A legal doctrine under which the successor corporation is held liable for the actions of the predecessor corporation, but only if one corporation remains after transfer of assets and both corporations share an identity of stock, shareholders and directors.
Kelley v. Thomas Solvent Co., 725 F. Supp. 1446 (1988).
Generally, when a corporation sells all its assets to another corporation, the sale does not bring with it the liquidated and unliquidated debts, claims, or liabilities of the selling corporation. There are four well-known exceptions where a corporation that purchases assets of another corporation will succeed to its liabilities:
(1) when the purchasing corporation expressly or implicitly agreed to assume the seller’s liabilities;
(3) when the purchaser corporation is merely a continuation of the seller corporation; [or]
(4) when the transaction is fraudulent.
The general rule and its exceptions are accepted in the majority of jurisdictions.
In cases where the underlying action sounds in federal law, courts have also fashioned relief for claimants under the law of successor liability.
The Court is convinced that the strongest argument for finding successor liability under the facts before it is under the third exception, the “mere continuation” doctrine. Under this doctrine, courts have used a number of factors to analyze whether “the purchasing corporation is simply a `new hat’ for the seller.” If the new corporation is simply a continuation of the old one, a claimant may successfully pursue the new corporation for satisfaction of a debt or judgment. Id.
In an environmental liability case that applied the “mere continuation” doctrine to hold the new corporation liable to creditors of the original corporation, the court relied on the following indicia of “mere continuation.” First, the court noted that the same entity owned 100% of both the original and the new corporation at the time the assets were conveyed. Id.at 615. In addition, the court found a continuity of officers and directors between the original and the new corporation. The court also observed similarities in staff, products marketed, customers, and use of trade names. Id.
The oft-cited factors identified by the Eighth Circuit in and used to establish successor liability under the “mere continuation” doctrine are: a common identity of officers, directors, and stockholders between the selling and purchasing corporations.