The decision to purchase the assets of a manufacturer raises a host of legal issues, including labor/employment, environmental, and product liability.  We thought we would do a group post to describe the first things that come to mind for each of us when one of our clients considers such a deal.

Nicole:  As a labor lawyer, I am always concerned about the implications of a unionized workforce.  If there are unionized employees, it is important to examine any “successors and assigns” provisions contained in the collective bargaining agreement(s) of each represented union.  This language generally requires that the terms of the contract are binding on the signatory company and all entities that succeed to its interest.  As a result, if the company is sold, the collective bargaining agreement may require the seller to secure the buyer’s agreement to assume the terms of the contract.

Although this language is not binding on the purchaser in an asset deal, it can create substantial confusion and delay the purchase.  In some cases, courts have enjoined transactions pending a labor arbitration between the seller and its union to determine whether the seller breached its obligations under the “successors and assigns” clause.  If a buyer discovers that the seller’s labor agreement contains such a provision, it should ensure that the seller has resolved all issues with the union fully to avoid any risk that this language would create problems after the deal has closed.  Buyers should consider whether such assurances should be included in the purchase and sale agreement at the outset.

Pam:  As an environmental lawyer, my first question is whether the buyer has retained an environmental consultant and begun its due diligence.  That due diligence will fall into two categories. First, there’s the evaluation of environmental impacts, such as historic releases of hazardous substances, which begins with a traditional Phase I site assessment.

The second issue is a compliance review – does the company have the permits it needs, and is it complying with those permits?  Can those permits be transferred to the new owner?  Does the seller generate hazardous waste and is it handling it properly?  Are there any outstanding enforcement actions?  In short, the day after the closing, can the buyer operate the business in compliance with all environmental laws?

Jeff:  As a litigator / product liability lawyer, the first thing that comes to mind is “successor liability.”  Typically, one of the main advantages of purchasing some or all of the assets of a company is that the buyer can avoid responsibilities for the debts and liabilities of the seller.  However, as with most things in the law, there are exceptions.  Although there are variations in the laws around the country, typically the buyer is not responsible for the debts and liabilities of the seller unless there is:

  1. An express assignment of liability;
  2. An express or de facto merger;
  3. A determination that the successor is a mere “continuation” of the predecessor; or
  4. A fraudulent attempt to avoid liability.

 NOTE:  Even if the answer to each of these questions is “no,” it does not mean you will not be sued. 

A minority of states have also adopted the “product line exception” in the product liability context.  State law differs, but this exception generally applies when:

  1. The buyer purchases substantially all of the assets of the seller (the whole business does not have to be acquired);
  2. The seller holds itself out as a continuation of the buyer by producing the same product line;
  3. The seller uses the goodwill of the buyer.

Significantly, under this exception the seller can be held liable for a product that the buyer manufactured.

What does this all mean?  Obviously, it is helpful to have your legal counsel consider these issues during the due diligence period, including if you sell products in one of the states that has adopted the product line exception.  Often times though, it is important to consider questions such as:

  • What is the litigation profile of the seller?;
  • Has the seller been sued for products liability before?
  • Will the sale lead to the seller going out of business in the near future?; and
  • Will you continue on with the product line?

Sometimes getting answers to these questions takes some digging because most sellers try to “clear the decks” of litigation in advance of any sale, but the necessary due diligence is a key component for the buyer in the transaction.