A buyer of the stock of a company that makes products wants and often gets the stock seller to promise to pay for any products liability claims that pop up after the closing that relate to products made before the closing. This promise is usually in the indemnification provisions of the stock purchase agreement.
This provision would be triggered, for example, when a person is hurt after the closing by a product that was made before the closing. In that case, the injured person would sue the company now owned by the buyer. The buyer would then make an indemnification claim against the seller to indemnify the company for the injured person’s claim.
Under the stock purchase agreement, the company now owned by the buyer may have a deadline for making an indemnification claim against the seller. This period is referred to as a survival period. The buyer’s right to indemnification is conditioned upon the company making an indemnification claim against the seller before the survival period expires.
This case involved the purchase of the stock of an Iowa based truck trailer design and manufacturing company. The seller promised in the stock purchase agreement to indemnify the company for any claim made by someone injured after the closing by a company product made before the closing. The survival period in the stock purchase agreement required the company to make an indemnification claim against the seller by the expiration of the applicable statute of limitations.
The deal closed December 17, 2012.
On December 26, 2014, a truck driver was injured when an auger manufactured by the company before the closing broke away from its trailer and fell on top of him. In May 2016, the truck driver sued the company in an Iowa trial court, alleging defects in the auger’s design and manufacturing.
The company immediately brought the seller into the lawsuit asking the court to order the seller to indemnify the company for the truck driver’s claim. The seller refused arguing that the company’s indemnification claim was made after the expiration of the applicable Iowa statute of limitations.
Both the seller and the company agreed that the applicable Iowa statute of limitations was two years. This statute of limitations stated that the truck driver had two years to bring his products-liability action against the company from the date of his injury.
The seller read this statute to require the company to bring its indemnification claim against the seller by December 17, 2014, which is the 2nd anniversary of the closing. Therefore, the seller argued, the company’s July 2016 indemnification claim was untimely.
The company said its claim was timely. It argued that the two year period expired on December 26, 2016, the 2nd anniversary of the December 26, 2014 accident.
The trial court agreed with the seller, but an Iowa intermediate appellate court did not and reversed the decision of the trial court and held that the company’s indemnification claim was timely, and that the company was entitled to indemnification from the seller.
This case is referred to CEI Equipment Company v. Gaddis, No. 17-1544, Court of Appeals of Iowa, (filed March 20, 2019)
The seller had argued that its exposure for product liability claims was unlimited because a product made before the closing could cause an injury 5, 10 or 15 years after the closing. The court was sympathetic but said that this outcome was the result of the deal the seller made with the buyer.
Furthermore, the court noted that this type of provision in not unusual. It quoted commentary by a highly respected M&A lawyer from Selected Provisions of the ABA Model Stock Purchase Agreement, an American Bar Association publication: “However, an extended or unlimited time period for … products liability … issues… is not unusual.”
By John McCauley: I help businesses minimize risk when buying or selling a company.
Telephone: 714 273-6291
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