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.
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.