Business Acquisitions

Category: Business Acquisitions

Employment Law Considerations in the Purchase of a Business

This is the last post in a four-part series discussing labor and employment law issues that should be considered when a company decides to buy another company. The previous post discussed issues that can arise when a union company acquires a nonunion business. This post will address employment law considerations that should be discussed in the due diligence phase of a proposed acquisition, regardless of whether either company is represented by a union. Employment Law Considerations in the Purchase of a Business Although union issues are often a critical factor in the purchase and sale of a business, there are other employment law issues to be considered. For example: Are the seller’s employees subject to restrictive covenants such as noncompetition agreements?In a stock purchase situation, it is likely these restrictive covenants will continue to apply if the buyer chooses to retain employees governed by these agreements. In the case of an asset purchase, the agreements need to be reviewed to determine whether the agreements expressly provide that the agreements can be assigned to others. Is the buyer in an asset purchase liable for pending discrimination charges?Generally, whether a buyer is liable for discrimination claims will depend on whether the buyer is a successor to the seller. If there are pending liabilities the purchase agreement should state whether the buyer or the seller is liable. Are there current or potential issues regarding the classification of workers as independent contractors? Are there wage and hour violations, immigration concerns, work place safety issues or other workplace concerns? What are the seller’s vacation and sick pay policies? If the buyer intends to hire all or most of the seller’s employees, will the buyer allow employees to carry over accrued paid time off from the seller? Is the buyer obligated to reinstate an employee on a state or federal mandated leave of absence?In the case of a stock transaction, the buyer steps in the shoes of the seller and has the same obligation to reinstate an employee on a required leave. In an asset purchase, whether the buyer has an obligation to reinstate an employee at the expiration of a leave of absence will depend on whether the buyer is a successor to the seller. If the buyer hires all the seller’s employees, an employee on an FMLA leave would have to be re-instated unless the buyer can prove the employee’s position would have been eliminated whether or not the employee was on leave. If the buyer does intend to hire all the seller’s employees, or there will be a hiatus between the closing date and the buyer’s active operation of the business, is the seller required to give its employees a WARN Act notice of layoff?The federal Worker Adjustment and Retraining Notification Act (WARN Act) must be considered in designing an acquisition. The WARN Act requires employers to notify affected workers at least 60 days before a plant closing or a mass layoff that will last more than 6 months and affect 50 or more employees. Under the federal WARN Act, a covered employer is a business enterprise that employs: (i.) 100 or more employees, excluding part-time employees; or (ii.) 100 or more employees, including part-time employees, who in the aggregate work at least 4,000 hours per week, exclusive of overtime. Many states have some form of a WARN Act. In Minnesota, there is no notice requirement separate from the federal WARN Act, but employers are “encouraged” to give advance notice of the decision as early as possible to affected employees and their unions, the state commissioner of jobs and training, and the government of the locality where the facility is located. Parties to a sales transaction should work with their attorneys to determine if WARN Act notices must be provided in connection with a business acquisition. Buyers should be clear in the transaction documents that the seller is responsible for compliance with any applicable state and federal WARN laws. Does the seller have change in control or other agreements with key management employees such that the acquisition costs will be increased or the buyer’s ability to retain these key executives is compromised?In a stock transaction it is likely that the buyer continues to be bound by such agreements. This is not necessarily the case in an asset purchase although the seller may request that the buyer provide similar severance benefits to seller’s key employees. Thus, it is important that a prospective buyer engage in due diligence to fully understand and, if possible, minimize risk in an acquisition transaction. The buyer should have a full understanding of the seller’s employment practices, existing or threatened employment obligations and union obligations. Where there are such existing or threatened obligations, the transactional documents should contain appropriate representations, warranties, covenants and indemnification provisions to clarify what the buyer’s understandings are and what the respective obligations are between the buyer and seller. In designing the transaction, the buyer should attempt to determine whether integration of the buyer and the seller’s facilities and employees is important, understanding the legal consequences of integration. It is helpful for the buyer to have a due diligence checklist to ensure that all of the appropriate questions are asked. Buying a business can be an integral part of the expansion and success of an existing company. However, whether or not such an acquisition is in the buyer’s best interests needs to take into account the seller’s labor and employment obligations, agreements and liabilities. Due diligence is critical to any acquisition and it is important that a labor and employment lawyer be involved in the planning and documentation of the transaction. Do you have further questions about business acquisitions? Phyllis Karasov is chair of Larkin Hoffman’s Labor and Employment Law Group. She, or another member of the team, is available to answer your questions. Phyllis Karasov, pkarasov@larkinhoffman.com, 952-896-1569.

May 22, 2020

Best Practices

Five Important Questions to Consider When a Union Company Buys a Non-Union Business

This is the third post in a four-part series discussing labor and employment law issues that should be considered when a company decides to buy another business. My last post addressed withdrawal liability when a company acquires the assets of a business which contributes to a multiemployer pension plan pursuant to a collective bargaining agreement. This article discusses labor law issues when a union company acquires a nonunion business. Five Important Questions to Consider When a Union Company Buys a Non-Union Business You would think that when a union company buys a non-union business, there should be no concern that the non-union business could be subject to the buyer’s existing collective bargaining agreement, or that the purchased business is subject to an obligation to recognize the union. Like most things in labor law, it is not quite as neat as you would like. 1. What Jurisdictions are Both Parties In? The first thing to ask when a union company is considering buying a non-union company is whether the non-union company is operating in the geographical jurisdiction of the current collective bargaining representative of the buyer. If the target company is outside the union’s jurisdiction, it is unlikely that there will be any obligation to bargain with the union which represents the buyer’s employees. 2. Companies are in the Same Jurisdiction, What Now? If the target company is in the union’s jurisdiction, the next step is to review the buyer’s collective bargaining agreement to see if there are any provisions that discuss application of the collective bargaining agreement to other businesses owned by the buyer. If so, the buyer should think about designing the transaction so that the buyer does not own the new company, but instead, different shareholders or companies will own the business to be purchased from the seller. 3. How Similar are the Businesses of the Buyer and Seller? Another factor to be considered is how similar the businesses are. For a manufacturer, is the product being manufactured by the seller, and the classifications of employees working for the seller, similar to those currently in the bargaining unit represented by a union? If the buyer is engaged in the manufacture of, for example, computer chips and the seller is engaged in the distribution of cellular phones, it would be difficult for the union representing the buyer to claim that they should also represent the employees formerly employed by the seller. On the other hand, if the target company and the buyer are engaged in similar businesses and employ employees in similar classifications, the buyer’s union may argue that the buyer’s union should also represent the employees employed by the target company in those similar classifications. If the products being manufactured or sold by the seller and the buyer are similar and the classifications of employees are similar, there is still a question as to whether there is an arm’s length relationship between the two entities. 4. Will There Be an Arm’s Length Relationship Between the Acquired Business and the Buyer After the Purchase? An arm’s length relationship occurs when two unrelated parties or strangers have no special obligation to the other party. If there is an arm’s length relationship between the buyer and the entity it purchased, the buyer’s union is less likely to have a claim for the target company’s employees. Thus, in planning how the buyer will manage the entity it is considering for purchase, the buyer should think about the degree to which the two entities will be connected. In determining whether there is an arm’s length relationship between the two entities, the NLRB considers four factors: The interrelationship of operations Common management Centralized control of labor relations; and Common ownership No one of these four criteria is controlling and all four need not be present to warrant a single employer finding. In various cases, the NLRB has stated that the first three criteria are more critical than common ownership, with emphasis on whether control of labor relations is centralized, as these tend to show operational integration. If the buyer plans to be involved in the management of the acquired company, written agreements between the two entities are helpful (for example, an agreement in which the buyer agrees to “manage” or provide management services to the target company); but these criteria will also be examined to determine if there is truly an arm’s length relationship. If there is no arm’s length relationship, then the NLRB could find that the buyer and the acquired company constitute a single employer, thereby opening the door to the union claiming that the collective bargaining agreement applies to both entities. 5. When is Accretion Appropriate? Another way in which the buyer’s union could attempt to apply the buyer’s collective bargaining agreement to the target company after the transaction is completed is through accretion. In accretion, the union would claim that some or all the target company’s employees should be accreted to the buyer’s existing operation. Whether it is appropriate to accrete a unit is subjective and depends on all the facts and circumstances. The factors which the NLRB discusses when considering accretion include: The degree of interchange among employees in the two companies; Geographic proximity; Integration of operations; Integration of machinery and product lines; Centralized administrative control Similarity of working conditions, skills and functions; Common control over labor relations; Collective bargaining history; and The number of employees at the facility proposed for accretion as compared with the existing operation. The critical question is whether the new facility is sufficiently integrated into the buyer’s existing operation to justify the application of the collective bargaining agreement. Therefore, when designing the transaction, it would be important that the purchased business use separate management and have an autonomous operation from the buyer’s existing facility. If these factors are not considered in structuring the acquisition, the buyer may be faced with a claim by its union that the seller’s employees should be added to the bargaining unit. Conclusion In planning an acquisition, a union-represented buyer should consider whether its union may have a basis to demand to add the target’s employees to its bargaining unit. The financial aspects of the transaction are not the only issues to consider.

May 15, 2020

Business Acquisitions

Pension Plan Withdrawal Liability in a Business Acquisition

This is the second post in a four-part series discussing labor and employment law issues that should be considered when a company decides to buy another business. Our last post discussed a buyer’s acquisition of a union business. Withdrawal Liability Whether an acquisition transaction involves the purchase of assets or stock, the buyer should be aware of multi-employer pension withdrawal liability. The concept of withdrawal liability is that where a pension plan is not fully funded, each employer is responsible for a share of the unfunded liability, which must be paid in the event the employer withdraws from the plan. An employer who terminates participation in a multi-employer pension plan, or substantially reduces its contributions to the plan, has either completely or partially withdrawn from the plan. In 2006, Congress passed the Pension Protection Act of 2006 (“PPA”), which among other things, created three status groups for multiemployer pension funds: funds which meet the funding standards, endangered or seriously endangered funds, and critical funds. A fund’s actuary must certify the plan’s status within 90 days of the start of each plan year. A buyer considering the acquisition of a union business should ask the seller to request from the multiemployer pension plan for the information necessary to compute withdrawal liability, and an estimate of potential withdrawal liability. Whether a multiemployer pension plan has sufficient funds to pay the benefits to all participants as promised in the pension plan will impact the extent of withdrawal liability. Typical events which can result in withdrawal liability are the sale of a business, downsizing a business, or going non-union. There are different rules for certain industries, such as the building and construction industry, the entertainment industry, trucking, and the retail food industry. These rules can alter the circumstances in which a business is deemed to have withdrawal liability. In a stock purchase, the buyer steps into the shoes of the seller and assumes the collective bargaining agreement of the seller. The buyer would want to know whether a union collective bargaining agreement requires contributions to a multi-employer pension plan and, if so, whether that multi-employer pension plan is underfunded. The buyer would want to be aware of the potential for being responsible for withdrawal liability in the event it decides in the future to no longer operate as a union business (if the employer is in the building and construction industry) or if the employees vote to decertify the union. If the acquisition is an asset purchase,things get more complicated. Whether the buyer is liable for the seller’s withdrawal liability depends on a number of factors. Sale of Assets and Multiemployer Pension Plan Withdrawal Liability In general, a complete or partial withdrawal will not occur when an employer sells the assets of its business if certain conditions are met: The sale must be a “bona fide, arm’s length sale of assets to an unrelated party.” The buyer must have an obligation to contribute to the plan for substantially the same number of contribution base units as did the seller The buyer must post a bond for a five-year period. The amount of the bond is based on the seller’s average annual contributions over a specified period. The purchase agreement must contain a provision which makes the seller secondarily liable if the buyer withdraws during the five plan years following the sale and does not pay its withdrawal liability. If a business is a member of a control group, it is possible that entities under common control may be jointly liable for the company’s withdrawal liability if the company fails to pay its withdrawal liability. The MPPAA contains complex definitions of control group. If a buyer or seller is a member of a control group, and the buyer does not intend to continue to make contributions to the seller’s multiemployer pension plan, they should consult legal counsel to determine whether other members of the control group may also be liable for the contractor’s withdrawal liability. The size of the withdrawal liability in a multi-employer plan can be a surprise to the buyer and needs to be carefully considered in the negotiation of any deal. Even a well-funded plan may have a withdrawal liability due to long-term funding structure of these plans, thus no assumptions should be made. Stay tuned for the next post which discusses a union company buying a non-union business.

May 8, 2020

Best Practices

Buying a Union Business

This is the first post in a four-part series discussing labor and employment law issues that should be considered when a company decides to buy another business. The series will discuss transactions where the buyer is a union business and transactions when the seller is a union business. This first article focuses on the acquisition of a business whose employees are represented by a labor union. A buyer’s failure to ask appropriate questions or consider legal risks when deciding whether to buy a company can result in legal issues and unanticipated complications after the acquisition is completed. Stock Purchase vs. Asset Purchase Acquisitions can be structured as either an asset purchase or a stock purchase. A stock purchase is a transfer of the ownership of the business entity, and the entity continues to own the same assets and have the same liabilities. An asset purchase is an acquisition of individual assets and an assumption of agreed-upon liabilities. The seller may or may not continue in operation after some or all of its assets are sold. Before a company decides to buy a union business, it is prudent to review all collective bargaining agreements to which the seller is a signatory. When the sale is a stock purchase, the collective bargaining agreement continues in effect. Essentially, the buyer steps into the shoes of the seller and assumes the seller’s obligations in the collective bargaining agreement. The buyer should be familiar with the wages, hours and working conditions specified in the collective bargaining agreement(s) so the buyer is familiar with the obligations it is assuming. In an asset purchase, whether or not the buyer has an obligation to negotiate with the collective bargaining representative of the seller’s employees depends on the circumstances. If the buyer in an asset purchase intends to employ all of the seller’s employees, including management, it is probable that the buyer will have an obligation to negotiate with the union which represented the seller’s employees. The buyer is not necessarily required to adopt the seller’s collective bargaining agreement which is already in place but most likely will have the obligation to negotiate a new collective bargaining agreement with the seller’s collective bargaining representative. Regardless of the type of transaction, in its review of existing collective bargaining agreements, the buyer should pay attention to any obligations to contribute to a multiemployer pension plan. It is common that multiemployer pension plans are underfunded, and if a contributing employer stops making contributions to the multiemployer pension plan, the employer may be assessed withdrawal liability. Withdrawal liability will be discussed in a future post, but it is mentioned here to alert prospective buyers of a union company that withdrawal liability can be a factor in evaluating potential acquisitions. In an Asset Purchase is the Buyer a Successor? One of the determinants as to whether a buyer is obligated to recognize the seller’s union as the collective bargaining representative of employees is the degree to which the buyer has hired the seller’s employees and continues to operate the business as the seller did. Is there substantial continuity of business at the new business? If the buyer hires none or a small minority of the seller’s employees there could be an argument that the buyer has no obligation to recognize the union because the buyer is not a successor to the seller. There are a number of factors that are taken into account in determining whether a buyer in an asset purchase is a successor, including: what percentage of the seller’s employees are hired by the buyer; whether the wages, benefits and working conditions are different from those of the seller; whether the equipment and products manufactured by the buyer are the same as those of the seller; whether management has changed; and the amount of integration between the seller’s other employees and the employees hired to work in the purchased facility. “Perfectly Clear” Successor vs. “Not a Perfectly Clear” Successor If a purchaser intends to dispute the application of the seller’s collective bargaining agreement, the manner in which it hires the new employees could be important. A buyer’s relationship with the union is controlled by whether the buyer is a “perfectly clear” or “not a perfectly clear” successor to the seller’s unionized company. To ensure that a buyer is not a “perfectly clear” successor, the buyer should tell employees that it does not intend to adopt the existing collective bargaining agreement and that any offer of employment will include wages, benefits and other terms and conditions that will be different from those contained in the collective bargaining agreement. Thus, if the buyer needs to reduce expenses and change the operations and administration of the purchased entity in order to make the purchase worthwhile, the buyer needs to structure the transaction, as much as possible, to enhance a result that either does not require the buyer to recognize the union at all, or at least allows the buyer to have the right to negotiate an entirely new collective bargaining agreement. If the buyer is a successor, in most circumstances, it is advisable to negotiate a new collective bargaining agreement rather than assume the seller’s contract. It is much easier to negotiate a new collective bargaining agreement at the time of purchase, rather than try to change an existing collective bargaining agreement in future negotiations. The buyer should assess whether the existing contract’s non-economic provisions will adversely impact the buyer’s operations. Conclusion The decisions regarding whether the buyer intends to recognize the union as the collective bargaining representative or dispute that the union represents the seller’s employees should be made early in the planning process so that the buyer does not unintentionally say or do things which can result in the buyer having to recognize a union as the collective bargaining representative of the new employer, or be required to follow the terms and conditions of the seller’s collective bargaining agreement. Stay tuned for my next post which will discuss withdrawal liability when the seller contributes to a multiemployer pension plan.

May 1, 2020

Search

Business Acquisitions

Search Blog

Category: Business Acquisitions

Employment Law Considerations in the Purchase of a Business

Five Important Questions to Consider When a Union Company Buys a Non-Union Business

Pension Plan Withdrawal Liability in a Business Acquisition

Buying a Union Business

Firm Highlights