Asset Purchase: Potential Successor Liability

Jeffrey S. Baird, Esq.

Generally, there are two ways to purchase a pharmacy: an asset purchase or a stock purchase.

Stock purchase of a pharmacy

Let’s talk about a stock purchase first. Assume that John Smith owns ABC Pharmacy, Inc. Assume that Bill Johnson wants to buy the stock, not the assets, of ABC. Smith, individually, will be the seller. Johnson, individually, will be the buyer. Smith will sell his stock certificate (exhibiting ownership of ABC) to Johnson. ABC will continue to operate as it always has: same Tax ID #, same Medicare Part B supplier number (if ABC furnishes DME), same Medicaid provider number, same accreditation, same employees, same third-party payor contracts, etc. In some states, ABC’s pharmacy license will remain intact. In other states, ABC will need to obtain a new license, but will be able to operate under its existing license until a new license is issued. There will be no “break in billing.” The only change is that Smith is “out” as the stockholder and Johnson is “in” as the stockholder. Change of ownership (“CHOW”) notifications will need to be filed with the appropriate governmental contractors and agencies. The third-party payor contracts will need to be examined to determine if any steps must take place in order for the contracts to remain in effect, such as prior notice to the insurer or approval by the insurer of the new stockholder. The pre-closing liabilities of ABC, known or unknown, will remain with ABC. Barring something unforeseen, Johnson (individually) will not be responsible for ABC’s pre-closing liabilities.

Asset purchase of a pharmacy

Now, let’s switch gears and talk about an asset purchase. In an asset purchase, Johnson will form his own legal entity (XYZ Pharmacy, Inc.). The seller will be ABC and the purchaser will be XYZ. ABC will sell its tangible and intangible assets to XYZ. Tangible assets include inventory, computers, delivery vans, etc. Intangible assets include patient files and intellectual property. XYZ will need to obtain its own pharmacy license, DEA permit, Part B supplier number (“PTAN”), accreditation, Medicaid provider number, third-party payor contracts, etc. If ABC furnishes DME, there likely will be a “break in billing” until ABC is issued a PTAN.

Benefits and drawbacks to both methods of buying a pharmacy

There are positives and negatives with each approach. An upside for engaging in an asset acquisition is that, as a general rule, XYZ is not liable for any of ABC’s liabilities. Over the years, the Department of Justice has taken the position that the purchaser of assets might be responsible for the seller’s pre-closing fraudulent acts if the asset purchase is a “de facto merger.” A recent federal appellate court decision illustrates how such a de facto merger might arise.

Eriem Surgical, Inc. (“ESI”) purchased the assets of Micrins Surgical, Inc. (“MSI”) shortly after it closed its doors. In so doing, ESI (i) hired MSI’s former employees, (ii) took over the MSI facilities, and (iii) took over usage of MSI’s trademark, website, phone number, and e-mail address. ESI is owned by the wife of a large stockholder of MSI. The IRS took $400,000 from ESI’s account to pay $400,000 owed by MSI to the IRS. The federal district court (trial court) upheld the IRS’s treatment of ESI as a “continuation of MSI.” The trial court found that Carol Teitz (owner of ESI) served as the “proxy” for Bernhard Teitz (a large stockholder of MSI) to “continue to exert control over the company.” The 7th Circuit Court of Appeals upheld the trial court’s decision. In its opinion, the 7th Circuit stated: “We could imagine an argument that, because Bernhard owned only 40 percent of Micrins’ stock, Eriem should be liable for only 40 percent of its taxes. But Eriem has taken an all-or-none stance; it is unwilling to concede owing the Treasury a penny. Given a choice between all and none, the district court did not commit either a legal or a factual error in electing ‘all.’”

It is important to not read too much into this case. In almost all of the asset acquisitions, the purchaser is not liable for the seller’s obligations. However, when a “de facto” merger occurs, such liability might be imposed on the purchaser. The ESI case gives us an example of when successor liability can be imposed. Although the ESI case deals with tax liability, its reasoning equally applies to fraud liability.

Attribution: A portion of this article was taken from a December 19, 2016, Health Law360 article entitled “7th Circ. Sticks Surgical Tools Co. With Predecessor Tax Bill,” written by Chuck Stanley.

Jeffrey S. Baird, Esq. is Chairman of the Health Care Group at Brown & Fortunato, P.C., a law firm based in Amarillo, Texas. He represents pharmacies, home medical equipment companies, and other health care providers throughout the United States. Mr. Baird is Board Certified in Health Law by the Texas Board of Legal Specialization. He can be reached at (806) 345-6320 or jbaird@bf-law.com.