise in a wide range of different ways. Some of the most common examples include product liability lawsuits, environmental cleanup actions, and employment law claims. In Texas, a buyer of assets generally does not acquire the liabilities of the seller. Buyers certainly do not acquire liabilities automatically. However, state law does allow for exceptions to this standard. Some of the most common exceptions include:
- The buyer expressly or implicitly accepts the seller’s legal liabilities;
- The transaction was a merger under Texas law, not an acquisition;
- The transfer of assets was intended to defraud creditors;
- The buyer company is simply a continuation of the seller company; and
- The buyer company is operating a virtually identical business/product line as the seller.
One common theme: If a Texas court determines that the purpose of the acquisition was solely to escape liability, it is likely that the acquiring company will be held responsible for the seller’s debt through the doctrine of successor liability.
Businesses Must Carefully Manage Risks
When acquiring assets, it is crucial that companies carefully consider all financial and legal risks. All large commercial transactions and assets transfers must be properly structured. A poorly structured commercial agreement could result in liabilities being transferred to the detriment of the acquiring company.
In terms of protection from liability, purchasing assets is generally a better business strategy than is acquiring stock or ownership interests in another company. For example, structuring an M&A deal as an asset purchase may be the best strategy for the buyer to retain the flexibility to avoid
assuming unwanted liabilities. However, this is an issue that must always be considered on a case-by-case basis with attention paid to all relevant factors. Large commercial transactions are always complex, and they require a comprehensive review from an experienced attorney.
Contact Our Legal Team Today
At Bennett, Weston, LaJone & Turner, P.C., we work diligently to protect the legal rights and financial interests of our clients. To get more information on how successor liability affects you and your company, please give our Dallas law office a call today at (214) 691-1776 or (888) 991-1776. Business law consultations are always fully confidential.