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Practice Tip: Buyer (of the Assets of a Company) Beware

By Kenneth R. Meyer and Brian P. Sharkey

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.

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