Legal Definitions - mere-continuation doctrine

The mere-continuation doctrine is a legal principle that allows a new corporation to be held responsible for the debts and liabilities of an older corporation, even after the older one has transferred its assets to the new one. This doctrine applies when the new corporation is essentially just a continuation of the old one, rather than a truly distinct entity. It prevents a company from simply changing its name or legal structure to avoid existing obligations while continuing the exact same business with the same people in charge.

For this doctrine to apply, two main conditions must typically be met:

• Only one corporation remains: After the transfer of assets, the original corporation effectively ceases to exist, and only the new corporation continues to operate the business.
• Identity of stock, shareholders, and directors: The new corporation must have substantially the same ownership (stock), owners (shareholders), and management (directors) as the old one.

Here are some examples illustrating the mere-continuation doctrine:

• Example 1: Family Business Restructuring

  Imagine a small, family-owned construction company, "Build-It-Right Inc.", which has been operating for decades. The family decides to restructure for tax purposes and creates a new entity, "Build-It-Right Solutions LLC". All the assets, equipment, client contracts, and employees from Build-It-Right Inc. are transferred to Build-It-Right Solutions LLC. The same family members who owned and managed Build-It-Right Inc. become the owners and managers of Build-It-Right Solutions LLC, and Build-It-Right Inc. is then dissolved. If Build-It-Right Inc. had an outstanding warranty claim from a previous project or a pending lawsuit for a construction defect, Build-It-Right Solutions LLC could be held liable under the mere-continuation doctrine. The court would view the LLC as simply a continuation of the Inc., as it's the same business run by the same people, despite the change in legal form.

• Example 2: Professional Services Firm Reorganization

  Consider a well-established accounting firm, "Precision Accounts, P.C." (a professional corporation). The partners decide to convert the firm into a Limited Liability Partnership (LLP) to gain certain liability protections, forming "Precision Accounts LLP". All the existing partners become partners in the LLP, the same staff are retained, and all client accounts, office leases, and intellectual property are transferred from the P.C. to the LLP. The P.C. is subsequently dissolved. If Precision Accounts, P.C. was facing an audit negligence claim or had an unpaid vendor invoice, Precision Accounts LLP could be held responsible. The mere-continuation doctrine would apply because the LLP is essentially the same business, with the same ownership and management, simply operating under a new corporate structure.

• Example 3: Manufacturing Company Attempting to Shed Liabilities

  A manufacturing company, "Industrial Gearworks Inc.", is facing significant product liability lawsuits due to a faulty component it produced years ago. To try and avoid these liabilities, the company's board of directors and primary shareholders create a new corporation, "New Age Gear Solutions Inc.". Industrial Gearworks Inc. then transfers all its manufacturing plants, machinery, customer lists, and inventory to New Age Gear Solutions Inc. The CEO, CFO, and all key executives and board members of Industrial Gearworks Inc. take on the same roles in New Age Gear Solutions Inc., and the ownership structure remains largely identical. Industrial Gearworks Inc. then formally dissolves. Under the mere-continuation doctrine, the pending product liability lawsuits against Industrial Gearworks Inc. could be transferred to New Age Gear Solutions Inc. The court would likely find that New Age Gear Solutions Inc. is merely a continuation of the old company, as it operates the same business with the same assets, management, and ownership, despite the attempt to create a new legal entity.