Of Equity, Continuation and the De Facto Merger Doctrine: Reflections on Mississippi Law and Successor Liability
Mississippi College Law Review, Vol. 20, p. 307, 2000
15 Pages Posted: 26 Oct 2014
Date Written: 2000
Much has been written regarding the proper theories of successor liability. Courts and scholars have searched the vagaries of the de facto merger doctrine, the mere continuation theory, and the many ways a successor might assume the liabilities of another corporate entity. Even after all this searching, little certainty exists about whether a corporation that purchases another company's business can or may prevent an unplanned assumption of the liabilities as well. The failure to address this problem in a uniform way creates uncertainty in the purchase and sale of any business and therefore increases the transaction costs associated with those arrangements.
Courts use several different theories to deal with the questions surrounding the disposition of liabilities when the assets of a business are transferred from one owner to another, either by sale or by dissolution. The primary lines of analysis arise from the exceptions to the general rule that the purchaser of a business is not liable for the debts of its predecessor. Among the exceptions to the general rule of non-liability are the de facto merger doctrine and the mere continuation of the business test. These exceptions, while useful, create a great deal of confusion and often lead to an increase in the expenses associated with the purchase, sale, or dissolution of a business. The responses to this confusion are varied. Several noted scholars, including the reporters for the American Law Institute's Restatement (Third) of Torts, call for a legislative solution to alleviate the confusion arising in this area. However, a uniform statutory approach has not materialized, and courts around the country grapple with these theories and reach varied conclusions.
The development of the law governing when a successor corporation is liable for the debts of the predecessor is significant because of its ability to demonstrate the tension between the need to protect innocent creditors (both in tort and contract), and the need of corporate managers and owners for certainty when businesses are purchased, sold, or dissolved. Under traditional corporate law rules, a corporation is not liable for the debts of its predecessor unless: (1) the predecessor expressly or impliedly agreed to assume the liabilities; (2) there was a de facto merger of the two firms; (3) the successor was a “mere continuation” of the seller, or; (4) the transaction was fraudulent. This strict rule began eroding during the late 1970s and early 1980s. Cases from several jurisdictions began to loosen the traditional exceptions and provide recovery for plaintiffs in different circumstances. This article will argue that some very old cases from Mississippi contain the key to an appropriate resolution of these issues.
Keywords: Equity, Merger Doctrine, Successor Liability
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