Explore the concept of buyer’s liability in M&A deals and the impact of product line exceptions. Learn from the McAllister v. Mcdermott case and understand how to manage potential risks when acquiring manufacturing businesses.
M&A Stories
December 02, 2020
Introduction:
When a company buys the assets of another business, they typically aren’t responsible for any claims related to products made by the seller, unless they agree to take on that risk in the purchase agreement. However, some states have a “product line exception” that changes this rule. Let’s dive into an example that helps explain this concept.
The Story:
Back in 1985, a company bought another company that made products containing asbestos. The agreement said the buyer wouldn’t be accountable for any problems caused by the seller’s products.
The Legal Issue:
A person who worked with the seller’s asbestos-based products sued the buyer after developing a serious illness. The lawsuit landed in a Louisiana federal court. The buyer argued that they shouldn’t be held responsible because they hadn’t agreed to take on the seller’s product liabilities.
The Twist:
The person suing agreed that the buyer didn’t agree to take on those liabilities. But they said a Pennsylvania rule called the “product line exception” should still make the buyer responsible. This rule is used in cases where a buyer takes over a seller’s manufacturing business assets and makes the same things. In this situation, the buyer can be held accountable for defects in products even if they were made by the seller before.
The Buyer’s Argument:
The buyer said, “Hold on, the rule about Pennsylvania’s laws in our agreement only applies to interpreting that agreement, not to other things.” They claimed that the rule didn’t apply to this case.
The Court’s Decision:
The court agreed with the buyer’s argument and ruled in their favor.
This case is referred to as McAllister v. Mcdermott, INC., Civil Action No. 18-361-SDD-RLB, United States District Court, M.D. Louisiana, (August 14, 2020)
Key Lesson:
When buying a manufacturing company’s assets, it’s smart for the buyer to avoid agreeing to take on the seller’s product liabilities. In states like Pennsylvania and California, where the “product line exception” exists, there’s a chance the buyer could still be responsible for those liabilities. This risk can be managed with tools like insurance.
By John McCauley: I help people manage M&A risks involving privately held companies.
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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