The asset buyer had not assumed this liability in the asset purchase agreement and no common ownership or officer director management between buyer and seller.
M&A Stories
August 26, 2021
Introduction:
When an asset buyer acquires a business, they have the opportunity to manage legal risks through the asset purchase agreement. The buyer can choose which liabilities they will assume and seek indemnification from the seller. However, there are certain liabilities, known as successor liabilities, which might be imposed upon the buyer by law.
The Deal:
In this case, a buyer purchased a talcum powder brand from a seller in 1987. The asset purchase agreement explicitly stated that the seller would indemnify the buyer for any pre-existing liabilities.
The Lawsuit:
Subsequently, a hairdresser who regularly used the talcum powder sued the buyer in a North Carolina federal district court, claiming that the product caused her mesothelioma. She argued that the buyer was liable under two North Carolina successor liability rules: the de facto merger rule and the mere continuation rule.
Court’s Decision:
The court concluded that neither of the successor liability rules applied to this transaction, and therefore, the buyer was not legally responsible for the hairdresser’s damages. The de facto merger exception required various factors that were only partially alleged in this case, such as continued management between the two corporations, continuity of shareholders, and the seller’s immediate dissolution, which were not present. Additionally, the mere continuation exception, which typically considers continuity of stockholders and directors between the selling and buyer corporations, also did not apply because there was no continuity between the two entities. The buyer corporation had different directors, and the seller continued to exist, albeit on a smaller scale.
This case is referred to as Bell v. American International Industries, No. 1:17CV111, United States District Court, M.D. North Carolina, (July 30, 2021).
Comment:
The court applied North Carolina law to the case, rejecting the plaintiff’s attempt to apply California’s products line successor liability rule, which does not require common ownership between the seller and buyer. The court declined this application as the plaintiff had only used the product in North Carolina, making North Carolina’s successor liability rules relevant.
Overall, the court’s decision clarified that the asset buyer, in this particular situation, was not liable for products liability as a successor, as they did not meet the requirements of the relevant successor liability rules under North Carolina law.
By John McCauley: I help people manage M&A legal risks.
Email: jmccauley@mk-law.com
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Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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