Explore the court decision regarding de facto merger in asset acquisitions. Learn how the absence of common ownership impacted this M&A case. Insights on product liability risks.
September 17, 2019
M&A Stories
Introduction:
When acquiring a manufacturing business, evaluating product liability risks is crucial, even when purchasing assets instead of stock or membership interests.
The Transaction:
In this case, a manufacturing company specializing in lathes filed for bankruptcy and sold its intellectual property, including pricing and customer data, and know-how, to another company. Subsequently, this company sold the same intellectual and intangible assets to a buyer. The buyer’s business involves manufacturing machines for various industrial applications and servicing parts for machines made by different companies, including those originally produced by the bankrupt manufacturer.
The Lawsuit:
Before the bankruptcy, the seller had sold a lathe to a customer. An employee of that customer was injured due to a piece of metal released from a lathe manufactured by the seller. Unable to locate the seller, the injured employee sued the buyer, alleging that the buyer was a successor to the seller based on Ohio’s de facto merger successor liability doctrine.
The injured employee’s argument rested on the buyer’s acquisition of the seller’s intangible assets, such as intellectual property, and its website’s representation as the seller. The buyer countered that it made similar claims for numerous legacy companies but did not assert actual ownership over them.
Court Decision:
The court dismissed the de facto merger claim because the buyer did not acquire the seller’s physical office or inventory.
Comment:
In cases where there is no common ownership between the seller and buyer, establishing a de facto merger is challenging. Even under the more plaintiff-friendly product line exception to successor liability, the buyer must acquire substantially all of the seller’s assets, which did not occur in this instance.
Case Reference:
Sowell v. Bourn & Koch, Inc., Case No. 18-CV-0320-CVE-FHM, United States District Court, N.D. Oklahoma (August 15, 2019)
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
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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