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Practice Tip: Buyer (of the Assets of a Company) Beware
Company X is evaluating whe-ther it should purchase the assets of Company Y, which manufactures lawnmowers. Company X has been looking to break into the lawnmower market and sees the purchase of Company Y's assets as an excellent opportunity to do so. Company X is considering two courses of action if it purchases Company Y's assets: 1) continue the manufacture of Company Y's lawnmower product line, using Company Y's designs, specifications, diagrams, blueprints, personnel, and manufacturing facilities; or 2) cease the manufacturing of the product line, but continue Company Y's ancillary business of repairing and servicing the lawnmowers it sold to its customers. Company X comes to you with a seemingly straightforward question: Under these two scenarios, will it be held liable for product liability claims arising from Company Y's manufacture and sale of defective lawnmowers, even if, as part of the asset purchase, it expressly declines to assume Company Y's liabilities? Unfortunately, based on the current state of the law, you will not be able to provide Company X with an easy, clear-cut answer.
The general rule of corporate-successor liability in the United States is that when a company sells its assets ' as distinguished from stock ' to another company, the acquiring company is not liable for the debts and liabilities of the selling company simply because it succeeds to the ownership of the assets of the seller. There are four traditional exceptions to that general rule: 1) the successor expressly or impliedly assumes the predecessor's liabilities; 2) there is an actual or de facto consolidation or merger of the seller and the purchaser; 3) the purchasing company is a mere continuation of the seller; or 4) the transaction is entered into fraudulently to escape liability.
Several jurisdictions, however, have developed two other exceptions to the general rule of non-liability. Unlike the traditional exceptions, these newer exceptions do not emphasize the corporate form but instead focus on the operations of the acquiring entity following the asset purchase. One of these exceptions is referred to as the continuity of enterprise exception. The seminal case adopting this exception is Turner v. Bituminous Casualty Co., 244 N.W.2d 873 (Mich. 1976). Under this exception, a successor corporation may be liable for a predecessor company's injury-causing product where the totality of the circumstances surrounding the acquisition demonstrates a basic continuation of the enterprise from the seller to the buyer. Turner held that an individual injured by a predecessor's product could establish a prima facie case under this exception against the successor if he or she established the following facts: 1) a continuation of the seller corporation, so that there is a continuity of management, personnel, physical location, assets, and general business operations of the predecessor corporation; 2) the predecessor corporation ceases its ordinary business operations, liquidates, and dissolves as soon as practicable; 3) the successor corporation assumes the liability and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the predecessor corporation; and 4) the successor corporation holds itself out as the continuation of the predecessor corporation. Id. at 883-84.
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