Successor Liability
Jeff McDonald

In the last newsletter, we published an article about Jeff McDonald's cooking adventures. We are happy to report that he hasn't been spending all of his free time in restaurant kitchens (although he did make pastries for 200 people for a reception for Cardinal Francis George and helped his client cater a VIP reception at Northwest Community Hospital to celebrate the grand opening of their new wing). On April 7th, Jeff was one of the speakers at a Northwest Suburban Bar Association Corporate Law seminar. Jeff spoke on the issue of successor liability as it applies to acquisitions of business assets.

Generally, when you purchase the assets of another company, as distinguished from the purchase of its shares or membership interest, you will not become liable for the seller's liabilities. There are four exceptions to the general rule: 1) an express assumption of liabilities; 2) the merger of two or more companies into a surviving successor entity; 3) continuity of ownership between the selling and purchasing companies; and 4) a sale intended to defraud creditors.

When representing parties in a merger or acquisition, there are a number of provisions we, as your attorneys, can negotiate for, to give you the most protection.

About three years ago, Jeff got a call from a client who was buying out his partner's interest in his catering company. Our client's job was to cook and his partner's job was to handle the operations. Our client was an owner before the buyout and would be the sole owner after the buyout. Successor liability was an issue, since our client was an owner before and after the buyout. The key to making this a successful deal for our client was to find the unknown liabilities before the closing and provide mechanisms to adjust the purchase price in the event any were found after the closing.

This was a very amicable deal and both owners were very trusting. "Why do we have to go through all this legal stuff," they asked, "We're caterers!" But business is business. Our client took Jeff's advice and started looking at each account and checking with each vendor. About two weeks before the closing, our client found some invoices and a couple of booked events that hadn't yet made the accounting system. Without performing the due diligence, our client would have paid his partner too much for the business and would not have had enough cash to pay the "surprise" expenses. Fortunately, most of the omissions were found and, as the buyout agreement was drafted, there were further protections to cover the one or two liabilities that surfaced post-closing.

Today, our client's business is thriving.