Business Litigation: How Do Disputes Impact the Pending Sale of a Business?

When acquiring a business in Colorado, the buyer can potentially inherit the seller’s outstanding debts and obligations. Some situations allow businesses to transfer assets without automatically saddling the new owner with all prior liabilities. However, exceptions exist where successor liability may apply. Whether you are the seller or buyer of a business with legal disputes pending, you need the counsel of an experienced Colorado business lawyer.

Common Sources of Business Conflicts That May Impact Sales Negotiations

Disagreements and disputes can emerge in the business world from a variety of situations, but certain types tend to occur more frequently. Here are some examples of common sources of business conflicts that can arise for companies operating in any location:

• Alleged breaches of contract
• Issues between employers and staff members
• Disputes among business co-owners or partners

These are just a few common types of disputes that may arise for a business. All of these and many others may impact the purchase desirability of a business. It is crucial that you understand the implications of purchasing or selling a business with pending litigation or potential legal disputes.

Buyer/Seller Considerations

Express or Implied Assumption – If the buyer explicitly agrees to assume the seller’s liabilities through the purchase agreement or other documentation, they become responsible for those debts. Even absent an express provision, the buyer’s actions after the sale could imply they accepted certain liabilities, like continuing the seller’s insurance policies covering potential claims.

• Fraudulent Transfer to Avoid Creditors – The law prohibits acquiring a business through fraudulent means to escape the seller’s outstanding liabilities to creditors. Structuring the transaction to improperly deprive creditors of repayment can expose the buyer to those debts.
• Consolidation or De Facto Merger – When the transaction effectively merges the two companies’ operations and assets into a single entity, the buyer may inherit liabilities, even if not technically structured as a merger or consolidation. Courts examine factors like continuity of management, business purposes, ownership, and control in making this determination.
• Mere Continuation Exception – If the acquired business essentially continues operating in the same manner under the buyer, just with a new formal owner, successor liability can attach. Indicators include the buyer purchasing all assets, retaining the same employees and leadership, using the same name and brand, and maintaining similar ownership/control structures.

While Colorado law does not recognize the “product line” exception for product liability claims, other states do impose successor liability in those cases.

Let Our Colorado Business Law Attorneys Take Care of You

Mitigating successor liability risk involves carefully drafting the transaction documents, conducting thorough due diligence on potential liabilities, and appropriately restructuring the acquisition. It is vital that business sellers and buyers have experienced business lawyers to represent their interests. Our Colorado business law attorneys will work tirelessly to protect your business interests.