Explore the legal implications of choice of law provisions in M&A deals and their impact on product liability, with insights from a significant case. Learn how choice of law can affect buyer responsibilities in asset purchase agreements.
June 7, 2019
M&A Stories
Introduction:
In the world of mergers and acquisitions (M&A), understanding the legal implications is crucial, especially when it comes to product liability. Today, we delve into a significant case that highlights the nuances of choice of law provisions and their impact on product liability in M&A deals.
The Basics:
When a cash buyer acquires a business’s assets, they typically aren’t held responsible for the seller’s defective products unless they explicitly accept that liability in the asset purchase agreement. However, this landscape changed in 1977 when California started imposing the seller’s product liabilities on certain asset buyers, setting a precedent that some other states would follow.
The Case:
Let’s explore a 1984 acquisition involving a company that manufactured valves. In this case, the buyer explicitly disclaimed any responsibility for the seller’s liabilities in the asset purchase agreement.
The Lawsuit:
Fast forward to 2014, a plumber and his wife filed a lawsuit against the buyer in a New York state court. They claimed that the plumber had installed and removed seller valves, potentially exposing himself to asbestos-containing dust from various components. The plumber alleged that this dust settled on his work clothing, subsequently exposing his wife when she washed his work attire.
The Choice of Law Twist:
Here’s where it gets interesting. The buyer and seller’s asset purchase agreement had an Indiana choice of law provision, and Indiana had adopted California’s product line exception. Consequently, the plumber and his spouse argued that the buyer should be held responsible for the seller’s asbestos product liability.
The Court’s Verdict:
However, the court had a different perspective. It clarified that the choice of law provision in the agreement specifically applied to contractual disputes, not tort claims unrelated to the contract. Therefore, the court applied New York law, which did not recognize the product line exception. As a result, the buyer was dismissed from the lawsuit.
Key Takeaway:
In the world of M&A, a choice of law provision primarily determines the law applicable to interpreting the contract itself. It doesn’t automatically dictate the resolution of other disputes, especially those not directly tied to the contract. When acquiring a business, buyers are generally only responsible for the seller’s liabilities if they expressly agree to assume them in the asset purchase agreement. Beyond that, buyers must consider the specific state’s successor liability laws, which can vary significantly.
In Closing:
This case serves as a reminder that in the complex landscape of M&A, it’s crucial to understand the legal intricacies involved, especially regarding product liability. Always consult legal experts to navigate the intricacies of choice of law provisions and their implications in your specific deal.Top of Form
Case Reference:
In Re New York City Asbestos Litigation., Docket No. 190364/2014, Motion Seq. No. 005, Supreme Court, New York County, (May 20, 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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