Businesses constantly open, dissolve, and merge with other companies. As a result, lawsuits are sometimes filed against companies that no longer exist or were not in operation at the time of the alleged harm. When a new business is sued for the acts of a now defunct corporation, the general rule is that the new business is not liable for the predecessor’s actions. However, some exceptions exist.  Those exceptions are conceptually known under the legal umbrella of successor liability.  Successor liability is the idea where the debts and liabilities of a predecessor company shift onto its successor. Nationwide Mut. Ins. Co. v. Eagle Window & Door, Inc., 424 S.C. 256, 263, 818 S.E.2d 447, 451 (2018). In other words, rather than a company’s debts going away when it is sold, the debts are transferred to a new company, which becomes the successor of the old company. 

In certain circumstances, liability for the former or purchased company may follow the new business after an asset sale. A successor or purchasing company may be liable for its predecessor’s debts in the following scenarios:

  1. There is an agreement for the successor or purchasing company to assume the debts.
  2. The circumstances surrounding the transaction suggest a finding of a consolidation or merger of the two corporations. 
  3. The successor company is a mere continuation of the predecessor company. 
  4. The transaction between the two companies was fraudulently entered for the purpose of wrongfully defeating claims against the predecessor company. 

Brown v. Am. Ry. Exp. Co., 128 S.C. 428, 123 S.E. 97, 99 (1924).

When a business is sold, merged, or consolidated with another business, successor liability is typically established (or not) by statute or in the contractual agreement between the parties. It is difficult, but not impossible, to establish successor liability without a contract or evidence of a consolidation or merger. A successor company may be a mere continuation of a predecessor rather than a separate corporation in two circumstances: (1) if there is commonality of ownership and/or control between the two companies or (2) if the transaction is a fraudulent attempt to avoid claims. 

Commonality of ownership occurs either when the new company shares substantially the same officers, directors, and shareholders of the predecessor company or is controlled by non-owner directors or officers. Nationwide Mut. Ins. Co., 424 S.C. at 269, 818 S.E.2d at 454. While uncommon, if a corporate sale is really a fraudulent attempt for the predecessor to escape liability, then a court may find the new company is liable for its predecessor’s obligations even if the test for mere continuation has not been met. Id. at 270, 818 S.E.2d at 455.

When defending a company sued as a successor in interest to a predecessor company, it is essential to evaluate whether the new company is truly liable for claims against the former company. If the new company is not statutorily required to assume the former’s debts and did not contract to do so, the circumstances surrounding the transaction and the ownership/control of the new company may determine the new company’s liability for claims against the former company. If none of these exceptions apply, then the general rule protecting new companies from liability for their predecessors may provide a defense to the lawsuit.