Asset Sales: Successor Liability Issues

The Alberta Court of King's Bench has recently confirmed that the American doctrine of corporate successor liability has no application in Alberta. This is welcome news for asset purchasers as it resolves uncertainty created by a recent Ontario decision that re-opened the door to the doctrine’s application in Canada.

In 2011 the Defendant, an international accounting firm, purchased a local accounting firm in Edmonton. Though advertised publically in marketing materials as a “merger”, the transaction was structured as an asset sale pursuant to which the international accounting firm obtained the goodwill and office furniture of the small accounting firm in exchange for valuable consideration. It was an express term of the Purchase Agreement that the Purchaser would not be liable for the liabilities of the Vendor.

Following the transaction, the sole equity partner of the local firm joined the international firm as a non-equity partner. The former employees of the local firm also joined the international firm and were integrated into its ranks. Though some of the local firm’s former clients transferred their business to the international firm following the transaction, some, including Agra Services of Canada, Inc., did not.

In the years preceding the transaction, the local firm had performed audit work for Agra. When the Plaintiff, an international bank specializing in agriculture, determined that it had been defrauded by Agra in the amount of $42 million, it sued the local firm asserting that it had relied on the audits to its detriment. Notwithstanding the fact that the international firm had never performed work for Agra or received payment for work performed on behalf of Agra by the local firm, the international firm was also named in the lawsuit pursuant to the American doctrine of corporate successor liability.

In Canada, a business that acquires the assets of another is generally not liable for the latter’s debts and liabilities unless they are expressly assumed. The doctrine of corporate successor liability has emerged in a number of American jurisdictions as a collection of exceptions to this general rule. In certain circumstances, some American courts have ruled that if a corporation goes through a mere change in form without a significant change in substance, it should not be allowed to escape liability for its pre-change of form wrongs. As explained by the Supreme Court of New Jersey in Ramirez v. Amsted Industries Inc.:

The successor corporation, having reaped the benefits of continuing its predecessor’s product line, exploiting its accumulated goodwill and enjoying the patronage of its established customers, should be made to bear some of the burdens of continuity, namely, liability for injuries caused by its defective products.

The bank asserted that because the international firm took the benefit of the local firm’s business in the transaction, hired all of its employees, and advertised the transaction as a merger, it was liable for any wrongs that occurred in relation to the local firm’s audit work prior to the transaction.

The international firm applied for summary dismissal of the claim and was successful before Master Robertson. The bank appealed and Justice Sullivan of the Alberta Court of King's Bench upheld Master Robertson’s decision, dismissing the action against the international firm and ruling that the doctrine of successor liability has no applicability in Alberta. Noting that there was no evidence to suggest that the intention or the effect of the transaction was to place the local firm’s assets out of reach from its creditors, Justice Sullivan concluded that this case was not a proper case for the doctrine’s introduction into Canadian law.

This decision is significant for two reasons.

It confirms that simply invoking a legal doctrine from a foreign jurisdiction is insufficient to preclude summary judgment. Previously, both the Alberta Court of King's Bench and the Ontario Superior Court had refused to dismiss actions alleging corporate successor liability on the basis that the doctrine “could” apply in Canada. However, since the Supreme Court of Canada’s decision in Hryniak v. Mauldin and the changes to the Alberta summary judgment rule in 2010, Alberta courts have been willing to decide novel legal issues in summary fashion where the circumstances warrant. This is a welcome development and is consistent with the court’s stated goal of expedited justice.

More importantly, this decision puts to rest the doctrine of corporate successor liability in Alberta. Asset purchasers can take great comfort from the decision knowing that they will not be held liable for the pre-transaction wrongs of the vendor unless expressly assumed in the purchase agreement.