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