Delaware Court Of Chancery Dismisses Breach Of Contract Claims Against Buyer, Finding Seller Retained Post-Closing Liability Related To Certain Product-Liability Litigations
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  • Delaware Court Of Chancery Dismisses Breach Of Contract Claims Against Buyer, Finding Seller Retained Post-Closing Liability Related To Certain Product-Liability Litigations
     
    04/18/2023
    On April 3, 2023, Vice Chancellor Nathan A. Cook of the Delaware Chancery Court dismissed the breach of contract claims by one pharmaceutical company (the “Seller”) against another (the “Buyer”) in connection with the Buyer’s acquisition of Seller’s consumer product lines in 2014 pursuant to a Stock and Asset Purchase Agreement (the “Agreement’).  Merck & Co., Inc. v. Bayer AG, No. 2021-0838-NAC (Del. Ch. Apr. 3, 2023).  After closing, product liability claims relating to talcum powder used in one of the product lines were filed against both companies.  Seven years after the closing, Seller informed Buyer that as of the seventh anniversary, it would no longer pay for defense and liability stemming from the claims and, after Buyer refused to assume the liability, sued Buyer for breach of the Agreement.  The Court found that the Agreement—which was negotiated by sophisticated parties—unambiguously established that Seller was indefinitely liable for the products liability claims for products sold before closing.

    In the “Assumption of Liabilities” provision of the Agreement, Buyer assumed liability for all purchased assets, except for “Retained Liabilities” that remained with Seller.  Seller “absolutely and irrevocably” retained “all obligations and liabilities” for the Retained Liabilities, which included products liability claims relating to products purchased prior to the closing date.  Seller asserted that if the parties had intended Seller to retain the liability indefinitely, the Agreement would have used words like “perpetual” or “forever.”  The Court disagreed, explaining that the words “absolutely” and “irrevocably” established that Seller retained the liability into perpetuity.

    Seller also argued that the “Expiration of Representations and Warranties” clause (the “Expiration Provision”) imposed a seven-year limitation on its obligations to defend product liability claims, asserting that “the general language” describing the Retained Liabilities was “qualified by the specific language” of the Expiration Provision.  The Court disagreed, finding that (i) the Expiration Provision imposed limits only on claims that the parties might bring against each other, not tort claims by third parties, and (ii) the sections of the Agreement were neither in conflict nor ambiguous.

    The Court noted that Seller’s reading would have unwound the carefully assigned liabilities explicitly established in the Agreement, which also contained no mechanism for any assumption by Buyer of the liabilities.  The Court further observed that Seller’s interpretation was commercially unreasonable and thus could not possibly be correct.  Carried to its logical conclusion, the Court reasoned that Seller’s construction of the Agreement would allow Seller to purposefully stall litigation so that after the seven-year period had passed, Buyer would be liable for all pending claims.  Finally, the Court reviewed the purchase price for the assets and found it did not contemplate liabilities for litigation.
    CATEGORY: Deal Disputes

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