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Buyers and sellers frequently find plenty to fight about post-closing, but it’s unusual to see a seller claim that obligations that were spelled out as being “retained liabilities” in the contract should pass to the buyer after a period of time.  Nevertheless, that’s the kind of claim that the Chancery Court recently addressed in Merck & Co. v. Bayer AG, (Del. Ch.; 4/23).

The case arose of out Bayer’s 2014 acquisition of Merck’s s Claritin, Coppertone, and Dr. Scholl’s product lines.  Bayer paid $14 billion in a combined stock & asset deal, and the purchase agreement detailed the liabilities that would be assumed by Bayer and those that would be retained by Merck. After the deal closed, the parties became defendants in numerous lawsuits alleging injuries arising from consumers’ use of talc-based products. These product liability claims concerned allegedly asbestos-contaminated talcum powder that Merck used in certain Dr. Scholl’s foot powder product lines sold to Bayer.

Under the terms of Section 2.7 of the purchase agreement, Merck agreed to “absolutely and irrevocably” retain “all obligations and liabilities” for product liability claims related to the product lines acquired by Bayer, including the Dr. Scholl’s product line, to the extent such claims arise out of or relate to periods prior to the Closing Date. Accordingly, Bayer tendered all of the talc claims that it received to Merck, which conditionally accepted them while reserving its rights.

In January 2021, Merck notified Bayer that it would cease accepting tenders of all product-related claims from Bayer on October 21, 2021, which was the seventh anniversary of the closing date. In support of its position, Merck cited Section 10.1 of the purchase agreement, which provided that “[a]ll liability and indemnification obligations with respect to the Section 2.7(d) Liabilities shall survive until 5:00 P.M. (Eastern time) on the date that is the seventh (7th) anniversary of the Closing Date.”  Based on this language, Merck contended that responsibility fo all product-related liabilities transferred to Bayer on October 1, 2021.

Bayer argued that the language of Section 2.7 unambiguously provided that Merck retained the liabilities at issue forever and that the language Merck relied upon in Section 10.1 dealt only with separate indemnification rights.  Vice Chancellor Cook began his analysis of the parties claims by observing that  that the purchase agreement dealt with two distinct forms of liability. The first was potential substantive damages liability to third-party consumers, while the second was costs incidental to litigation, even if Bayer wasn’t substantively liable for these third-party claims. This excerpt from the opinion addresses the implications of the way the contract approached those two distinct forms of liability:

While substantive third-party liability was apportioned in Sections 2.6 and 2.7, Article X addresses the separate and distinct issue of various, limited contractual indemnification rights belonging to Merck and Bayer vis-à-vis each other. In addition, Article X sets forth time limits on these contractual indemnification rights, as well as the [purchase agreement’s] representations and warranties. What Article X does not do is extinguish the underlying liability for third-party claims. Indeed, Article X cannot do this, since it addresses purely contractual rights between Merck and Bayer and has no bearing on the tort claims of third-party consumers who are not party to the [purchase agreement].

Merck argued that language in Section 10.1 providing that “all liability” for the liabilities retained under Section 2.7 would expire on October 21, 2021, but the Vice Chancellor concluded that this interpretation would lead to an absurd result:

Indeed, if I were to adopt Merck’s advocated interpretation of Section 10.1, that approach would lead, at most, only to the absurd conclusion that, after seven years, the pool of Section 2.7(d) Liabilities retained by Merck simply “expires.” Merck avers that upon this “expiration” the Section 2.7(d) Liabilities become Bayer’s, but there is no mechanism in the [purchase agreement] by which these liabilities would be transferred upon expiration. And it does not make sense to say that the third-party tort claims that comprise the Section 2.7(d) Liabilities would “expire” after seven years. As highlighted by Bayer, Merck and Bayer have no power to extinguish liability for the Product Claims, which are tort claims brought by third parties that were not parties to the [purchase agreement].

As a result, the Vice Chancellor concluded that Bayer’s interpretation of the agreement was the only reasonable one and granted its motion to dismiss the complaint.

– John Jenkins