The Law Offices of Paul H. Appel – Your Trusted Business Law Partner in New Jersey
Buyer Risk · New Jersey
An undisclosed liability is an obligation that existed before closing but was not revealed to the buyer — an old tax bill, an unpaid supplier, a claim waiting to be filed. This page explains how such liabilities reach a buyer and how the purchase agreement can send them back to the seller.
Definition
In deal terms, an undisclosed liability is any obligation of the business arising from events before closing that was not listed in the agreement's disclosure schedules or reflected in the financial statements the buyer relied on.
They come in three broad kinds. Some the seller knew about and chose not to mention. Some the seller knew about but did not think were important — a customer complaint, an informal promise to an employee. And some nobody knew about yet, because the claim had not been made: a product sold years ago that fails, or an audit of a period long before the sale.
The routes
The path depends mainly on how the deal is structured.
Stock deal
When you buy shares or membership interests, every obligation of the entity remains with it. You do not assume it personally, but the company you now own has to pay, which reduces the value of what you bought.
Asset deal
Asset buyers generally take only the liabilities they agree to assume. But tax exposure from a missed bulk sale notice, liens attached to the assets, and doctrines of successor liability can still reach the buyer. The legal rules are explained in successor liability in NJ.
Practical
Even when you are not legally liable, a supplier who was never paid or a customer with a defective job may expect the new owner to make it right. Refusing may be lawful but bad for business, so the agreement should let you recover the cost.
Contract remedies
Because no amount of diligence finds everything, the agreement has to deal with what is not found. That is the job of a handful of linked provisions.
First, a no undisclosed liabilities representation: the seller states that the business has no liabilities except those shown in the financial statements, those incurred in the ordinary course since then, and those listed on a schedule. Sellers often try to limit it to liabilities they know of, or to those required to appear on a balance sheet; buyers should understand what each qualification gives away.
Second, in an asset deal, a clear excluded liabilities clause stating that every liability not expressly assumed stays with the seller. Third, an indemnity that covers both breaches of representations and excluded liabilities, ideally with the excluded-liabilities indemnity outside the general cap and basket. And fourth, security — escrow, holdback or offset against a seller note — so that the remedy is collectible.
How strong these protections should be is a negotiation. Sellers have legitimate reasons to want limits; the point is to make sure the limits are understood before signing.
After closing
Gather the facts first: what the claim is, when it arose and how much is demanded. A hasty payment may waive arguments or be hard to recover.
Most agreements require written notice to the seller within a set time and in a particular form. Missing that procedure can jeopardize the claim.
Describe the claim, the representation or indemnity it falls under, and the amount, as the agreement requires.
If there is an escrow, holdback or offset right, follow the agreement's process for drawing on it.
If the seller disputes the claim, the agreement's dispute clause will point to negotiation, mediation, arbitration or court. The firm's dispute resolution services can take it from there.
Before you sign
These provisions sit alongside the wider buyer protections described in the firm's M&A services for buyers and sellers.
Questions & answers
It is an obligation of the business, arising from events before closing, that was not disclosed to the buyer in the agreement's schedules or reflected in the financial statements. Examples include unpaid pre-closing taxes, supplier debts, wage claims and customer disputes. Some are concealed, some overlooked, and some simply had not arisen as claims when the deal closed.
It depends on the structure. In a stock or membership interest purchase, the company you bought remains responsible for its own debts. In an asset purchase, you generally take only liabilities you agree to assume, but there are exceptions — including tax exposure if the bulk sale notice is missed and successor-liability doctrines in some circumstances.
It is the seller's statement that the business has no liabilities other than those reflected in the financial statements, those incurred normally since then, and those listed on a schedule. It is one of the most valuable buyer protections because it covers problems no one specifically asked about. Sellers commonly negotiate to narrow it.
Review the purchase agreement right away for the relevant representation, the indemnity terms and the notice procedure, then give the seller written notice in the required form and time. If there is an escrow or offset right, follow the process to use it. Acting quickly and by the book preserves the claim.
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