06.25.2012 Williams Mullen Client Wins Important Case, Assuring That It Is Not Held Liable for Debts of its Corporate Predecessor ADVERTISING MATERIAL
CASE RESULTS DEPEND UPON A VARIETY OF FACTORS UNIQUE TO EACH CASE. CASE RESULTS DO NOT PREDICT SIMILAR RESULTS IN ANY FUTURE CASE.
The North Carolina Business Court recently affirmed North Carolina’s restrictive approach to successor liability, offering some reassurance for similarly situated corporations engaged in substantial asset purchases that the form of those transactions will be respected and that they will not be held liable for the debts of their predecessors.
The law firm of Williams Mullen recently represented WorkSmart, Inc. and WorkSmart Charlotte, LLC against claims that they should be held liable for an office lease executed by Steaksauce, Inc. f/k/a Techie, Inc. Williams Mullen attorneys Elizabeth Stone and Camden Webb undertook lengthy negotiations with the landlord's attorney to settle this matter, however, a settlement could not be reached. WorkSmart decided to fight the issue in court.
In Lattimore & Associates, LLC v. Steaksauce, Inc. f/k/a Techie, Inc., Steven E. Smith, WorkSmart Charlotte LLC and WorkSmart, Inc., the North Carolina Business Court addressed whether the purchaser of a distressed competitor’s assets should be held liable for amounts owed under the competitor’s office lease. The landlord argued that liability should be imposed under the mere continuation and de facto merger theories of successor liability because the purchaser acquired substantially all of the competitor’s assets, hired the competitor’s employees (including the former owner), and continued servicing the same clients. In particular, the landlord argued that the purchaser should have to pay the outstanding rent because it publicly announced that it had “merged” with its competitor. The landlord made these allegations despite the fact that the landlord was informed within days of its execution that the competitor’s assets had been sold as a result of an asset purchase agreement—an agreement that explicitly excluded liability for the office lease. Although informed that proceeds from the sale were applied to the competitor’s outstanding bank debt and that there was no continuity of ownership, management or control between the two companies, the landlord insisted that successor liability was nonetheless appropriate.
The Court rejected broad application of successor liability. Instead, North Carolina adheres to the traditional, more restrictive, application of “mere continuation” liability. That application requires strict continuity of ownership, management, or control between the selling and acquiring companies. Without continuity, there was no compelling justification for imposing liability, and the Court ruled against the landlord.
For the first time, the Court also addressed the availability of the de facto merger doctrine in North Carolina. The Court, however, declined to apply it under the facts of this case. In short, the landlord failed to satisfy the traditional elements of de facto merger liability because (1) there was no continuity of ownership, management, business operations, or physical location; (2) the assets were obtained in a cash transaction, rather than through the exchange of stock; (3) the seller did not dissolve or otherwise liquidate following the transfer; and (4) there was no evidence that the purchaser assumed the obligations “ordinarily necessary” for the uninterrupted continuation of the seller’s business. Most importantly, the Court emphasized that simply referring to a transaction as a “merger” is insufficient, in and of itself, to confer liability.
In a positive sign for North Carolina’s business community, the Court emphasized that policy implications weigh heavily against the imposition of successor liability. Also, in the wake of this decision, the availability of de facto merger liability in North Carolina remains uncertain. Therefore, parties engaged in substantial asset purchases should be mindful of procedural considerations addressed by the Court. Parties should ensure that there is no continuity of ownership, management, and control between the selling and acquiring corporations. The purchase consideration should be in the form of cash or other assets unrelated to any ownership interest in the purchaser. The selling corporation should remain in existence to address outstanding liabilities, even where it has ceased ordinary business operations. Finally, and as noted by the Court, parties should be careful about how they characterize these transactions to interested third-parties.
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Williams Mullen provides comprehensive legal and government relations services that help grow the business of our clients and the economy of our region across North Carolina, Virginia and Washington, D.C. As an AmLaw 200 firm, our attorneys and consultants strive to find the answers and solutions that help clients grow. Putting our clients’ needs first has been the foundation of our approach since the firm was founded 103 years ago. Visit us at www.williamsmullen.com.
WorkSmart is an industry leading provider of Information Technology management and support for organizations throughout North Carolina and the Mid-Atlantic region. With the philosophy that reliable IT services require dedication, responsiveness and accountability, WorkSmart partners with clients to provide IT strategy consulting, managed services, onsite and helpdesk support and computer network design and implementation services. They are headquartered in Raleigh-Durham with branch-offices in Charlotte, Greensboro and Philadelphia and onsite support partners across the U.S. www.worksmart.com.