Asset Sales: When Does Successor Liability Apply?

Asset purchase enables buyer to cherry-pick favorable assets and leave behind unwanted liabilities, creating buyer-preferred structure for distressed targets and selective acquisitions. Stock purchase transfers entire entity including all known and unknown liabilities to buyer through ownership transfer of equity securities. Statutory merger creates entity combination by operation of law with shareholder approval and appraisal rights under DGCL § 251 (Delaware) and parallel state statutes. Tax considerations frequently drive structure choice with asset purchase providing buyer stepped-up basis (§ 1060 allocation) while stock purchase creates seller capital gain treatment. Strong asset disposition counsel coordinates structure analysis, tax pathway evaluation, and successor liability planning throughout transaction.

Asset purchase agreements typically identify acquired assets (Schedule 1.1), excluded assets (Schedule 1.2), assumed liabilities (Schedule 1.3), and excluded liabilities (Schedule 1.4) through detailed inventory schedules. Working capital adjustments true up purchase price for actual inventory, receivables, and payables at closing relative to agreed targets. Real property transfer requires deed preparation, title insurance, and state recording with applicable transfer taxes allocated by jurisdiction custom. Inventory, work-in-progress, and finished goods transfers require physical inventory verification, condition documentation, and warranty disclaimer drafting. Strong asset purchase (APA) counsel coordinates schedule preparation, working capital adjustment, and real estate transfer mechanics.

Asset allocation under IRC § 1060 requires buyer and seller to use consistent purchase price allocation across asset classes (cash, securities, receivables, intangibles, goodwill) on Form 8594. Disputes arise over goodwill vs amortizable intangibles allocation and tangible property fair market value affecting buyer's tax basis and seller's character of gain. IRS Section 1060 residual method allocates purchase price to seven asset classes with goodwill as residual class capturing remaining purchase price. Section 197 intangible amortization over 15 years applies to acquired goodwill and customer-based intangibles affecting buyer's post-acquisition tax treatment. Strong asset purchase transactions counsel coordinates allocation negotiation, valuation defense, and IRS examination preparation.

Asset due diligence covers ownership verification, encumbrance review, and transferability across target's asset categories with particular focus on IP chain of title. Patent and trademark assignment requires written agreement under 35 U.S.C. § 261 (patents) and Lanham Act § 10 (trademarks) with USPTO recordation for priority. Real property due diligence includes title search, survey, environmental Phase I/II assessment, and lien searches with title insurance covering subsequent challenges. Contract assignment review identifies anti-assignment clauses requiring third-party consent under UCC § 2-210 and common law contract law. Strong asset valuation counsel coordinates IP chain of title, real estate due diligence, and contract consent identification throughout transaction.

IRC § 1060 governs purchase price allocation in asset acquisition transactions (applicable asset acquisitions) requiring consistent reporting by both buyer and seller on Form 8594. Allocation drives buyer's stepped-up basis and depreciation/amortization benefits while determining seller's character of gain (ordinary income vs capital gain). Goodwill and going concern value treated as Section 197 intangibles allow buyer 15-year amortization deduction creating significant tax benefit absent in stock acquisition. Section 338(h)(10) election (for qualifying corporate stock acquisitions) provides asset purchase tax treatment while preserving stock acquisition legal mechanics. Strong asset management transactions counsel coordinates § 1060 allocation strategy, Form 8594 preparation, and § 338(h)(10) analysis.

Traditional rule provides that asset purchaser does not assume seller liabilities absent express assumption, with four major exceptions creating successor liability. De facto merger doctrine applies when transaction has merger characteristics (continuity of ownership, dissolution, continuity of business) imposing seller liabilities on buyer. Mere continuation doctrine applies when buyer is essentially the same enterprise as seller with continuity of management, personnel, and operations, transferring seller liabilities. Product line exception (Ray v. Alad Corp., 19 Cal. 3d 22 (1977) in California) and fraudulent transfer exception under Uniform Voidable Transactions Act provide additional successor liability bases. Strong asset and liability management counsel coordinates successor liability assessment, transaction structuring for limitation, and defense preparation.

Bulk sales laws (former UCC Article 6) required pre-sale notice to creditors of asset sales outside ordinary course, repealed in most states (1989) but remaining in California, Maryland, and limited jurisdictions. California bulk sale provisions (Cal. Comm. Code § 6101 et seq.) require pre-closing notice to creditors and tax authorities with seller liability for non-compliance. Uniform Voidable Transactions Act (UVTA, formerly UFTA) protects creditors against transfers with actual intent to hinder or constructive fraudulent transfers (insufficient consideration when seller insolvent). Bankruptcy Code § 548 fraudulent transfer (2-year reach-back) and § 544(b) state law fraudulent transfer (4-6 year typical reach-back) extend creditor remedies in subsequent insolvency. Strong asset finance counsel coordinates bulk sales notice, fraudulent transfer analysis, and creditor protection planning.

Post-closing disputes commonly arise over working capital adjustment calculation, representation breaches, indemnification claim handling, and excluded liability allocation requiring purchase agreement interpretation. Indemnification structure (basket, cap, survival period) under purchase agreement governs buyer recovery for seller misrepresentation with R&W insurance increasingly supplementing or replacing seller indemnity. Creditor claims against acquired assets under fraudulent transfer or bulk sales theories may pursue clawback despite arm's-length transaction. Specific performance, rescission, and damages remedies provide differing relief frameworks depending on dispute nature and contractual provisions. Coordinated asset-based lending counsel manages post-closing disputes, creditor protection, and indemnification claims throughout case lifecycle.