It is never a bad idea to acquire a thriving business. But sometimes, buyers find themselves in a bit of a pickle because of successor liabilities. Dissecting this topic with Domenic Rinaldi is Dino Armiros from the law firm Saul Ewing Arnstein & Lehr. Together, they discuss the most common sorts of successor liabilities every buyer should be aware of. They delve into the red flags to be determined while the final act asset purchase agreements are getting drafted. Dino also explores the responsibilities of the seller by talking about how they can mitigate their liabilities, making them desirable assets in the eyes of potential buyers.

Listen to the podcast here:

Subscribe Now:

Subscribe to K2 Adviser on YouTube
K2 Adviser on Apple iTunes
K2 Adviser on Google Play
K2 Adviser on Stitcher App
K2 Adviser on Spotify

Dino Armiros: How To Avoid And Mitigate Successor Liabilities

As a business buyer, you might think that running a comprehensive diligence process, identifying all the risks, structuring an asset versus a stock transaction, and negotiating solid reps, warranties and indemnifications are enough to keep you protected from future liabilities. Unfortunately, that may not be the case. Successor liability is a legal term worth discussing with both your M&A advisor and attorney as it relates to a contemplated transaction. In a nutshell, the successor liability is a liability that may follow you as the buyer of the company from issues related to the seller’s operation of that entity. Protecting yourself from any successor liabilities should be of paramount importance.

We are being joined by my good friend and bankruptcy restructuring attorney, Dino Armiros from the law firm Saul Ewing Arnstein & Lehr. Dino discusses the overview of successor liability, how those risks can be manifested, and how best to mitigate these potential liabilities. Dino brings a unique perspective to this topic. Having the experience of both helping companies undo the damage of these liabilities as well as being involved in the initial M&A transaction. I know you will gain a ton of knowledge from Dino’s expertise in this area.

Before we get to our episode, if you want to avoid the common deal pitfalls and the risk of losing substantial dollars, you need to know how ready you are to buy a business. Because I believe proper preparation is so critical to your deal success, we have published a catalog of free resources to help you be better prepared. You can access these resources on our website at Being prepared is critical to ensuring that you maximize returns and minimize risks. Thank you for being here. I hope you enjoy our show.

Dino, Welcome to the show.

It’s great to be here. Thank you, Domenic, for the chance to talk to you and your audience. I’m excited about it.

Not only are you a good friend but you’re a hell of an attorney. I’m excited to get into this topic because I don’t think it gets enough conversation in M&A transactions. A lot of people tend to talk about reps, warranties and indemnifications but the topic that we’re going to be talking about is successor liabilities. It’s so critical and you see that a lot on the backend with your bankruptcy and workout work. If you could do a little bit of preventative maintenance during the M&A transaction, you’ve set yourself up for success. Why don’t we start off with a quick bio on yourself and then I want to get into the definition of successor liability.

I’ve been practicing law for about 40 years. I spent the earlier part of my career in litigation. A while ago, I shifted more into distress which is workouts up to bankruptcy, restructuring transactions sometimes in court, sometimes out of court. It’s a very challenging area. It’s a situation where if something can go wrong, it will go wrong. You get prepared for all sorts of different eventualities, especially since the clients in distress or if you’re representing the lender and the counterparty is in distress, there’s a lot of desperation going on. It was a very good training ground.

If you are selling the entity or buying a company's stock, you are buying its problems. Share on X

Years ago, I started shifting more into traditional transactional work. I’ve been doing a mix of distress transactions, healthy transactions and mostly healthy transactions. As I said, that’s a good training ground. That creates the sensitivity to the potential successor liability, which we’re going to be talking about here. If you’re dealing in a situation where a client is in trouble, the buyer does not want to buy those troubles. Most commonly in healthy transactions, it’s not that big of an issue because it’s a healthy seller, healthy buyer. There’s positive stuff going on. There might be some excluded liabilities. What I like to joke about is that the difference between a healthy transaction a distress transaction is that at the end of the healthy transaction, there might be a post-closing party and everybody’s celebrating. At the end of the distress transaction, a lot of times, people are happy that it’s over with, we dodged some bullets and we’re moving on.

I got to imagine, your experience in bankruptcy and workout lends itself very well to the healthy transaction M&A side because you see what could go wrong and you have a leg up on how to prevent it. With that said, let’s get into what is the definition of successor liability. Why should buyers and sellers be aware of this and corral all of their efforts around understanding if there is one there?

Successor liability is a concept where the successor i.e. the buyer in an M&A transaction is saddled with the problems of the seller. In a healthy transaction, there’s been due diligence. They’ve scrubbed the company. They know what the problems are. Most importantly, there is enough money in the transaction so there’s no claim that the creditors were shortchanged in some way. Generally, successor liability is something that’s not a concern in the new company because they bought. They’ve assumed liabilities. They know what’s going on. There’s a great deal of comfort. You also have the standard safeguards in the forms of perhaps R&W insurance or you have an indemnity structure that’s been set up, perhaps a holdback. That aspect of successor liability has been successfully managed in so many words.

For the readers, R&W insurance is reps and warranties insurance. We have another episode that was dropped by with Patrick Stroth that talks about reps and warranties insurance. If you want a reference to that episode, you can learn more about that. You’re right, there are things you can do to make sure that you’re protected. Even in a healthy transaction, there’s the potential for some successor liability to rear its ugly head like taxes. If proper tax lien searches weren’t done or something was missed, that essentially could roll over to the buyer.

There’s a black swan event type of thing that could be a problem that might emerge during due diligence. You could say, “I discovered the fact that you have a real contractual dispute with one of your vendors or with one of your customers.” Maybe it emerges during the midst of the transaction. You could have a seven-figure exposure. Do you want to kill the deal or do you want to somehow structure the deal to accommodate that potential risk? From the buyer’s perspective, they want to make sure that it’s once and done. In other words, what you’ve done in terms of that structuring has put that problem in a box and it doesn’t come back to haunt them. Coming back to haunt them is successor liability. There will be that type of situation that could come up. It could be a workplace situation. All of a sudden, you discover that your warehouse in Topeka is rife with all sorts of personnel problems. Maybe an episode is going on over there that you just discovered. The company is otherwise healthy, successful and profitable. You want to sell it but on the other hand, the buyer is saying, “You got to deal with this problem. I don’t want you to make it my problem.”

We just ticked off two potential successor liabilities with tax and personnel issues. What are the most common sorts of successor liabilities that people need to be aware of?

Every situation is different, but I would see it as something like a potential tort liability. There might be insurance to accommodate that, but there might not. That’s one amorphous problem that could be out there. Another thing that will be coming out in the context of due diligence would be a contractual problem where you say, “We have a supply chain issue here. All of a sudden, this thing is starting to go sideways. How do we manage this?” There’s a disgruntled customer and they’ve been threatening a lawsuit. We thought we had it settled and all of a sudden, it explodes. How are we going to deal with that? It’s the kind of stuff that’s lurking out there and it crops up.

MAU 102 | Successor Liabilities

Successor Liabilities: Successor liability is a concept where the buyer in an M&A transaction is saddled with the seller’s problems.


I even read an article about defective products. To the extent that there were defective products and those issues haven’t been addressed. As a buyer, if you continue those practices of manufacturing and distributing defective products, you potentially are liable not only for what you’re doing now but for what the seller had done while they were running the company.

That would be a tort. That would be something that could create personal injury or personal harm. Clearly, the buyer then has to understand what that problem is. If the process itself creates the defect and they continue that process, they’re exposing themselves to the successor liability issue because they haven’t remedied it. Maybe they discovered it six months after they buy the company and they say, “We’ve got to stop this. We’ve got to use a different chemical or a different technique here for manufacturing this product.” Therefore, they’ve stopped it. The problems that had been created in the old company stay in the old company.

The first point of departure in terms of protecting yourself and successor liability is the consideration of going between an asset sale and an entity sale. In other words, if you’re selling stock or LLC interests versus selling the assets that are held in that entity. I’m going to do a disclaimer right here and I’ll do it again later in the discussion. We’re not giving legal advice here. We’re just talking hypothetically about situations. If someone says, “I have a defect problem I got to deal with. Dino said this on the show.” You can’t rely on this because every situation is fact-specific. You have to engage your own counsel. What we’re talking about is in generalities and broad strokes, what kinds of considerations you have to flag.

One point of departure is the idea of the entity sale versus the asset sale. If you are selling the entity or buying the stock of a company, then you are buying its problems. If you’ve done your due diligence and you’re satisfied with the company, then that’s fine. You feel comfortable. If the aggrieved party is going to sue company XYZ and you buy company XYZ, then you’ll be the defendant. You can allow for this liability to be excluded but by buying the entity, you are creating a through-line of exposure to yourself.

I think the point that you’re making here is the better defense by the assets is to form your own entity, pull the company’s assets into your new entity, but that is not the Holy Grail. That doesn’t necessarily create a complete Chinese wall. It’s a great start but it’s not where it ends. The story can continue.

There’s an adage that the debts follow the assets and you have to separate them out. You can’t just strip the company of its assets and say, “Oops, you’ve got your problems over there,” but you also have an empty shell of a company. You have to allow for those problems in the old company.

This is always dangerous. You read things and you go on the internet but I did get ahold of some case law. I was interested to see one of the exceptions that popped up. It was something that they called continuity of enterprise. Even in a scenario where you take most of the employees, all the products and services, if there’s a continuity of enterprise, that potentially is something that the courts would look at and say, “You are a successor. These liabilities can transfer even in an asset transaction.” It sounds far-reaching to me because in my experience, in most deals, you’re transferring all the employees, products and services. That seemed a bit far-reaching from my perspective.

Keep in mind that issue manifests itself when there’s nothing in the old company. The party that’s asserting the claim, whether it’s in a lawsuit, lien or something like that has already found that the old company is an empty shell. They’re saying, “Who is my target now? You are continuing to run the business. You didn’t leave sufficient capital in the old company to deal with this problem.” Therefore, you’re an alter ego. You are a successor to the problems that you thought you left behind in the old company. The continuity of enterprise is one of the elements. There are others, for example, if you have the same leadership personnel or if you’re operating centrally from the same premises. You’ve switched hats. That would be a situation where you’re trying to evade some of those old problems, but you’re not doing it effectively. If it’s an arm’s length transaction and there has been a bonafide payment for the assets that are bought, then you are starting to create that firewall between the old company and the new company. Most healthy transactions are being done in that manner. They are arm’s length. There might be a rollover of 20% or 10%. You might keep the old management on for consulting purposes or as employees but there are new owners, and the new owners are different from the old owner.

Even if the previous owners retained 10% or 20% of the new company, you can create a scenario. You’ve created enough of a firewall, potentially.

You won't be facing problems as a successor if you have properly allowed that liability in the old company. Share on X

As I said, everything is very fact-specific, especially in this continuity and the successor liability piece. There are many facts that go back and forth. You have to analyze all of those facts. Getting back to some of the basic preventatives, the idea is you won’t be facing that problem as a successor if you have properly allowed for that liability in the old company.

Let’s talk about that. Give some examples. What do you mean by, “if you’ve allowed that in the old company?”

Keep in mind that when you buy the assets, the check is made payable to the company, not to the individual owner. Let’s say it’s a $10 million transaction. The company has $10 million and there have been some liabilities that have been left behind including product defects situation, potential hostile workplace situation that’s going on at that warehouse, and potential tax liens that you weren’t aware of that you became aware of during the due diligence period. You say, “What is that problem?” If the owner of the old company says, “I got a check for $10 million, thank you very much,” and they take all that out, you’ve left the old company impoverished. You have not treated your potential creditors properly. You want to create a structure whether it’s with insurance, holdback escrow, personal indemnity or some manner. You can’t just sit there and shrug your shoulders and say, “We discovered that there was a poisoning situation as a result of our products. If the insurance isn’t good enough, then so be it.” If the insurance isn’t good enough, then they’re going to start looking for other targets. You have to allow for that.

How do you determine what kind of pool to do there? One thing would be to talk to a professional. The professional could be someone who gets a solvency opinion or someone who’s an expert in the field and says, “In an injury situation in Cook County, the jury verdicts have come in between X and Y. We feel that this is an appropriate route to hold back. It’s not by any means definitive, but we’ve examined the situation and we’ve decided we’re giving our opinion.” The professional who gives that opinion is going to charge a fee. That is like an insurance premium.

On the other hand, because it’s pretty wide open, you’re not going to necessarily be able to sue that professional for malpractice if they are wrong, but it is an arrow in your quiver. It is something that you can point to and say, “I tried to do the right thing. I hired this reputable company that is an expert in this area, or an investment bank that has been exposed to a lot of these things. They gave me an opinion. They said that we have to hold back $5 million, and that’s what I did. I left $5 million in the old company.” Three years later, after a lawsuit, I got hit for $7 million. The $5 million that we left behind was a good estimate of what it was at that time. Therefore, that protects you. Whether the other party have gotten the blood in the turnip in terms of the $5 million. Maybe they go after the new company for the $2 million. You started to create a basis for saying, “We properly reserved for it,” and the new company should be off the hook.

In a scenario that you just described, that might come as a shock to a seller. They might be looking at this going, “I’ve got to leave half of the proceeds in an escrow account for future liabilities.” How does the seller get some comfort around these things? What can a seller do to mitigate their liability so that they can walk away with the maximum proceeds in their pocket at the closing table?

The idea is that you have to balance everything. You have to say, “In the $10 million sales, $5 million reserve situation, at least I got the $5 million and at some point, I could possibly get the other $5 million,” because you could wait for a statute of limitations. You could try to be proactive and say, “This is the best we can do for you here.” Don’t tell him you got the full $5 million but say, “We’ve got some money set aside, let’s settle this,” or you can sit there and say, “We’ll lie and wait and see where it goes.” In terms of bulletproofing, there’s no way to bulletproof situations like this.

It could entail insurance being an insurance policy that an owner of a business would take out once they sell their business to a buyer that remains inside of the old entity to cover certain liabilities.

Typically, insurance would cover tort. If there’s an injury situation, you say, “What is the premium? What are we going to pay here?” The insurance company understands underwriting better than anybody. They look at the situation and say, “I get it. You’re going to have to pay a lump sum of this, and then we’ll take care of everything else.” That’s certainly an option.

MAU 102 | Successor Liabilities

Successor Liabilities: One aspect of reps and warranties insurance is that they do the underwriting. You have to disclose.


Is that reps and warranties insurance?

Reps and warranties would be in a more conventional situation. If you are aware of a specific item, keep in mind, one aspect of reps and warranties insurance is that they do the underwriting. You have to disclose. If you know about the situation, then either the premium goes up or they say, “This is going to be carved out of the coverage.” You have to be sensitive on that front. As I say, if you can find an underwriter that can lay the risk off, absolutely because then it also becomes your defense to the aggrieved party. You say, “I did the right thing. I tried to allow for this potential exposure.”

Some key takeaways there for me is in the transaction when the final act asset purchase agreements are getting drafted, you want to make sure that you’re accommodating for all of these things in that asset purchase agreement. Also, making sure that the owner is going to keep that entity open for some period of time. As you said, don’t bleed the business. Now, we can’t handle any known or unknown liabilities that might pop up six months or a year later.

The concept behind the legal theory for going after the owner or the seller entity is that you have stripped the company of its assets. Arguably, the transfer of the proceeds from the entity to the buyer is considered a fraudulent conveyance because what you’ve done is you’ve left the old company with an ability to pay its debts either as they come due or the potential exposure is greater than the assets that you’ve left in the company. You have to be prepared to defend the distribution that’s made to the owner and say, “We have properly allowed for this exposure.” Therefore, the transfer that was made to the owner does not leave zero in the company.

Is that a difficult conversation for the buyer’s attorney to have with the seller’s attorney and then the parties? I’m sure all sellers want to take all their proceeds out and go on their merry way. They want to call it a day.

Domenic, that’s where you are on your feet because the first conversation is with the intermediary. You start saying, “We’ve got a problem here.” It’s a business situation. What we’re saying is that you might not be able to take as much money off the table as you’re contemplating. You could then bring in the lawyers for the drafting, but you also might have to bring in other professionals for purposes of trying to assess the risk and trying to determine.

The level of difficulty with this type of conversation is that you’re not having it during the Letter of Intent negotiation unless there’s something material that’s known at that point in time. This is a discussion that’s happening after or during due diligence, which could materially change the outcome of the deal for the seller and even the buyer. It’s a renegotiation and that’s never a happy thing to do in a transaction.

If the seller knew the liabilities and didn't talk to the buyer about them, that could create some issues. Share on X

It’s never a pleasant conversation. The thing is if you are going into the transaction knowing about it, then when you’re putting together your book, you could say, “There is this situation here and this is how we’re contemplating dealing with it, or you have to buy the company subject to this problem. It will impact your purchase price but you have to take over the problem.”

This is an excellent point that if there are material things or things that are on the fringe. It’s so much better to get them out early and get them on the team table early so all the parties can contemplate it as you’re getting an initial offer of interest or a letter of intent. You don’t have to maybe go through a painful renegotiation later on.

It gets rolled into the structure of the transaction rather than having to do a reassessment of how we’re going to do the deal.

Even if you don’t know the totality of the issue, at least if you documented in the letter of intent and you identify that this could be an issue. We don’t know what the total liability is, but at least we know we have to address it, then all parties are on notice upfront.

The other part of it is that if the seller knew about it and didn’t talk to the buyer about it, then that could create some issues. Typically, I would think that something like this would come up. It’s like an “Oh my” moment that’s going on.

We’re talking about the things that are known. Obviously, the big challenge in all of this is the risks and the liabilities that are unknown that might happen after the sale, which is something that the parties need to consider and contemplate upfront. The buyers need to do their due diligence, that’s number one, then put in all of the downside protections, reps and warranties insurance, tail insurance, director’s insurance, whatever they need to do so that they’ve got a firewall because there will be unknowns.

MAU 102 | Successor Liabilities

You Can Negotiate Anything: The World’s Best Negotiator Tells You How To Get What You Want

You’re talking about a conventional transaction where you’re trying to get your arms around the wrist. Do you think you’ve covered everything with your due diligence? You allow for potential hold back to see how things play out over the next 12, 18 to 24 months. You have your fundamental reps which are obviously longer but your specific reps that are transaction-based, you hope that you’ve properly allowed for them. You have the negotiation with the basket and the cap, and where we go with all this. How do we manage this risk? That is more of a standard negotiation that goes on in an M&A deal rather than something that appears out of the blue.

Dino, this has been awesome, tremendous information. We’re going to wrap it up here but I want to reiterate what you said earlier around every situation is different. That’s why when you’re contemplating a transaction, whether it’s a healthy company, a distressed company or a workout, you need an expert at your side. Certainly, someone like you has the experience of both doing the workouts and restructurings. Healthy company transactions are tremendous expertise to have on your side. Is there something we haven’t covered at a high level or some high-level points that you’d like to make as we wrap up here?

The one thing I realized that I didn’t cover at the beginning was my law firm.

I covered it in the intro but please go ahead.

Saul Ewing Arnstein & Lehr, we’re a mid-market firm. We’ve got our lawyers in sixteen cities throughout the United States. Our biggest office is here in Chicago. We also have private offices in Philadelphia, Baltimore, Miami and other offices throughout the major markets, starting from Minneapolis going to Boston as far South as Miami. Years ago, I read a book called You Can Negotiate Anything. It’s one of my favorite business books and I read it before I was even practicing law. The concept is that if they’re willing parties, they can figure out how to manage this risk. Hopefully, with good advisors like you’re talking about, you can successfully navigate these waters. If people are forthright, dealing in good faith, and willing to handle these transactions, you can overcome that. That’s something to keep in mind in going through a transaction.

The common theme in almost all of my episodes is to have good advisors, willing parties and you can get deals done. It’s been such a pleasure. If folks wanted to reach you, how can they get in touch with you?

If people are forthright, dealing in good faith, and are willing to do M&A transactions, you can overcome successor liabilities. Share on X

You can go through email [email protected]. We can provide that and then just call me. I’ll give you my cell phone number 874-226-6031. That’s where I am. As you can see, I’m working from home most of the time. I hope to get back downtown sometime soon.

You’re healthy. You’re safe. You’re doing deals. That’s good news. Dino, thank you so much for being on. I appreciate you being here.

Thank you, Domenic.

Important Links:

About Dino Armiros

Konstantinos (“Dino”) Armiros is a partner in the firm’s Bankruptcy and Restructuring practice and handles real estate, commercial litigation, restructuring, bankruptcy and workouts. In that capacity, he has represented lenders and borrowers in complex work-outs of significant credits. Typically, such negotiations result in a restructuring of the credit by the mechanism of a forbearance agreement; negotiating and drafting forbearance agreements have become something of Dino’s stock-in-trade in these matters.

In addition to commercial lenders and borrowers, Dino has also represented other constituents in distress situations, including asset purchasers, trade creditors and contractors. He provides leadership in running distress transactions, calling on the various specialties that the firm offers (be they labor, environmental, tax, commercial finance, or real estate counseling) to satisfy his clients’ needs. Such out-of-court restructurings also may involve assignments for the benefit of creditors – and Dino has represented a number of assignees in recent years.

Love the show? Subscribe, rate, review, and share!

Join the M&A Unplugged Community today: