Chapter 48 - § 48.4 • ASSET SALES

• Jurisdiction: Colorado

§ 48.4 • ASSET SALES

In an asset sale, the seller typically sells all or substantially all of its assets to an acquirer. This should be done subject to an asset purchase agreement containing customary representations, warranties, covenants, and indemnifications. As with stock purchase agreements, there is no "one-size-fits-all" form asset purchase agreement. Counsel is advised to find a reliable form agreement and tailor it to fit the circumstances of a given transaction.

At a minimum, the asset purchase agreement should identify the specific assets to be sold and the form of consideration to be paid in exchange for those assets. As is discussed in more detail below, to avoid successor liability issues, it also is important that the asset purchase agreement addresses with particularity how the parties intend to allocate responsibility for liabilities, debts, and obligations associated with the assets.

§ 48.4.1—Dissenters' Rights in Asset Sales

Under Colorado law, shareholders are entitled to dissent and obtain payment of the fair value of their shares in the event of a sale of all or substantially all of the corporation's assets.³⁷ The substantive and procedural requirements for exercising these dissenters' rights are essentially the same as those for shareholders exercising dissenters' rights in a merger transaction.³⁸

§ 48.4.2—Successor Liability in Asset Sales

In a 1982 case, the Colorado Court of Appeals stated that as a general rule, "where one company sells or otherwise transfers all its assets to another company, the latter is not liable for the debts and liabilities of the transferor. . . ."³⁹ Nevertheless, an acquirer should be aware that this common law rule is subject to several important exceptions.⁴⁰

As discussed below, an acquirer may be held liable for a seller's debts or obligations if any of the following circumstances exist:

1) Express or implied assumption of the seller's liabilities;
2) Merger or consolidation;
3) Acquirer is a "mere continuation" of the seller; and
4) Fraud.⁴¹

Whether exceptions (1) through (4) above could apply where less than substantially all of a company's assets are transferred to another company is not clear.⁴²

A 2005 Colorado Court of Appeals case held that, even though the seller had transferred less than substantially all of its assets to the acquirer corporation, the acquirer was a mere continuation of the seller where both corporations had the same officers, directors, and shareholders; both were subject to the same controlling persons; and insufficient assets were left in the seller corporation to cover its debts. Although the court ultimately held that the substance of the seller's transfer was such that the seller did transfer substantially all its assets (only a portion of which were transferred to the acquirer), the court expressly noted that, when applying the exception of "mere continuation," it would not hold that the transfer of substantially all of a corporation's assets is necessarily a factor in imposing successor liability under that exception.⁴³

In addition, counsel should be aware that additional successor liability issues may arise under tax, bankruptcy, or environmental law,⁴⁴ or under failure to warn theory, as well as other exceptions that apply outside of Colorado, including distribution of products out of state.⁴⁵ In such contexts, counsel should undertake additional research to determine the scope of potential successor liability.

Express or Implied Assumption of Seller's Liabilities

If the plain language of the asset purchase agreement clearly allocates responsibility for post-closing liabilities, this will be a relatively straightforward inquiry⁴⁶ under the standard rules of contract interpretation.⁴⁷ However, if the agreement is ambiguous or silent with respect to risk allocation (or there is no asset purchase agreement), a court likely will look at the parties' conduct and assess whether the acquirer "impliedly" agreed to assume the liability in question.⁴⁸

The issue of whether an acquirer "impliedly" agreed to assume a liability turns on the acquirer's intent. Intent is a question of fact and will depend on the circumstances of a given transaction. Although no Colorado case has directly addressed this issue, courts in other jurisdictions have found that persuasive evidence of intent to assume liabilities includes (1) a discounted purchase price⁴⁹ or lack of consideration altogether;⁵⁰ (2) assumption by the acquirer of a large category of liabilities (even if the particular liability at issue is unspecified);⁵¹ or (3) continuation of payment of insurance premiums on the part of the acquirer on...