In a stock acquisition, the buyer acquires the target company as a going concern, including all of its liabilities. That basic principle is settled law. The interesting questions in successor liability are more specific: How does the purchase agreement address the allocation of pre-closing liabilities that are unknown at signing? What does the indemnification structure actually accomplish for the buyer when a pre-closing environmental claim, product liability matter, or tax exposure surfaces after closing? And when a transaction involves subsidiaries operating under different legal frameworks, how does the successor liability allocation in the purchase agreement interact with statutory successor liability rules that neither party can contractually override?
In-house counsel reviewing a proposed acquisition typically focuses on a different layer of successor liability questions than outside M&A counsel does. Outside counsel focuses on whether the indemnification provisions are defensible and well-drafted. In-house counsel focuses on whether, when a real claim arrives, the mechanisms in the agreement will actually work.
Contractual Versus Statutory Successor Liability
A threshold issue in any successor liability review is understanding which liabilities are governed by the purchase agreement and which are governed by applicable law regardless of what the agreement says. The purchase agreement can allocate between the parties who bears the cost of a pre-closing liability. It cannot override statutory successor liability regimes that impose liability directly on a buyer as a matter of law.
Environmental liabilities under CERCLA are the most commonly cited example. In an asset acquisition, CERCLA successor liability doctrine can follow the business even when the agreement purports to exclude it. In a stock acquisition, the company carries all of its environmental liabilities as a matter of corporate law regardless of how the purchase agreement allocates them between buyer and seller indemnification. The purchase agreement addresses which party reimburses the other. It does not affect the company's statutory obligations.
Similar dynamics apply in employment law. Certain successor employer obligations under the NLRA and WARN Act follow the business rather than following the contractual allocation. In-house counsel who reviews a purchase agreement focused only on the indemnification provisions, without checking whether the target's pre-closing conduct created obligations that survive independent of the agreement, will have an incomplete picture of post-closing exposure.
The Indemnification Scope Question
Within the scope of contractual allocation, the key question for successor liability is how the indemnification provisions handle pre-closing liabilities. Most purchase agreements follow a standard architecture: seller indemnifies buyer for losses arising from breaches of reps and warranties, certain specified liabilities listed in a disclosure schedule, and (in some agreements) a general pre-closing liability carve-out. Buyer indemnifies seller for post-closing operations.
The practical gaps in this architecture are where exposure concentrates. A liability that is not covered by any rep, not listed in the disclosure schedule, and not explicitly assumed by seller falls outside the contractual protection framework. Whether the buyer has recourse depends on whether the liability arose from a breach of a general rep, whether the seller's disclosure obligations were met, and whether the survival period for the applicable rep has expired.
For in-house counsel, the review checklist should include: What categories of pre-closing liabilities are explicitly assumed by seller rather than left to the rep and warranty framework? Are environmental liabilities, litigation-related liabilities, and tax liabilities specifically addressed as identified liabilities rather than left to the general rep? Is there a general indemnification for pre-closing conduct that provides protection beyond what the reps cover?
Cross-Border Complications
Deals with international subsidiaries introduce an additional layer of complexity because successor liability rules and indemnification enforcement mechanisms vary significantly across jurisdictions. A purchase agreement governed by New York law may have a carefully drafted indemnification provision that is effective and enforceable as drafted. But if the target has a subsidiary in a jurisdiction that imposes mandatory successor liability under local labor law, local environmental law, or local tax statute, the contractual allocation in the purchase agreement does not prevent those claims from being asserted directly against the acquired entity under local law.
The practical implication for review: any transaction involving non-US subsidiaries requires a jurisdiction-specific analysis of mandatory successor liability regimes in each relevant location. That analysis cannot be done from the purchase agreement itself. It requires local counsel input and should be reflected in a disclosure schedule exception or in a specific indemnification provision that addresses the identified jurisdictional exposure.
What the purchase agreement review can do is flag where that analysis needs to happen. If the disclosure schedules show subsidiaries in multiple jurisdictions but the purchase agreement does not contain any jurisdiction-specific liability assumption or carve-out, that gap in the document structure is the flag that triggers the local counsel conversation. Documents that appear complete on their face can be incomplete in practical effect when they do not address known jurisdictional complications.
Regulatory Carve-Outs and Their Interaction with Successor Liability
Regulated industries create successor liability complications that do not appear in standard M&A templates. A target operating in healthcare, financial services, or a licensed profession may have pre-closing regulatory obligations, pending investigations, or licensing conditions that transfer with the business regardless of the purchase agreement's allocation provisions.
The regulatory carve-out question in successor liability review is: Are there ongoing regulatory proceedings, conditions of license, or compliance obligations at the target that will become the buyer's responsibility post-closing as a consequence of the acquisition itself rather than as a consequence of any indemnification gap? Healthcare transactions often involve this issue because Medicare and Medicaid provider agreements may require recertification or may impose liability for prior period overpayments regardless of indemnification provisions. Financial services transactions may involve pending regulatory examinations or consent orders that follow the regulated entity rather than the pre-closing ownership.
When in-house counsel reviews a purchase agreement for a regulated-industry target, the successor liability review should include a check against any pending regulatory matters disclosed in the schedules, the status of material licenses, and whether any licenses require regulatory approval of the change of control that would create an intervening period of unlicensed operation.
What Makes a Successor Liability Provision Actually Work
Successor liability provisions that work in practice share a few characteristics beyond the standard indemnification architecture.
First, they identify specific pre-closing liability categories explicitly rather than relying on the general rep and warranty framework to capture everything. Environmental liabilities with known site contamination, litigation matters listed in the schedules with their current procedural status, and tax obligations for open audit periods are cleaner as specifically assumed liabilities than as implied claims under a general rep.
Second, they set survival periods that match the actual latency of the liabilities being covered. Environmental claims may not materialize for years. Certain tax exposures survive until the applicable statute of limitations closes. A general indemnification survival period of 18 months post-closing does not protect against liabilities with longer latency unless those liability categories have their own, longer survival periods.
Third, they address the seller's financial capacity to actually perform the indemnification obligation when a claim arises. An indemnification from a seller entity that will be dissolved or stripped of assets immediately after closing is an illusory protection. The practical review question is whether the indemnification is backed by an escrow, a holdback, rep and warranty insurance, or some other mechanism that does not depend on the seller remaining solvent and accessible years after closing.
These are not exotic drafting innovations. They reflect how practitioners who have seen indemnification claims actually proceed understand what makes an agreement work under real-world conditions rather than just under the conditions that existed at the time of signing.