Legal criteria for identifying the existence of a business succession
A matter that we increasingly deal with at our firm involves providing legal advice on the criteria for identifying business succession and the resulting liability of the new company for outstanding debts left by its predecessor.
What is business succession?
Business succession is a legal concept regulated under Article 44 of the Spanish Workers’ Statute (Estatuto de los Trabajadores), designed to protect workers’ rights when there is a change in the ownership of a company, workplace, or autonomous production unit. Under this provision, the new employer becomes legally bound by the former employer’s labour and social security obligations, including those related to pension commitments.
Business succession typically occurs when there is a transfer of an economic entity that maintains its identity — understood as a set of organised resources intended to carry out an economic activity. In such cases, it is common for the acquiring company to have assessed potential liabilities through a due diligence process and to have accepted responsibility for them.
However, legal issues most often arise when there is no formal transfer of the business or production unit. In such instances, the company continuing the activity may not wish to assume the predecessor’s labour, tax or social security obligations.
Spanish case law has clarified that succession can also exist without a formal agreement between the initial and successor entities, provided that there is functional continuity between their operations. For example, if both businesses operate in the same sector, use the same premises or staff, or retain the same clients, a court may conclude that a succession has occurred.
While continuity of activity does not automatically trigger legal succession, workers, the General Treasury of the Social Security (TGSS), or the Salary Guarantee Fund (FOGASA) frequently seek such a declaration as a means to recover unpaid debts, whether in the form of wages, social security contributions or public compensation schemes.
How to avoid liability transfer to the new company for unpaid debts of the predecessor
No transfer of essential elements of the production unit
The first step is to avoid transferring the core elements that define the economic identity of the unit. To avoid triggering business succession, it is essential not to transfer:
Premises or physical facilities: relocation away from the former business site is strongly advised.
Machinery, technology, and tools: these should not be transferred or leased to the new operator.
Client and supplier portfolios: substantial changes should be made to the commercial relationships; avoid arrangements that imply continuity.
Workforce: retaining key employees, particularly those performing essential functions, should be avoided.
In labour-intensive sectors such as cleaning, security or outsourced services, the workforce may constitute the essential element of the business. Therefore:
Conduct independent recruitment processes.
Avoid offering previous staff the same roles, terms or pay.
Hire new personnel or redefine job roles.
Implement substantial changes to the business structure
Another recommended measure is to substantially alter the nature of the activity. Ideally, this would involve changing the company’s corporate purpose — although this is not always practical, especially when the owner has industry-specific expertise.
Still, as noted above, continuity of activity alone does not suffice to establish business succession, provided other mitigating steps are taken.
For instance:
Change the business model significantly.
Use different production methods.
Introduce new technologies or distribution channels.
These changes must be genuine and substantive — not merely formal or cosmetic.
Evidence of the previous company’s closure
This is a crucial factor. When the former company does not formally cease operations, the risk of liability transfer increases. However, even this is not a definitive safeguard if other indicators of succession are present.
It is essential to document:
Actual asset liquidation, at fair market value and without simulation.
Closure of former business premises.
Termination of contracts and administrative licences.
This documentation can serve as key evidence in legal proceedings to rebut claims of succession.
Legal guidance in drafting third-party contracts
It is also vital to carefully draft commercial contracts with third parties, ensuring that they explicitly state that no transfer of business or personnel is taking place. Contracts should:
Include clauses preventing or limiting staff subrogation.
Emphasise the provider’s autonomy and independent management.
Although such clauses may not override legal findings of de facto succession, they strengthen the company’s legal position.
The importance of preventive legal advice
Given the complexity and fact-specific nature of business succession cases, it is essential to seek comprehensive legal advice early on.
A thorough legal analysis allows companies to design operational and contractual structures that minimise the risk of triggering business succession and ensure compliance with current law and case law.
Businesses must proceed with the utmost caution when making organisational, contractual and strategic decisions. Clear and transparent actions, backed by legal-technical analysis, are crucial to avoiding unintended liabilities — such as the assumption of employment debts, litigation, or collective labour disputes.
Do you need advice? Access our area related to the steps to be taken by a company in a business succession: