For The Defense, November 2012 - DRI Today

Product Liability
ation exceptions when trying to establish
that successor liability should apply.
The focus of the de facto merger analysis
is on the similarity of business operations
of the predecessor and the successor companies.
If a successor retains continuity of
certain aspects of the predecessor company’s
general business operations and obligations,
such as management, personnel,
Which state’s law
applieswill play a
significant role in
determining whether a
company does or does
not have asbestos- related
successor liability.
business location and shareholders, and
the two companies reasonably promptly
dissolved the predecessor’s business operations,
a court likely will find that the
two companies executed a de facto merger.
See Philadelphia Electric Co. v. Hercules,
Inc., 762 F.2d 303, 310 (3d Cir. 1985); T.H.S.
Northstar Assocs. v. W.R. Grace & Co., 840 F.
Supp. 676 (D. Minn. 1993). Although courts
have developed a four-part test incorporating
these factors to assess whether a de facto
merger exists, the analysis is less than scientific,
and how a court will rule is not easy
to predict. Indeed, several Minnesota courts
have issued conflicting opinions on whether
the acquisition of Zonolite Company by
W.R. Grace resulted in successor liability.
In T.H.S. Northstar Associates, Northstar
claimed that it had been forced to remove
and replace Monokote asbestos fireproofing
at considerable cost and that W.R. Grace
should be held liable for those costs as a successor
in interest to Zonolite Company. Under
the purchase agreement, W.R. Grace
acquired substantially all of Zonolite’s properties
and assets, including its business as
a going concern, its name, know-how, formulas,
and contracts, in exchange solely
for a small part of the common stock of
32 ■ For The Defense ■ November 2012
W.R. Grace. Under the agreement Zonolite
was to dissolve and liquidate as soon as
practicable after closing the deal, and W.R
Grace assumed all Zonolite’s debts and liabilities
existing on the date of the closing.
W.R. Grace argued that the transaction was
an asset purchase rather than a merger because
Zonolite remained in business for 17
months after the closing and retained assets
of over $200,000. Furthermore, even
though the agreement required W.R. Grace
to retain Zonolite’s president for five years,
W.R. Grace did not add any Zonolite representatives
to its board, and Zonolite shareholders
held a mere 2.27 percent of W.R.
Grace’s stock after the acquisition. Despite
that in an earlier Minnesota district court
decision in East Prairie R-2 School District
v. U.S. Gypsum Co., 813 F. Supp. 1396 (E.D.
Mo. 1993), the court found that W.R. Grace
was not a successor in interest to Zonolite,
the Northstar court held that the evidence
satisfied each element of a de facto merger,
thereby making W.R. Grace liable for the
cleanup associated with Zonolite’s asbestoscontaining
fireproofing under Minnesota
law. The Northstar court viewed the East
Prairie court’s application of the de facto
merger doctrine as too narrow; the East
Prairie court grounded its decision in two
facts: “the small percentage of W.R. Grace
shares held by former Zonolite stockholders
and the lack of mutual officers and directors.”
The Northstar court, instead found the
continuity of shareholders, rather than the
percentage of ownership, more significant
to a finding of a de facto merger. The court
also found it important that Zonolite did
not remain at arms’ length with W.R. Grace
after the litigation, but instead W.R. Grace
created a “Zonolite Division” and continued
the operations of Zonolite through the use
of its expertise and personnel.
The mere continuation exception to the
rule against successor liability in asset purchases
is based on the premise that despite
the change in name and other characteristics
the successor corporation has in
essence the same identity as the predecessor
corporation. Tift v. Forage King Indus.,
Inc., 322 N.W.2d 14, 16–17 (Wis. 1982);
Sculptchair, Inc. v. Century Arts, Ltd., 94
F.3d 623, 630 (11th Cir. 1996); Bud Antle,
Inc. v. Eastern Foods, Inc., 758 F.2d 1451,
1458 (11th Cir. 1985) (a “mere continuation
of business” will be found where the purchasing
corporation is merely a “new hat”
for the seller with the same or similar management
and ownership).
Unlike the de facto merger exception,
the authors have not identified a widely
accepted formula listing the elements that
courts must identify to determine whether
a successor corporation merely continued
the operations of the predecessor. Instead,
courts have considered various factors
when trying to identify business continuity,
including the circumstances surrounding
the successor’s purchase of the assets
of the predecessor and the degree of continuity
between the shareholders, directors,
and officers of the successor corporation
and the predecessor.
Evolving Theories of Successor Liability
Courts traditionally have applied the de
facto merger or the mere continuation
exceptions in product liability cases very
narrowly and reluctantly. As a result, other
theories of successor liability have evolved
that have provided more fertile ground for
asbestos plaintiffs in jurisdictions that have
adopted them.
The continuous enterprise exception was
developed as a way to broaden the restrictive
mere continuation exception. It emphasizes
continuation of the entire business
operation rather than the mere continuity
of the corporate entity. Courts consider
factors such as (1) whether there is a basic
continuity of the enterprise of the seller
corporation, including the retention of key
personnel, assets, general operations, and
corporate name; (2) whether the seller corporation
ceases business operations, liquidates,
and dissolves soon after the sale;
(3) whether the purchasing corporation assumes
those liabilities and obligations of the
seller that are ordinarily necessary for continuing
the normal business operations of
the seller corporation; and (4) whether the
purchasing corporation holds itself out as
in effect a continuation of the seller corporation.
Courts that have supported the development
of this doctrine have reasoned
that this approach places the risk associated
with a defective product on the manufacturer
rather than the consumer, and
the successor corporation should be made
to bear some of the burden of its predecessor
after receiving the benefit of continuing
the predecessor’s business.