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How successor liability can hinder growth after a merger

On Behalf of | Feb 21, 2023 | Mergers & Acquisitions

A business merger takes two separate, possibly competing companies and combines them into one organization. The resulting company will have more facilities and talent to manage, and there are many steps involved in combining two separate companies into one cohesive business entity.

When successful, corporate mergers can lead to industry domination and major innovations. However, the process of merging is fraught with risk. In addition to the practical consequences of combining two companies, there are unique concerns for the resulting organization. Successor liability could potentially be an issue that either party considering a merger needs to explore, as it could have a profound impact on the company’s reputation and finances after the merger.

What is successor liability?

When two companies merge, the resulting business is the successor to the prior companies. That successor organization is liable for any legal or financial claims other parties could bring against the previous business entities. In other words, starting a new business by combining existing ones will not eliminate any liability generated by either entity before the transaction.

For example, if former workers were in the process of pursuing a wrongful discharge claim against the organization, a merger would not prevent them from filing a lawsuit against the newly formed company. Successor liability would make the new company responsible for the liability of the previous organizations.

Both parties looking into a merger must therefore carefully evaluate the situation, and due diligence typically needs to involve an exploration of possible financial or legal liability. Making careful choices is crucial for investors and executives involved in the operation of corporate entities.