busted m&a deals headed for litigation - Jackson Walker LLP

imposed upon findings of (1) continuity of the outward appearance of the enterprise, its management
personnel, physical plant, assets and general business operations; (2) the prompt dissolution of the
predecessor following the transfer of assets; and (3) the assumption of those liabilities and
obligations necessary to the uninterrupted continuation of normal business operations. These are
essentially the same ingredients which support the de facto merger doctrine - but without the
necessity of showing continuity of shareholder ownership.
3. Product Line Exception
In 1977 California took a slightly different tack in holding a successor liable in a products
liability case. In Ray v. Alad Corp., 560 P.2d 3 (Cal. 1977), the buyer had acquired essentially all of
the seller’s assets including plant, equipment, inventories, trade name, goodwill, etc. and had also
employed all of its factory personnel. The buyer continued to manufacture the same line of products
under the seller’s name and generally continued the seller’s business as before. Successor liability
was found by the California Supreme Court:
A party which acquires a manufacturing business and continues the output of its line
of products under the circumstances here presented assumes strict tort liability for
defects in units of the same product line previously manufactured and distributed by
the entity from which the business was acquired.
The rationale for this doctrine had moved a long way from the corporate statutory merger analysis of
the de facto merger doctrine. The Court determined that the plaintiff had no remedy against the
original manufacturer by reason of the successor’s acquisition of the business and consequent ability
of the successor to assume the original manufacturer’s risk. The Court also determined that the
responsibility of the successor to assume the risk for previously manufactured product was
essentially the price which the buyer had paid for the seller’s goodwill and the buyer’s ability to
enjoy the fruits of that goodwill. See also Ramirez v. Amsted Industries, Inc., 431 A.2d 811 (N.J.
1981).
4. Choice of Law
Of those states which have considered the issues directly, more have rejected the product line
exception than have embraced it. However, because choice of law principles, especially in the area
of product liability, may find the law of a state in which an injury occurs to be applicable, the reach
of those states which have embraced either the product line exception or the narrower continuity of
interest doctrine may be beyond their respective borders. See generally Ruiz v. Blentech
Corporation, 89 F.3d 320 (7 th Cir. 1996); Nelson v. Tiffany Industries, 778 F.2d 533 (9 th Cir. 1985).
5. Environmental Statutes
In 1980 the federal Superfund law was enacted - Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (“CERCLA”). In the years since the enactment of that
statute, environmental issues have become a central - and often dominant - feature of acquisitions.
Moreover, in creating liability of a current owner for the costs of cleaning up contamination caused
by a prior owner, the statute effectively preempted the ability of a buyer to refuse to accept liability
for the sins of the seller or seller’s predecessor. Unlike the theories discussed above which might
impose successor liability on a buyer if certain facts appeal to certain courts, CERCLA determined
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