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You are here: Home / General / Successor Liability by De Facto Merger in New Hampshire

Successor Liability by De Facto Merger in New Hampshire

As chronicled in the A&E television show Storage Wars, it is common for modern-day treasure hunters to place bids on repossessed storage units in the hopes of making a (very large) profit. However, the bidders would probably think twice if purchasing the contents of the unit resulted in the buyer taking on the obligation to pay the former owners’ debts generally.

This is also true for corporations in New Hampshire when considering an asset purchase of another company. If the purchase of these assets resulted in “successor liability” for the seller’s debts, the proposed transaction becomes drastically different. However, the general rule of successor liability in New Hampshire is that the corporation purchasing the assets is not liable for the seller’s debts. Bielagus v. EMRE of N.H., 149 N.H. 635, 640, 826 A.2d 559 (2003). The general rule is meant to prevent the waste of assets by allowing their free alienability to maximize their productive use by another company.

However, there are exceptions to this rule that could result in successor liability for the asset purchaser. For example, under the de facto merger exception, courts will impose successor liability if the parties have achieved virtually all of the results of a merger without following the statutory requirements for merger of the corporations. The factual situation that typically tips the scales in favor of finding a de facto merger (and thus making the purchaser liable for the seller’s debts) involves a continuity of ownership, usually taking the form of an exchange of stock for assets.

To make this determination, courts consider four “non-exclusive factors.” The factors are “non-exclusive” because courts also consider additional facts surrounding the transaction, such as the similarity or distinctiveness between the companies. The four primary factors question whether:

  1. Continuity of Enterprise. There is a continuation of the enterprise of the seller corporation, so that there is continuity of management, personnel, physical location, assets, and general business operations. For example, a court is less likely to impose successor liability if the purchasing corporation takes control over the board of directors of the seller, replaces some of its management and employees, or drastically changes the nature of the business by moving it to a new location or employing new forms of equipment and technology.
  2. Continuity of Ownership. There is a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation. This factor does not preclude the purchasing company from owning shares in the seller. Instead the focus is on whether there is a bona fide change in ownership, such as the purchaser’s share of the target’s stock changing from 40% to 100% after the transaction.
  3. Cessation of Business. The seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible. However, there are instances where the assets would lose much of their value if the purchasing corporation immediately begins the cessation of the business. In these situations, a court would likely not find the continuation of the business to preserve the purchased asset values results in a de facto merger.
  4. Assumption of Necessary Obligations. The purchasing corporation assumes those obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation. If the purchasing company buys only the assets necessary to keep the business running, it is likely that a de facto merger occurred. However, there are nuanced instances where this factor will not weigh in favor of a de facto merger when the purchasing corporation just buys those assets necessary to preserve the value of the assets.

Id.at 642; Celestica, LLC v. Commc’ns Acquisitions Corp., 168 N.H. 276, 281-87 (2015).

When considering whether purchasing another company’s assets will result in successor liability for the seller’s debts under the de facto merger exception, remember that courts are primarily trying to determine whether the transaction is essentially an illegal merger of the two companies in disguise. If the purchasing company acquires the assets and continues running the seller’s business as usual, courts are more likely to find a de facto merger and apply successor liability. However, if the purchasing company can demonstrate that its actions after the asset purchase are solely meant to preserve the value of those assets, a court is less likely to deem the transaction a de facto merger.

Filed Under: General

The above information is for informational purposes only and does not constitute legal advice.

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