What Constitutes a Successor Corporation?

By Tom Streissguth

The basic definition of a successor corporation is a new business that directly replaces an old one. The successor takes on the assets and liabilities of the former corporation, and carries out the affairs of the old company under a new name. Successor law governs the activities and legal obligations of these new companies.

Origins

Most successor corporations come about through a merger or an acquisition. A company may buy another company and take over its business, or combine itself with another, creating a new corporate identity. In bankruptcy cases, a federal court winds up the financial affairs of a company unable to meet its debts, and in some cases, creates a new company after the process comes to an end.

Successor Law

The law of the various states governs the affairs of successor corporations -- outside of bankruptcy. A state law, for example, may allow a creditor of a defunct corporation to make a legal claim against that corporation’s successor, within a limited time. A party that has suffered a personal injury may sue for damages by filing a claim in civil court against a successor corporation. In addition, in some states, an employee with a workers' compensation claim can continue the claim against a successor company and its work comp insurance carrier.

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Mergers and Acquisitions

In mergers and acquisitions, the terms of an agreement include the transfer of property, equipment and financial assets from a company to its successor. These often become important points of contention; the rights of a successor to assets and its need to take on liabilities may disrupt an otherwise easy negotiation. When a successor company gains the knowledge, contacts and ideas of an old company, it often must pay handsomely for the rights to these intangible assets, otherwise known as "goodwill."

Liabilities

In many cases, a successor corporation is set up to escape private liabilities as well as tax obligations; lawsuits often arise after the parties complete the transfer of titles and properties. The law often holds that if a new company carries out the same business with the same assets and in the same location, it can be held liable for the obligations of its predecessor, even if by the terms of the transfer the successor is held not responsible. Non-payment for goodwill strengthens the claim of any creditors who come forward.

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References

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