Avoiding Mass Tort Liability in Acquisitions

01 September 2007 Publication
Author(s): John P. Melko Timothy Spear

BNA Mergers & Acquisitions Law Report

‘‘Mass torts’’ were once thought the province of companies whose products caused injury or were the result of a catastrophic occurrence (such as a release of pollution into the drinking water supply of a city). To deal effectively with strategies designed to prevent or minimize a mass tort, it is important to understand what mass tort litigation is. ‘‘ ‘Mass tort litigation’ emerges when an event or series of related events injure a large number of people or damage their property.’’ A mass tort is defined by both the nature and the number of claims; the claims must arise out of an identifiable event or product, affecting a very large number of people and causing a large number of lawsuits asserting personal injury or property damage to be filed.1 Classic examples of mass tort litigation include asbestos litigation, breast implants, Vioxx, and Love Canal. With the current ‘‘M&A boom,’’ the potential for an entity to acquire a mass tort in the wings looms large. While it may not be possible to eliminate every potential mass tort risk in a business transaction, there are a number of issues that companies and their counsel should consider.


A. Deal Structure

1. Asset Acquisition. Perhaps the most effective deal structure for limiting a buyer’s liabilities is the direct asset acquisition. In such a deal, the buyer  and seller specify which assets will be acquired and which liabilities will be assumed by the buyer. General ‘‘successor liability’’ law provides that an asset buyer does not assume unknown seller’s liabilities, unless they have been expressly assumed or fall into one of the exceptions. Despite this general principle, there are certain exceptions to be aware of. Virtually every state’s law recognizes a form of successor liability. The following lists the major exceptions:

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