By Carol Buckmann
If you buy assets of a business rather than stock, can you avoid taking on multiemployer plan withdrawal liabilities? Buyers often assume that structuring a transaction as an asset sale rather than a stock sale protects them from inheriting liabilities of the seller that haven’t been expressly assumed, but recent case law makes clear that this isn’t always the case. Here are two cases in different parts of the country to worry about if you are a buyer continuing a business after an asset sale. Successorship liability, a labor law concept, has also traditionally required notice of the liability, but these courts have interpreted that requirement broadly.
Heavenly Hana Hotels.
A recent decision and a federal appeals court decision in June imposed liability on a private equity firm that purchased a hotel after seller terminated its employees. Under ERISA, the seller has a withdrawal under these circumstances if the buyer doesn’t assume similar future contribution obligations and seller’s contribution history, as well as put assets in escrow or purchase a surety bond to cover the liability if there is a withdrawal after the sale.
Those conditions weren’t met here. The seller had a withdrawal but the plan was able to proceed against the buyer as well under the theory that it continued the business and was a successor to the seller’s obligations. The Ninth Circuit Court of Appeals said it didn’t matter that the buyer had no actual knowledge of the liability. (From the statement of facts, it appears that the buyer relied on a seller representation but didn’t do due diligence beyond that. The decision noted that the buyer had bought businesses with union plans before, could have accessed the plan’s funding notices on line, and investigated the physical plant rather than just relying on seller’s representations. ) Constructive notice, meaning that the buyer “should have known” about the liability, and had access to information that would have disclosed the liability if investigated, was sufficient to uphold the assessment of withdrawal liability.
The Seventh Circuit Court of Appeals also found the buyer to be a successor employer in an asset sale, even though the liability was expressly excluded in the asset purchase agreement. The court found that the buyer’s continuation of the business with the same employees (13/40), management, goodwill and customers was sufficient to find liability, even though this wasn’t the only business operated by the buyer. The court noted that ManWeb had issued a press release describing the transaction as an “acquisition and merger.” The court said that notice of actual withdrawal liability (which would not be triggered until the closing) was not necessary. Notice of contingent withdrawal liability was sufficient to satisfy the notice requirement.
How Can Buyers Protect Themselves?
The clear takeaway is that ignorance is not bliss in these transactions. Due diligence needs to be done by the buyer to determine whether the sale will result in a withdrawal by the seller, what the potential withdrawal liability would be and whether there is prior outstanding seller liability for withdrawals. This is particularly important if the seller is in precarious financial condition or if the seller and any affiliates will cease all business operations after the sale. Actuaries and attorneys can help to quantify the exposure here. Buyer might then:
· Negotiate a purchase price adjustment
· Make sure that the indemnification agreements cover this liability and, if necessary, an escrow account is set up to fund any indemnification payments.
· Consider whether to use the asset sale provision in ERISA to make sure that seller has no liability on the sale. However, this has downsides for the buyer, including obligating the buyer to continue contributions for substantially the same number of base units and increasing the potential liability if buyer withdraws from the plan after the closing.
· Avoid using language suggesting that the transaction is a merger in press releases, which came back to bite ManWeb.
· Be aware that the successor liability theory has been applied with respect to multiemployer pension plans but could potentially be applied by other courts in other ERISA contexts.
Given the precarious financial status of many multiemployer plans, we can expect them to continue to be aggressive in pursuing withdrawal liability assessments against buyers in asset sales. Buyers need to plan for and consider this exposure long before the assessment notice arrives from the plan.