This document summarizes a presentation on successor and alter-ego liability. It discusses the general rule that an asset purchaser is not liable for a seller's debts, but outlines four exceptions: express or implied agreement, de facto merger, mere continuation, and fraud. It defines factors courts examine for de facto mergers and mere continuations. It also covers piercing the corporate veil and fraudulent transfer claims. The presentation aims to explain where risks can arise in mergers and acquisitions regarding successor liability, veil piercing, and fraudulent transfers.

1. Successor and Alter-Ego Liability
Presenters: Brendan L. McPherson, James R. Miller,
Paul R. Wood
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2. Introduction
 Where Risk Arises: Nuts and Bolts of
Successor Liability, Veil-Piercing, and
Fraudulent Transfer Claims
 Successor Liability: General Rule and
Exceptions
 Veil-Piercing Rules
 Successor Liability Exception and Fraudulent
Transfer Claims
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3. Brendan McPherson is a litigation shareholder whose
practice focuses on complex financial issues relating to
bankruptcy, real estate and disputes arising out of
complex business transactions. A significant part of his
practice relates to litigating claims of successor liability,
alter ego/veil-piercing, and fraudulent transfers, and in
this regard he frequently counsels clients both before
and after merger and acquisition transactions.
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4. Where Potential Risks Arise

5. Successor Liability &
Veil-Piercing 101
 Asset v. stock transactions
 General rule still applies:
– Stock acquisitions: liabilities travel
– Asset acquisitions: liabilities remain

6. Successor Liability 101
 Successor liability – the exception not the
rule
 Exception 1: express/implied agreement
 Exception 2: consolidation/merger – “de
facto”
 Exception 3: mere continuation
 Exception 4: fraud

7. GENERAL RULE
 The general rule is that the purchaser of a
corporation's assets is not liable for that
corporation’s debts. E.g., Johnston v. Amsted
Indus., Inc., 830 P.2d 1141, 1142-43 (Colo.
App. 1992); Ruiz v. ExCello Corp., 653 P.2d
415, 416 (Colo. App. 1982).

8. James Miller is a litigation shareholder whose practice
focuses on complex financial issues and securities
litigation. Jim represents large financial institutions and
clients involved in providing financial services. A
significant part of Jim’s practice includes litigating claims
relating to failed mergers and acquisitions. He has
extensive experience with de facto merger and mere
continuation claims and he has litigated a number of
securities fraud cases.
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9. EXCEPTIONS
There are several exceptions to the general rule. A company
that purchases the assets of another company can become
liable for the seller's debt where:
(1) there is an express or implied assumption of liability;
(2) the transaction results in a merger or consolidation
of the two corporations;
(3) the purchaser is a mere continuation of the seller; or
(4) the transfer is for the fraudulent purposes of
escaping liability. Alcan Aluminum Corp. Metal
Goods Div. v. Elect. Metal Products, Inc., 837 P.2d
282, 293 (Colo. App. 1992).

10. DE FACTO MERGER FACTORS
In evaluating a “de facto merger” the Court looks at these
four factors:
(1) continuity of management, personnel, physical
location, assets, and business operations;
(2) continuity of shareholders;
(3) cessation of the seller's business and liquidation of
its assets; and
(4) assumption by the purchaser of those liabilities of
the seller necessary to continue uninterrupted the
seller's former business operations.
Johnston, 830 P.2d at 1146-47.

11. ORDER IN HRC-SVL CASE
The Court concludes that the Plaintiff has failed to meet by a
preponderance of the evidence their burden of establishing that
there was a continuity of management and a continuity of
shareholders. The evidence showed that although there was a
continuity in HRC's and HRC-SVL’s business operations to some
extent the corporate operations were distinctly different. Due to
this failure their claim that the asset purchase agreement between
HRC and HRC-SVL must fail under the doctrines of "de facto merger"
and mere continuation doctrines. Since the Plaintiff has failed
under these doctrines then the Plaintiff has failed to establish that
HRC-SVL is the successor to HRC's liabilities and thus liable for the
debts accumulated by HRC, including the debts owed to the
Plaintiffs. Thus, this Court rules that the Defendant, HRC-SVL, is not
liable to the Plaintiffs for the liabilities owed by HRC under their
successor liability claims.

12. MERE CONTINUATION OF CORPORATION
Successor liability litigation frequently involves the purchase and continuation of
some aspect of the original going concern. The courts look to the following factors
to determine whether to invoke the continuation exception and attach liability to
the successor corporation:
(1) whether the successor and predecessor are in the same business;
(2) the degree of similarity between the business operations of the
predecessor and successor;
(3) whether the same equipment, physical structures, work force, and
supervisors used by the predecessor were also used by the new
corporation;
(4) whether the employees were notified of any change in ownership;
(5) whether there are common incorporators, officers, directors, or
stockholders between the predecessor and successor corporations; and
(6) whether employees retained by the new corporation were re-hired
under new employment contracts.

13. MERE CONTINUATION OF CORPORATION -
continued
In Brockman the plaintiffs sued on a promissory note executed by a
former corporation. The plaintiffs named as defendants the
trustees of the former corporation’s assets, the former corporation,
certain individuals who were directors of the new corporation and
the new corporation. The court of appeals held that the new
corporation was a “continuation” of the former corporation. The
two companies were in the same business; the directors, primary
officers and major stockholders were the same; the new
corporation used the same equipment and labor force; and the
transferee took over performance of the former company’s existing
contracts. As a result, the court ruled that the new corporation was
liable on the promissory note of the former Corporation. Brockman
v. O’Neill, 565 S.W.2d 796, 798-99 (Mo. Ct. App. 1978)

14. Paul Wood has handled numerous post-merger dispute cases,
many of which involved successor liability issues. Paul has tried
cases involving alter ego, de facto merger and other successor
liability theories. Paul’s experience in a wide range of industries,
including securities broker/dealers, financial services firms,
telecom, construction and manufacturing allows him to
understand the clients' business and tailor proactive litigation
strategies which fit into their overall business goals, rather than
simply react to the facts of a particular case.
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15. Piercing the Corporate Veil
 Exception to the established notion of limited liability for
corporate shareholders
 Because there is a presumption of separateness between
the entity and its owners, most courts recognize the
exception only in "narrow circumstances.“
 Equitable claim: may be decided by court, not jury.
 Party seeking to pierce the corporate veil bears the burden
of proof.
 Standard of proof varies from preponderance of the
evidence to clear and convincing.

16. Elements of a Claim
 State law controls, so determine choice of law
 General elements of a claim:
– Control and domination of corporation by shareholder
– Improper use or purpose
– Resulting injury

17. Control and Domination
 Must show "complete domination, not only of finances, but
of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction
has no separate mind, will or existence of its own.“
 Veil piercing doctrine also may apply to other types of
entities such as limited liability companies.
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18. Control and Domination
 Some of the factors considered:
– Inadequately capitalized or undercapitalized to carry out the
corporation's business.
– Failure to follow corporate formalities/keep corporate
records
– Identity of officers and directors
– Commingling or diversion of funds or assets
– Sole or majority stock control
– Same offices and employees
– Parent pays expenses/losses for subsidiary
 No one characteristic governs, but the courts must look at all the
circumstances to determine whether the doctrine should be
applied.
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19. Improper Purpose or Use
 Requires proof that the control was used to commit fraud,
perpetrate the violation of a statutory or other legal duty,
or commit a dishonest and unjust act against claimant.
 Improper conduct beyond establishing the corporation was
controlled and dominated by the shareholder must be
proved.
 Claimant must prove improper use of corporate form
caused injury
 Proof of the underlying cause of action may help establish
the second part of the test

20. Resulting Damage
 Must show that the defendant's control, exerted in a
fraudulent, illegal or otherwise unfair manner, caused the
harm suffered.
 Show it will be treated unjustly and damaged by the
defendant's exercise of control and improper use of the
corporate form unless the corporate veil is pierced
 Typical scenario: Corporate creditor demands payment or
attempts to execute on a judgment and learns that
previously available assets have been spirited away by the
owner to avoid collection.

21. Fraud and Fraudulent Transfers
 Unlike some exceptions, lack of
consideration key
 Lack of consideration may trigger fraud
exception or fraudulent transfer law

22. Fraud Exception
 Is the asset purchase arm’s length, with a
legitimate business purpose?
 Or was the asset purchase orchestrated to
avoid liability?

23. Fraudulent Transfers/Conveyances
 As old as the Statute of Elizabeth in 1570
 Standing: Applicable in bankruptcy (trustees
and debtors in possession) and out of
bankruptcy (creditors)

24. Fraudulent Transfers/Conveyances
 Two varieties:
– Actual fraudulent transfers
– Constructive fraudulent transfers

25. Actual Fraudulent Transfers
 Intent to hinder, delay, or defraud creditors.
 Badges of Fraud:
– The transfer or obligation was to an insider.
– The debtor retained possession or control of the
property transferred after the transfer.
– The transfer or obligation was disclosed or concealed.
– Before the transfer was made or obligation was
incurred, the debtor had been sued or threatened with
suit.

26. Actual Fraudulent Transfers
– The transfer was substantially all of the debtor’s assets.
– The debtor absconded.
– The debtor removed or concealed assets.
– The value of the consideration received by the debtor was
reasonably equivalent to the value of the asset transferred or
the amount of the obligation incurred.
– The debtor was insolvent or became insolvent shortly after
the transfer was made or the obligation was incurred.
– The transfer occurred shortly before or shortly after a
substantial debt was incurred.
– The debtor transferred the essential assets of the business to
a lienor who transferred the assets to an insider of the
debtor.

27. Constructive Fraudulent Transfers
 Constructive Fraudulent Transfer =
misnomer
 Elements:
– No reasonably equivalent value, i.e.
consideration
– Transferor insolvent or made insolvent by the
transfer
– Or other elements akin to insolvency

28. Thank you, and we hope you will join us for
our next webinar on September 20, 2016:
Claims By or Against (Former) Officers and
Employees
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