Liability of purchaser of Company assets for past liabilities

Liability of purchaser of Company assets for past liabilities

July 19, 2017

Many erroneously believe that it is preferable to purchase a company's activity in a transaction for company acquisition and not the corporate vehicle itself, thereby avoiding the risk of assuming company debts.  Because of this, many believe that it is possible to avoid transaction costs by a simple acquisition agreement without need for a comprehensive due diligence review of the company (and they also "save money" by using lawyers who are not familiar with mergers and acquisitions). This saving often results in a surprise at the end, and not the kind people like to receive.

The purchase of company assets instead of the acquisition of the corporate vehicle may sometimes be required (for example, when it is not possible to obtain consent of all shareholders and therefore it is advantageous to purchase assets and activities by a majority decision or when there are material accumulated shareholder loans and losses in the company using which the shareholders can sell the assets with a negligible tax burden), or where there are reasons not to take the corporate vehicle. The acquisition of assets without the acquisition of the corporate vehicle has many drawbacks, such as the inability to use accumulated losses, loss of Ministry of Defense supplier number or other permits that do not terminate upon transferring control of the company (and we note that the corporate business license and some other permits may terminate in the event of a transfer of control over the company) or high taxation where the company owns real estate assets.

Another area in which the sale of assets is not helpful is labor law. A recent holding by the Labor Court revealed another common mistake of purchasers of companies who believe that in a property acquisition transaction there is no responsibility for past liabilities to employees. That case dealt with an employee who was at the beginning of her pregnancy when company assets were transferred to the purchasing corporation and was terminated after two weeks. Although all employees were laid off and received severance pay prior to the purchase of assets and although the purchase agreement explicitly stated that the purchaser does not assume past obligations to employees, the purchaser was obligated to pay compensation to the employee.

Another area where many mistakenly believe that an asset acquisition transaction will be advantageous is the area of ​​responsibility to the tax authorities, because such liabilities are the corporate's own liabilities and the sale of assets allegedly does not transfer such debts. Many are not aware of Section 119A of the Israeli Income Tax Ordinance, which sets that if a company's assets are sold for no consideration or for partial consideration without the company having the means of resolving the debts to the tax authority, the purchaser may be personally liable to the tax authority for the selling company's debts.

In conclusion, the acquisition of a company is always a complex transaction and the choice of proper structure of the transaction should be performed after a comprehensive legal and tax due diligence by lawyers and accountants with experience in the field of mergers and acquisitions. Only experts will be able to "tailor the appropriate suit" with respect to the unique circumstances of the transaction and in accordance with the parties' priorities, and save direct and indirect costs and losses that may arise due to the use of erroneous transaction structure.