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Comment by lilyball | Hacker News Reader

Given that these businesses had contracts with Smyte, how is this not a flagrant violation of the contracts? Surely Twitter took on Smyte's contractual obligations when they acquired the startup?

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There are many ways to accomplish this, for example, doing it as an asset purchase instead of acquiring all the stock.

In the former, you can take the assets (including employee contracts) without the liabilities.

There's actually a reasonable quora answer (for once) on this, saving me from writing it up for you :)

https://www.quora.com/What-happens-to-legal-contracts-financ...

In a case like this, does that mean that Smyte (the company, even if they no longer own the trademark) still exists and is liable for all the penalties? Would they usually ask for the cash to pay for them as part of the asset purchase?

In a case like this what's left other than an empty sack? Unless you're able to pierce the corporate veil there isn't anyone/anything with assets left to be made whole by (e.g. sue).

One could argue the transfer was fraudulent. And go after both parties. Twitter and the founders.

Don't know, not a lawyer.

IANAL but I was a plaintiff in a similar case. We were made whole in a settlement but before that, the judge tore the defendants a new one over this tactic leading to a bitter dispute between the acquierer and shareholders (or the board of officers, don't remember) over who was liable for breach of contract. Eventually it came out that the auditors had done the math and included cost of litigation/liabilities on these contracts into their valuations, basically admitting that they knew about the obligations beforehand, so the acquierer ended up settling.

At the end of the day, judges (and appellate panels) have to interpret the law and they don't function like automatons. They take into account the spirit of laws/contracts as well as the letter and most have enough common sense to get missed off at these naive tactics.

The argument that penalties should be paid out of the purchase price would probably hold water. When Smyte entered into those contracts they took on some duty to honor them and to suddenly dishonor them and divert all the assets out of the company so that penalties wouldn't ve avoided would be constructive fraud.

in that case smyte would still exist and now have lots of money from the acquisition you could sue for

Well, usually they are using the money to wind down.

(All of this is a good reason i hate LLC's. They aren't necessary anymore to actually do risky innovation in 90%+ of cases. In a non-LLC, they shareholders would be liable, and then you'd still have someone to go after)

Yes, it does mean the former.

Usually, they would use the cash to wind down.

This is the thing that occurred to me. Surely those contracts don't have a clause that says "Smyte can terminate all services with no notice"? If so, surely someone spotted it by now? Or is this normal in service contracts in the US?

I guess the liability is covered by the usual "no liability outside provision of the service" clause - so you can't claim that you were damaged by their lack of service. But I can see a lawyer making a convincing case that the liability should rest with Smyte. IANAL, obviously, but it seems like the sort of thing they love to fight about ;)

gets popcorn this one will be interesting...

It is in fact a possibility that Smyte's terms were extremely one-sided.

Perhaps the default terms were Smyte-friendly, but I can't imagine that some of these big companies (with savvy lawyers) would sign an agreement with a change-of-control provision that would permit this.

There might be a carveout for consequential damages (which would be huge here), but this seems like it will trigger a number of sizable lawsuits against Smyte's new owner.

Does anyone think they companies that just got the shaft have legal recourse?

If nothing than just getting a pound of flesh from twitter.

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