Delve into the legal complexities of M&A with insights from Phillips v. Cooper Laboratories. Explore successor liability in asset acquisitions, learn from real-world cases, and master risk management strategies for businesses. Essential reading for entrepreneurs, legal professionals, and stakeholders navigating the dynamic landscape of mergers and acquisitions.
M&A Stories
April 18, 2018
In the realm of mergers and acquisitions, particularly in states like California, the specter of successor liability looms large for asset buyers. This legal principle, established in the 1977 California Supreme Court case Ray v. Alad Corp., holds buyers responsible for defective products made by the seller prior to the asset sale if certain conditions are met.
However, a recent case sheds light on the nuances of successor liability and underscores the importance of careful examination before assuming responsibility for past liabilities. In Phillips v. Cooper Laboratories (1989), the court ruled in favor of a company (“Buyer”) that had purchased part of a drug manufacturer’s assets in 1958, absolving it of liability for injuries caused by a drug sold by the original manufacturer (“Miller Lab”) in 1983.
The intricacies of the case lie in the timeline of asset transfer and the subsequent activities of Miller Lab. In 1958, the Nestlé group acquired all of Miller Lab’s stock, subsequently reorganizing its operations. While one subsidiary continued drug production, Buyer received Miller Lab’s marketing and sales assets, among others. Importantly, Miller Lab persisted as a separate entity, functioning profitably as a warehouse operation until its dissolution in 1968.
The court’s ruling hinged on the three criteria outlined in Ray v. Alad Corp. for imposing successor liability. Crucially, it found that Buyer’s acquisition did not result in the “virtual destruction” of the injured party’s remedies against Miller Lab. Instead, the dissolution of Miller Lab a decade later was deemed an independent cause, severing any causal link between Buyer’s actions and the loss of remedies.
This case serves as a cautionary tale for asset buyers, emphasizing the need for thorough due diligence and clear delineation of assumed liabilities in purchase agreements. Particularly for businesses involved in product manufacturing, understanding the implications of successor liability is paramount. In jurisdictions like California, where the legal landscape may not align with buyer expectations, recourse to insurance becomes a vital risk management strategy.
For entrepreneurs, business owners, CFOs, legal professionals, and other stakeholders navigating the complex terrain of mergers and acquisitions, Phillips v. Cooper Laboratories offers valuable insights into the intricacies of successor liability and underscores the importance of meticulous planning and legal counsel.
Case Reference: Phillips v. Cooper Laboratories (1989) 215 Cal. App. 3d 1648, and can be found at: https://law.justia.com/cases/california/court-of-appeal/3d/215/1648.html
By John McCauley: I help people start, grow, buy and sell their businesses.
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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