Buyer Beware: Successor Liability Issues When Purchasing a Physician Practice
If you’re purchasing a physician practice or any other type of Florida healthcare entity you must ensure that you have structured the acquisition in such a way that you are not inheriting the liabilities of the previous owner. To do so, you must conduct a thorough due diligence process and draft the appropriate agreements.
In Florida, a purchaser is generally not liable for the debts and liabilities of the seller unless the purchaser expressly (or impliedly) agrees to assume such debts and liabilities. Successor liability has the potential to become an issue when you purchase any existing company. The purchaser has the option to limit the assumption of liabilities of the seller by structuring the acquisition in a specific way. By doing so, the purchaser won’t be responsible for paying the seller’s debts and liabilities. Typically, in a “stock” purchase you are responsible for all liabilities and debts of the company, while in an “asset” purchase you are only assuming those liabilities and debts that you specifically agree to assume.
Stock vs. Asset Purchase
- Stock– In a stock purchase you are acquiring the stock of the seller’s company. The essence of the acquired company does not change other than the fact that it has a new owner. All of the assets (unless otherwise stated) as well as its debts and liabilities stay the new owner, whether they’re known or unknown at the time of the sale. This is what is called “stepping into the shoes” of the previous owner.
- Asset– In an asset purchase you create a business entity (i.e. an LLC or Corporation) to purchase specific assets and liabilities of the seller’s company. These are called “Acquired Assets”. This is different from a stock purchase where you are buying the entire company and not just pieces of the company. The seller’s company may remain in place after the asset purchase and they can continue to run it independently absent the assets and liabilities that they have sold to the purchaser. Alternatively, the seller may choose to close their business or sell other assets of the company to another purchaser or both.
Automatic Assumption of Liability Even in an Asset Purchase
Most healthcare entity acquisitions are structured as asset purchases to avoid the assumption of the all liabilities. However, there are instances where a purchaser still assumes certain liabilities by operation of law even when it is an asset purchase.
- Doctrine of Successor Liability– A purchaser assumes liabilities if the acquisition was done to purposely undermine the business interests of creditors. A purchaser strips the entity of its most valued assets and transfers them to another entity for a nominal purchase price so that when the creditor sues the defaulting original company there are no valuable assets for them to force the sale of to recoup their losses.
- Taxes– If one of more of the assets that you are acquiring through an asset purchase has a pre-existing tax lien or UCC filing, your asset purchase agreement will not automatically extinguish those obligations. Those obligations will be paramount to your purchase and will have to be dealt with accordingly.
Exceptions to the Purchase Agreement
- De Facto Merger Exception– This exception will be triggered if you answer “yes” to any three or more of the following questions: (1) Is there a continuation of the enterprise? (2) Is there a continuity of shareholders? (3) Has the selling company ceased its ordinary business operations? (4) Has the purchasing company assumed the seller’s obligations?
- Continuation of the enterprise– Exists when the physical location, directors, officers, assets, management, employees, etc. are the same (or substantially similar) between both the seller and purchaser.
- Continuity of shareholders– Exists when the same (or substantially similar) shareholders/owners exist in both the companies.
- Cessation of operations– Exists when the seller ceases to conduct its business after the sale of the assets.
- Assumption of obligations– If the purchase agreement doesn’t clearly stipulate which obligations will be assumed by the purchaser (i.e. vendor agreements, leases, etc.) the purchaser may become liable for the seller’s obligations.
- Mere Continuation Exception– Is triggered if only one company exists after the transfer of assets and the same stockholders and directors are present in both companies.
- Fraudulent Transaction Exception– This occurs when the owners of the purchasing company are transferred to the seller’s owners as payment for the assets. This is an attempt to escape certain debts and obligations of the seller company.
It is critically important that you hire an experienced business law attorney who has drafted these agreements specifically for healthcare entities. This attorney must conduct a thorough due diligence process which includes a lien and title search, review of recorded business loans and determine whether there are any outstanding state sales and gross receipt taxes.
It should be noted that I am not your lawyer (unless you have presently retained my services through a retainer agreement). This post is not intended as legal advice, it is purely educational and informational, and no attorney-client relationship shall result after reading it. Please consult your own attorney for legal advice. If you do not have one and would like to retain my legal services, please contact me using the contact information listed above.
All information and references made to laws, rules, regulations, and advisory opinions were accurate based on the law as it existed at this time, but laws are constantly evolving. Please contact me to be sure that the law which will govern your business is current. Thank you.