By Adrienne Braumiller (Braumiller Schulz PLLC)
Republished with permission; World Trade Executive: Practical Trade & Customs Strategies 8/2013
Defining Successor Liability
So what is successor liability? In corporate law, successor liability is created when a succeeding company acquires another company through an actual merger or acquisition. Even though successor liability is not created by only a sale of assets or stocks, there are exceptions. These include when:
- there is an agreement to assume liability, explicit or implicit;
- it is a de facto merger;
- the transaction is a mere continuation of the predecessor business; and
- the transaction was fraudulent and used to escape liability.
As practitioners in international trade law, we normally see hapless companies get ensnared by the exceptions related to de facto mergers and mere continuances of a prior business. A de facto merger occurs when a company sells all of its assets and then dissolves. A substantial continuation applies when one of the following actions occurs:
- retention of the same employees, supervisory personnel, same production facilities and same location,
- the same products are produced,
- the same business name is retained,
- there are the same assets and business operations, and/or
- the new company holds itself out to the public as a continuation of the previous corporation.
If any of these factors sound vague, that is because they are. Ultimately, successor liability is highly fact specific and comes down to a case-by-case analysis.
Successor Liability in Action
In export law, successor liability has been a regular character on the stage of export control enforcement. Import law on the other hand, does not offer many examples of successor liability. That being said, successor liability is alive and well in import enforcement actions, and recent case law demonstrates this point.
One of the first cases to address the concept of successor liability in import laws was the 1989 case of United States v. Shield Rubber Corp. In this case, Shields Rubber Corporation was charged with violating several customs laws by removing country of origin markings. However, Shields Rubber Corporation had not actually performed these acts, but rather its predecessor company had removed the markings. Shields Rubber Corporation had merged with Shields Rubber Corporation II and the successor thus protested it should not be liable for the actions of its predecessor. However, the U.S. Supreme Court found that the principles of merger law applied, and that the successor was liable for the violations of the predecessor. Even though this situation did not involve a sale of assets, it is important in case law history because it upholds the merger law doctrine.
In the recent CIT case of United States v. Adaptive Microsystems, without even asking whether successor liability applies to import cases, CIT found a company liable for the transgressions of the company it had acquired under the mere continuation principle. In this case, a company named Adaptive Microsystems LLC went into bankruptcy and was acquired by another company, which ultimately continued the company with the same name and with the same employees. However, the board of directors changed except for one person, who retained a fraction of the stocks he had in the previous company and retained his position on the board. CIT found that these facts rendered the company similar enough to the previous company to warrant holding the successor liable under the mere continuation doctrine. As a result, Adaptive Microsystems LLC was liable to the government for the unpaid duties of the former company.
In the experience of BSL, there are certain factors which make it more or less likely that CBP will pursue a claim under successive liability. These include variables such as the amount of the lost revenue to CBP (such as unpaid duties), public policy considerations including the type of harm caused by the violation, and the possibility of the violation recurring under the predecessor, to name a few. In one recent case handled by BSL, a successor company was being investigated by CBP. The company had bought the assets of the prior company, and the prior company had then dissolved. According to common law, this would be considered a de facto merger and the successor might be on the hook for paying the lost revenue. However, in this instance, the amount was comparatively very little, totaling approximately $10,000. In addition, the asset agreement included an absolution of liabilities and debt for the purchasing company. Given the factors of a low amount and agreement to absolve liabilities, CBP accepted the argument that successor liability would not attach. With this in mind, it is important to remember that CBP analyzes successor liability on a case-by-case basis.
Successive liability is even more commonly seen in export cases. One of the seminal cases in the export realm is the Sigma-Aldrich case in 2002. In this situation, Sigma-Aldrich Corporation (SAC) and Sigma-Aldrich Business Holdings (SABH) had purchased the partnership interests of another company and transferred the assets to Sigma-Aldrich Research Biochemicals (SARB). Through an investigation after the sale, BIS found the acquired company had exported biological toxins without a license. BIS then charged the three Aldrich-Sigma companies with the violations under successor rules. The judge held that all three Sigma-Aldrich companies were liable for the violations of the predecessor company, and assessed a $1.76 million fine to settle the charges against them.
The U.S. Department of State has also used successor liability to enforce export controls. In one case, the U.S. Department of State found that Hughes Aircraft, a subsidiary of Hughes Electronics, had violated provisions of the Directorate of Defense Trade Controls by not obtaining an export license for information released to certain foreign nationals in the mid 1990’s. In 2000, Hughes Electronics sold Hughes Aircraft to Boeing. As part of the sale, Hughes Electronics agreed to be liable for any liabilities of Hughes Aircraft. However, the U.S. Department of State still charged both Boeing as the successor and Hughes Electronics as the predecessor with the violations. In 2003, Boeing and Hughes Electronics agreed to a $32 million fine levied on them.
Lighten the Baggage
These cases above show that neither the agencies that oversee export compliance, nor the agencies that oversee import compliance are afraid to use the doctrine of successor liability. Furthermore, even though the common law provides guidance on when successor liability will be imposed, it can still be difficult to predict when a successor company is liable. This means that companies who are merging with or acquiring other companies need to do their homework when it comes to import and export matters. Companies should thoroughly assess target companies’ import and export history and determine if there are any compliance issues. They should then try to determine if they would be liable for those compliance issues and the extent of the liability. Through doing this analysis, companies may be able to address successor liability issues head on and possibly reduce the value of purchasing the target, or may decide to avoid the baggage all together.