Legacy liabilities in the asset deal: section 38 UGB, section 1409 ABGB, section 14 BAO and section 67(4) ASVG

A central rule on the asset deal with continuation is section 38 UGB. Whoever takes over a business inter vivos in principle enters the existing business-related legal relationships and is liable for the business-related liabilities. This liability hits the acquirer alongside the seller; creditors can usually approach the acquirer directly.

The rule at the same time provides for an exclusion of liability. Such an exclusion can be agreed between the parties; in order to take effect vis-à-vis creditors, however, it must be published in accordance with the statutory requirements. The exact formal requirements should be clarified before signing because a formal defect can cost the protection.

In the internal relationship the allocation of risk can be refined via warranties and indemnities. The seller then stands in for known and unknown liabilities and the acquirer is indemnified in the internal relationship. How warranties can be ordered systematically is shown by the post on the SPA warranty catalogue.

In addition to section 38 UGB, section 1409 ABGB applies. The rule obliges those who take over assets or a business to stand in for the debts belonging to the assets to the extent that they were known to them or had to be known. The liability is limited to the value of the taken-over assets; creditors therefore cannot hold the acquirer liable without limit.

Decisive is the knowledge or ought-to-know of the acquirer. Anyone who omits a careful examination of the asset situation cannot rely on lack of knowledge if corresponding hints were in the data room. Conversely a well-documented due diligence relieves the acquirer because it shows which debts were actually known.

In the contract section 1409 ABGB requires separate treatment. Common are express clauses on the disclosure of known liabilities, an indemnity of the acquirer in the internal relationship and, where appropriate, a security, such as an escrow amount held until the expiry of possible claims. A deeper view on securing the purchase price and the risks is provided by the glossary entry on escrow.

The acquirer can also be liable for legacy taxes and social security contributions. Section 14 BAO provides a separate liability for certain taxes of the predecessor, such as business taxes attributable to the time before the takeover. Section 67 paragraph 4 ASVG provides a liability of the acquirer for social security contributions of the predecessor. Both norms are important in practice because authorities not infrequently direct their claims at the acquirer.

In the asset deal a careful examination of the tax and contribution position should therefore be conducted. Current notices, confirmations of open amounts and, where appropriate, a request to the tax office or to the Austrian Health Insurance Fund are helpful. Which points are usually addressed in such an examination is shown by the post on the due diligence checklist.

In the contract the risks are usually allocated via specific warranties on taxes and social security and via a corresponding indemnity. How additional protection through a W&I insurance can work is addressed in the post on the W&I insurance.

In the asset deal contract the liability of the acquirer can be steered on two levels. The first level is disclosure: known liabilities belong expressly in the data room and in the contract. They thus become agreed takeover values or points excluded from the warranties. Whoever discloses nothing shifts the risk to the warranty level.

The second level is warranties and indemnities. Warranties stand in for the fact that certain features of the company exist, such as the completeness of the list of liabilities; indemnities oblige the seller to hold the acquirer harmless from specifically named risks. In the asset deal tax and contribution-related indemnities are particularly common because the liability rules apply directly here.

To secure the claims under these clauses, securities such as an escrow, a bank guarantee or a W&I insurance are used. How the purchase price and any securities can be reflected in the contract is addressed in the post on the purchase price adjustment via net debt and working capital. An initial assessment of the risks is provided by our M&A transaction risk profile.