Can I Sue a Company That Has Been Sold?
Yes. If the company still exists after the sale, you may file a civil lawsuit against it in state and, in some cases, federal court. If it no longer exists after the sale, you may be able to file suit against the company's shareholders. And there are situations in which you may be able to sue the buyer of the business, especially if you were injured by a defective product manufactured by the seller.
Claims Against the Seller of a Company
In most instances, just because a company is sold does not mean that it is no longer responsible for its debts. If it still exists after the sale, you can sue it just as if it had not been sold. Simple as that.
Claims Against the Owners of a Company
What if a company dissolves and no longer exists after its sale? You still are not necessarily out of luck. In certain instances, particularly those involving close corporations (companies that are owned by a few shareholders and are not publicly traded, often small businesses and sole proprietorships), the shareholders may be held liable in a civil lawsuit.
This is called “alter ego" liability or, more generally, “piercing the corporate veil." Very broadly speaking, corporations and their owners are separate legal entities. However, the separateness of a corporation may be disregarded and a shareholder held responsible for the company's debts if:
- The business owners failed to act as if the company were a separate entity (for example, failed to keep separate corporate books, mixed business, and personal assets, etc.); and
- Fundamental fairness requires it (such as where you might not otherwise have anyone else to recover from and a judge in state or federal court thinks it's unfair for you to bear the loss)
Although state laws vary, if the corporate veil is pierced, a shareholder's liability is limited to the assets distributed to them or their proportionate share of the claim, whichever is less. But again, state laws vary, so consider consulting a lawyer about suing the business owner in a civil lawsuit.
Claims Against the Buyer of a Company
Suppose the company dissolves and the shareholders are nowhere to be found. That still does not mean that you necessarily are out of luck. You may have a remedy: You may be able to sue the buyer of the company in state or, in some cases, federal court.
It is true that the general rule is that the purchaser of a company is not liable for the debts of the seller. But under the doctrine of “corporate successor liability," you may be able to recover. There are generally four (or in some situations, six) exceptions to the general rule under this doctrine.
Exception One: Fraud
The first exception is fraud. Judges hate fraud. If you can show that there was fraud involved in the sale of the company, you may be able to file suit. For example, if the buyer was created for the sole purpose of evading debts, a court might find the purchaser liable.
Exception Two: Assumption of Liabilities
The second exception is when the buyer agrees to be responsible for the seller's liabilities. Typically, when a company is sold the buyer and the seller get together and decide how to divvy up liabilities as part of the purchase price. In the contract for the sale of the company, the buyer might agree to be responsible for all or some liability for the debts of the seller.
If the buyer expressly agrees to assume the seller's debts in the contract, it is generally easy to spot; the contract says so. It can depend on the language of the contract, however.
A buyer can also assume the liabilities of a seller even if it is not written in the contract. This is called implied assumption. You look for the intent of the buyer. If the buyer engages in conduct or makes representations that show an intention to assume the seller's liabilities in whole or in part, a court may find the buyer responsible. What constitutes sufficient conduct or representations to assume a seller's liabilities depends on which state's law applies.
Exception Three: De Facto Merger
The third exception is for what lawyers call a “de facto merger." A merger occurs where two or more companies unite to form a single business. In a standard merger, the buyer becomes responsible automatically for all of the seller's debts. On the other hand, a “de facto merger," or a merger-in-fact, occurs if the sale of a company mimicked the result of a merger except for the assumption of liabilities.
In making this determination, a court will look at the following factors:
- Continuity of ownership.
- Cessation of ordinary business and dissolution of the seller as early as possible.
- Assumption by the buyer of the liabilities necessary for the uninterrupted continuation of the business; and
- Continuity of management, personnel, physical location, assets, and general business operation.
Once again, what constitutes a de facto merger depends on state law. And some states view this exception broadly when it comes to cases involving personal injury or products liability. As you see, this gets complicated. So consider consulting a lawyer about legal services.
Exception Four: Mere Continuation
The fourth exception is called the “mere continuation" exception. This exception is closely related to the de facto merger exception described above. This exception imposes liability if the sale of the company is really just a business reorganization. Some courts have described this situation as when the buyer is merely a “new hat" for the seller.
In determining whether a buyer is the mere continuation of a seller, a court will look at the following factors:
- Continued use of the name, facilities, and employees;
- Common identity of the owners or management of the buyer and seller; and
- Whether only one company exists after the purchase of the company.
Not only does state law vary, but courts within the same state are also inconsistent when it comes to this exception. A lawyer with the know-how would be able to help guide you through the complicated legal hoops.
Exception Five for Personal Injury or Product Liability: Continuity of Enterprise
In certain states, there are two more exceptions that might apply if you need to sue a buyer and the seller is not otherwise responsible, particularly if your claim involves personal injury or product liability.
This fifth exception is the “continuity of enterprise" exception. This is an expansion of the mere continuation exception, only with a different focus. The mere continuation exception asks whether there is a continuation of the company; the continuity of enterprise exception looks at the seller's business operations. Specifically, a court will focus on the following factors:
- Continuity of management, personnel, assets, facilities, and operations;
- The seller dissolves or stops doing business;
- The buyer assumes the liabilities necessary to keep the business running; and
- The buyer holds itself out to the public as a continuation of the seller.
Exception Six for Personal Injury: Product Line
A sixth possible exception is called the “product line" exception. The purpose is purely to compensate someone who suffers personal injuries caused by a product manufactured by the seller. A buyer that continues making the exact same product as the seller may be found liable to a claimant for a defective product, even if it did not own the company that made the specific product.
Consult a Lawyer
There are several different ways to recover if a company that is sold owes you money or injures you. If the company still exists, you can file suit. If not, you may consider suing the shareholders. And if that is not an option, you may want to pursue legal action against the buyer.
But as you can see, the legal analysis gets really complicated. Not only do state laws differ and often conflict significantly, but courts also disagree on how to choose which state's law applies to any given case.
If you decide that suing a sold company is necessary, bring in a law firm. An experienced business lawyer will be able to provide you with legal advice. Many don't charge legal fees for an initial consultation. And keep in mind that most states have statutes of limitations, so you may have a limited amount of time in which to file suit.