Blog: J is for Joint and Several Liability

Over several decades and more than 150 purchase and sale transactions on both the buy and sell sides, one recurring topic in discussions with owners and buyers in purchase and sale agreements (PSA) is joint and several liability. This legal concept means that each party to a contract, whether a seller or buyer, is independently liable for the entire amount of damages resulting from a wrongful act, such as a breach of representation or warranty in the PSA. This allows the injured party to sue any one of the liable parties for the full amount of damages.

Joint and several liability is closely related to the indemnification provisions of the PSA. Indemnification is a method of risk allocation between the buyer and seller, where one party agrees to reimburse the other for losses related to the transaction. For instance, the buyer does not want to assume any liability for claims arising from activities that occurred before closing, while the seller seeks to avoid liability for claims arising afterward. Both parties also want indemnification for damages resulting from untrue representations and warranties in the PSA. Generally, the buyer’s representations are minimal and less likely to be contested. The seller’s representations, though, are more numerous and significant, and include such items as representing that the seller has title to the assets, has operated the business in compliance with laws, that the seller’s financial statements are accurate, and that there is an absence of litigation. Indemnification provisions allow one party to recover monetary damages from the other for misrepresentations causing harm.

If there is only one owner of the selling company, joint and several liability does not apply since there are no multiple parties collectively responsible for liabilities. However, joint and several liability may become an issue when there is more than one owner, particularly if some are minority stakeholders with smaller stakes in the company and the sale proceeds. Often, minority stakeholders are family members of the majority owner.

A majority shareholder may have two conflicting reasons for opposing joint and several liability. First, the majority shareholder may be concerned that minority stakeholders cannot cover their share of liabilities, forcing the majority shareholder to shoulder more risk than proportionate. The second and kinder reason is that the majority shareholder is aiming to protect minority stakeholders from post-closing liabilities to the buyer, from heightened financial risk, and, in certain instances, may assume sole liability for indemnification. Since minority stakeholders may not be active in the business, the majority shareholder may feel it unfair to require them to use their sale proceeds to address indemnity claims.

Buyers generally prefer joint and several liability in asset purchase agreements for several reasons. The most notable is that it simplifies the recovery process, allowing the buyer to pursue the full amount due from any single stakeholder without needing to determine each one’s proportionate share of liability. Other factors for a buyer favoring joint and several liability include ensuring that if one seller cannot meet obligations, the buyer can seek full compensation from the other sellers. This arrangement reduces the risk of non-payment or incomplete indemnification while offering greater assurance and confidence that the buyer will be compensated for any breaches of representations, warranties, or other obligations.

In conclusion, the buyer and seller parties may have different viewpoints on the inclusion of a joint and several liability provision in a PSA, leading to complexities in negotiations surrounding liability and indemnification in a PSA. Balancing the interests of majority shareholders and minority stakeholders while ensuring adequate protection for buyers is crucial in shaping agreements that are fair and satisfactory for all parties involved. In cases where joint and several liability is applicable, the buyer will prefer to have it included since it simplifies the buyer’s efforts to collect damages and also better ensures that all of the damages are collected, since it can seek recovery from all the stakeholders. Sellers, on the other hand, may prefer other options in the PSA to protect the financial interests of the minority stakeholders. Whether you are a seller or a buyer, you should consult with your attorney when you see a joint and several liability provision in a PSA or other contract.