Canada: Successor Liability In Asset Acquisitions

It is a well-established principle in Canada that where two corporations amalgamate, the new, continuing corporation assumes all of the liabilities and obligations of each of the constituent corporations. In order to avoid this consequence, businesses seeking to make acquisitions may decide to structure their transactions in a way that allows them to choose which liabilities to assume. In theory, this type of transaction, an asset acquisition, can be structured such that the liabilities, if any, which are assumed by the purchaser are specifically identified in the agreement and accounted for in the purchase price.

The ability to limit liability by way of an asset purchase agreement is subject to a number of exceptions. Many of these exceptions are statutory, such as those found in employment standards, labour relations, bulk sales, personal property security, and environmental legislation. The fact that these exceptions are legislated allows the parties to an asset purchase transaction to properly account for them and to structure and price the agreement accordingly.

Less clear, and therefore much more difficult to take into account when structuring an agreement, is successor liability at common law. For example, where a latent product defect becomes evident after the sale of the related assets, is liability limited to the vendor as the former manufacturer or can the purchaser also be held liable in tort?

As explained by John H. Matheson in his article on successor liability in the United States, there have traditionally been four exceptions to successor non-liability under US common law:

  1. The transaction is a fraudulent effort to avoid liability;
  2. The successor, either expressly or impliedly, assumes the obligations of the predecessor;
  3. The asset sale amounts to a de facto merger; and
  4. The asset purchase takes place in the context of reorganization where the purchasing corporation is effectively the same as the vendor corporation.

Matheson adds that these traditional exceptions have now been expanded in some jurisdictions in the United States to include instances where there is a continuation of the vendor's business operations or product-line by the purchaser.

In imposing successor liability in this expanded context, the courts have pointed to the following factors:

  1. A continuity of management, personnel, assets, and operations;
  2. The assumption by the purchaser of the liabilities necessary to continue the business;
  3. The purchaser holding itself out to the public as being the successor to the vendor; and
  4. The vendor dissolving or ceasing operations shortly after the transaction closes.

With the exception of some older cases, Canadian courts have only addressed the question of successor liability in the context of preliminary motions. These more recent decisions suggest that there may be a willingness to adopt some or all of the US exceptions in Canada and that, as such, the doctrine of successor liability remains unsettled in Canada. As suggested by William D. Black et al, in their article summarizing the Canadian case law, the law of successor liability will likely remain unsettled in Canada unless and until the issue is addressed in the context of a full trial. Even then, it may take years before there is a Canada-wide consensus or determinative dicta from the Supreme Court of Canada on the issue.

Until then, parties to an asset purchase agreement should be aware of the unsettled state of the law in Canada and do their best to account for this in the terms of their agreement. Given that one of the central policy concerns underlying the doctrine of successor liability is the concern that a plaintiff will be left without a remedy, making some provision for third party claims, such as an escrow fund, may be advisable.

Norton Rose Fulbright Canada LLP

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