Asset Purchases: Still a Danger of Successor Liability for Employee Wage/Benefit Payments

If you are thinking of buying a San Diego business, one key legal consideration is whether to structure the deal as an asset purchase or as a stock purchase. The financial issue is avoiding application of the successor liability doctrine. Successor liability occurs when the seller does not meet some obligation — say, for the payment of rent — and the creditor sues the buyer claiming that the buyer is really just the continuation of the seller. Successor liability issues have come to the forefront lately because of the changes to California employment law. If the seller used any significant number of workers classified as “independent contractors,” there is now a high danger that those workers can sue for worker misclassification. In such a lawsuit, potentially, the workers would be entitled to overtime, reimbursements, rest/meal break premiums, and other payments.

As such, trends show that asset purchases have been on the rise over the last couple of years (as opposed to stock purchases). An asset purchase does not wholly protect the buyer. Even when the deal is an asset purchase, California courts can still hold the buyer liable under theories of successor liability. This is more likely if the seller goes out of business after the sale or if the seller’s assets are significantly depleted. Two factors that California courts consider when evaluating successor liability are the seller’s ability to pay the wage and benefit claims prior to the sale and after the sale. If the seller could have paid the claims before the sale, and now cannot, then that is a factor in favor of finding successor liability. Other factors include:

  • Are the workers doing “substantially the same work”?
  • Are the working conditions “substantially the same” including the same bosses, location, etc.?
  • Is the buyer doing substantially the same work, using the same processes, offering the same goods/services to the same customers, etc.?
  • Is there a similarity in ownership and management between the buyer and seller?
  • Are there family relationships among the owners/managers of the buyer and seller?

See Cal. Lab. Code, §§ 238, 1434. Case law has identified a number of specific facts that flesh out these generalized statements. For example, “doing substantially the same work” can be shown where the buyer is doing similar business within the same geographical area, has the same business address as the seller, has the same contact information like telephone number, email addresses and website, employs the same workers, uses the same administrative employees, uses the same equipment and/or the same business/manufacturing process, and more.

Despite the fact that successor liability can be imposed for wage and benefit claims even in an asset purchase type deal, an asset purchase generally exposes the buyer to less financial liability than a stock purchase. However, being aware of the dangers highlights various steps that all buyers should take. First, buyers should retain an experienced San Diego corporate attorney for advice and counsel. Further, before the closing, the following are essential:

  • Get all Clearance Letters from state labor and taxing authorities
  • Strong indemnification provisions in the purchase agreement
  • Escrow holdback of a significant sum from the seller’s proceeds for a significant period of time — note that California has a four-year statute of limitations for worker wage and benefit claims
  • Serious pre-closing due diligence with respect to worker wage and benefit issues
  • Obtain insurance products if available
  • Third-party personal or corporate guaranties for the indemnity provisions and representations and warranties

Call San Diego Corporate Law Today

For more information, call attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard provides legal services related to business law, private securities offerings/sales, the sale/purchase of a business, and for mergers and acquisitions. Mr. Leonard can also assist with setting up a new corporate entity, annual corporate maintenance, and can help review and draft business contracts. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.

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