Explore the intricacies of products liability claims in M&A deals, including indemnification agreements and survival periods. Dive into the legal resolution of a real case, CEI Equipment Company v. Gaddis.
M&A Stories
April 11, 2019
Introduction:
In mergers and acquisitions, buyers often secure indemnification from sellers to cover potential products liability claims related to pre-closing products. These indemnification agreements are typically found in purchase agreements.
Triggering the Indemnification:
Let’s say, after the closing, an injury occurs due to a product manufactured before the deal. The injured party sues the now-owned company, prompting the buyer to seek indemnification from the seller. However, there’s a catch – the buyer must make this claim before a specified deadline known as the “survival period.”
The Deal:
In this case, the stock of an Iowa-based truck trailer manufacturer was acquired, and the seller agreed to indemnify the company for injuries resulting from pre-closing products. The survival period mandated the buyer to file a claim before the expiration of Iowa’s statute of limitations.
Key Events:
1. Deal closed on December 17, 2012.
2. On December 26, 2014, a truck driver was injured by a pre-closing product.
3. In May 2016, the driver sued the company for design and manufacturing defects.
4. The company promptly included the seller in the lawsuit, seeking indemnification.
5. The seller argued that the company’s claim was filed after Iowa’s statute of limitations had expired.
The Dispute:
Both parties acknowledged Iowa’s two-year statute of limitations, which counted from the injury date. The seller contended that the indemnification claim had to be made by December 17, 2014 (2nd anniversary of the closing). In contrast, the company argued that the claim was timely since the two-year survival period ended on December 26, 2016 (2nd anniversary of the injury).
Legal Resolution:
The trial court favored the seller, but an Iowa appellate court disagreed. It ruled that the company’s indemnification claim was timely and that the seller was obligated to indemnify the company.
Analysis:
The seller’s concern about unlimited exposure to product liability claims post-closing is understandable. However, the court emphasized that such outcomes stem from the terms negotiated in the deal. Additionally, it noted that this type of provision is not uncommon in M&A agreements.
Case Reference:
CEI Equipment Company v. Gaddis, No. 17-1544, Court of Appeals of Iowa, (filed March 20, 2019)
By John McCauley: I help businesses minimize risk when buying or selling a company.
Email: jmccauley@mk-law.com
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