Dive into the intricate world of M&A legalities with our latest blog post. Explore the strategic advantages and potential pitfalls of asset purchases versus stock acquisitions, as we unravel the complexities of liability, particularly in jurisdictions like Georgia. Discover how a landmark federal case sheds light on the unexpected legal obligations asset buyers might face, from asbestos claims to warranty service liabilities. Gain insights into the crucial lessons learned from this case, emphasizing the necessity of comprehensive due diligence and strategic foresight in navigating the legal intricacies of M&A transactions. Don’t miss out on this cautionary tale that underscores the importance of understanding legal risks in asset acquisitions.
M&A Stories
June 7, 2018
In the realm of mergers and acquisitions, the decision to acquire a company’s assets rather than its stock can offer strategic advantages. Asset buyers typically have the freedom to cherry-pick which liabilities they assume from the seller, mitigating risks. However, in certain jurisdictions like Georgia, asset buyers may find themselves unexpectedly liable for additional obligations, such as claims related to asbestos exposure from products sold by the seller.
Consider a pivotal federal case originating from Georgia, which underscores this nuanced legal landscape. In 1980, a buyer acquired a pump product line from a seller, unaware that the products contained asbestos marketed under the name “Chicago Pump.” Despite assuming only limited warranty service claims in the asset purchase agreement, the buyer faced an unforeseen challenge.
The crux of the matter emerged when Bobby, a former maintenance worker at a textile plant, developed pleural mesothelioma due to asbestos exposure during his tenure from 1969 to 1996. Bobby’s widow, Mary, brought forth a lawsuit against the buyer, alleging that his illness stemmed from exposure to Chicago Pump products.
The buyer’s defense rested on the assertion that Bobby’s exposure occurred prior to their ownership and was therefore the responsibility of the seller. However, the court’s ruling refuted this contention.
Under Georgia law, by assuming warranty service obligations for the products sold by the seller, the buyer inadvertently assumed a duty of care towards end-users. Consequently, the buyer could be held liable if three conditions were met: Bobby’s exposure to asbestos-containing products supplied by the seller, a reasonable expectation for the buyer to provide warnings, and the buyer’s failure to do so being the proximate cause of Bobby’s injury.
This case underscores a crucial lesson for asset buyers: assuming warranty service obligations may extend beyond mere customer service—it may entail assuming a duty to safeguard users against foreseeable risks associated with the product. By neglecting to provide adequate warnings, the buyer inadvertently exposed themselves to legal liabilities, despite their limited contractual obligations.
In essence, this legal precedent serves as a cautionary tale, highlighting the importance of thorough due diligence and strategic foresight in navigating the complexities of asset acquisitions, particularly in jurisdictions where liability can extend beyond contractual agreements.
Case Reference:
Farmer v. Air And Liquid Systems Corporation, Case No. 1:16-CV-054 (LJA, United States District Court, M.D. Georgia, Albany Division (March 28, 2018).
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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