Purchasing Assets from a Third Party Manufacturer – Legal Issues You Need to Be Aware Of
It is a common practice in the business world – a company purchases the assets of a third party manufacturer, or sub-contracts the manufacture of its product to a third party company. Making such deals are likely good for business, but also raise a myriad of legal issues that need to be addressed including labor, compliance and product liability.
If there are unionized employees working for the manufacturer, you need to thoroughly examine any provisions containing “successors and assigns” language in the union’s collective bargaining agreement. This language basically means that the terms of the labor contract are binding on the signatory company and all entities that succeed to its interest. Therefore, if you are purchasing assets from a manufacturer that has an active labor contract, you are assuming the terms of that labor contract.
If you discover such a provision prior to the asset purchase being complete, you need to ensure that the party selling the manufacturing base has resolved any outstanding issues with the unionized workers in order to avoid the risk of a conflict between the new owner and the labor force.
Review of regulatory compliance is essential to ensure your company minimizes the possibility of a fine, or other penalties, from a state or federal regulator. You must ask the following questions regarding compliance:
- Are there any outstanding regulatory enforcement actions such as sanctions or fines?
- Does the seller have all the necessary permits to do business and is it complying with those permits?
- Can the permits be transferred to your company as the new owner?
- Does the seller generate hazardous waste and is it handling it properly?
If you are purchasing the assets of a manufacturer, be prepared to hear the phrase “successor liability” quite often from your counsel. Typically, the purchaser of a company is able to avoid responsibilities for the debts and liabilities of the seller. Though, there are exceptions. For example, a successor company can be held liable if:
- There was an express assignment of liability;
- There was an express merger of the two companies as opposed to one company buying the assets of another; or
- A determination that the successor is a mere “continuation” of the predecessor company.
Furthermore, some states have adopted a “product line exception” which can expose you to liability for alleged product defects. This product line exception may apply if the purchaser acquires all assets of the seller or the purchaser holds itself out as a continuation of the seller by producing the exact same product line.
Due Diligence is Key
Your legal counsel needs to consider these issues during the due diligence period when assessing the viability of the asset purchase or sub-contract agreement. Your counsel should assess the litigation profile of the seller to determine the likelihood of becoming embroiled in litigation (e.g., has the seller been sued for product liability before?) and whether you plan to continue on with the same product line. It will take some investigating to get clarity on these important issues, but it is absolutely necessary to ensure your company makes the wisest decision when purchasing assets from a third party manufacturer.
Talk To One Of Our Brownsville Corporate Attorneys
The attorneys at Colvin, Chaney, Saenz & Rodriguez, L.L.P. are experienced and highly skilled trial lawyers. We know how to represent corporate clients and provide strong, effective defense in all matters of litigation. Learn more about how our firm can help your company today. You can reach our South Texas litigation attorneys by phone at 956-542-7441.