Unlock the complexities of M&A asset acquisitions with insights into liability for defective products. Explore legal precedents, such as the product-line exception, and learn how to navigate post-closing liabilities effectively. Dive into case studies, due diligence strategies, and industry insights to safeguard your interests in mergers and acquisitions.
M&A Stories
April 16, 2018
Title: Understanding Asset Buyer Liability for Defective Products in M&A
In the realm of mergers and acquisitions, the acquisition of assets comes with its own set of responsibilities and potential liabilities. Consider a scenario where one company purchases the assets of another, assuming various obligations but not the liabilities for defective products manufactured and sold prior to the transaction. What happens if an injury occurs due to one of those defective products post-closing?
Let’s delve into a case study involving a company owned by Bill, specializing in ladder manufacturing. Another entity acquires Bill’s company, taking on contractual commitments with suppliers and clients but refusing to inherit any liability for defective ladders produced before the deal’s closure.
Fast forward to a post-acquisition scenario: Herb, a third party, suffers an injury caused by a defective ladder manufactured and sold by Bill’s company prior to the acquisition. Herb takes legal action against the acquiring company, seeking recourse for the damages incurred.
In 1977, the California Supreme Court addressed a similar case, establishing a precedent that reshaped liability in asset acquisitions. The court ruled that Herb’s claim against the acquiring entity would typically be invalid unless specific conditions, such as assuming liabilities outlined in the asset purchase agreement, were met—circumstances absent in this instance.
Interestingly, Herb would find no solace in pursuing legal action against Bill’s dissolved company. The court highlighted the practical hurdles Herb would face in enforcing any judgment against a defunct, assetless entity like Bill’s former company, which likely lacked adequate insurance coverage to address post-closure liabilities.
In response to such complexities, the court introduced a groundbreaking concept known as the “product-line exception.” This legal doctrine holds an asset buyer accountable for injuries stemming from defective products previously manufactured and distributed by the acquired entity, even if the liabilities were not explicitly assumed during the transaction.
The product-line exception, initially established in California, has garnered recognition in some other states. However, its applicability varies, necessitating a thorough review of state laws to determine its relevance.
For entities operating in jurisdictions where the product-line exception applies, diligent due diligence becomes paramount. Prospective buyers must scrutinize public records for litigation history, examine the seller’s records concerning past product liability claims, and assess loss run reports from the seller’s insurer to mitigate potential risks.
Reference: Ray v. Alad Corp., 560 P. 2d 3 (1977). [Link to the case: https://scocal.stanford.edu/opinion/ray-v-alad-corp-28005]
In navigating the intricate landscape of asset acquisitions, understanding and addressing potential liabilities, such as product defects, is instrumental in safeguarding both parties’ interests and ensuring a smooth transition post-transaction.
By John McCauley: I help people start, grow, buy and sell their businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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