Successor Liability and Asymmetric Information

Abstract

The doctrine of successor liability transfers tort liability arising from the seller's past conduct from the seller to the buyer. If the buyer has as much information about the liability as the seller, all beneficial acquisitions take place and the seller takes the efficient level of precaution. However, if the seller has more information about the liability than the buyer, not all beneficial acquisitions are consummated and the seller takes a suboptimal level of precaution. I argue that, in the presence of information asymmetry, the courts should increase the damages against the (potential) seller to provide better incentives to take precaution while decreasing the damages against the buyer to encourage more beneficial asset sales.

JEL Classification: K13, K22, K32