Business Law Section

Are We Buying a Union?

by Martin W. Aron and Eric G. Guglielmotti

Corporate transactions regularly entail a myriad of business risks. This is especially true when a buyer contemplates entering into a transaction with an entity that has a unionized workforce.¹ In this realm, it is critical that the buyer conduct a thorough evaluation of the transaction and due diligence of the target business. The buyer should consider the composition of the workforce, the work being performed, as well as the express terms and conditions of any applicable collective bargaining agreement. Without doing so, the buyer can be exposed to undisclosed liabilities and/or obligations that directly impact the fair market value of an entity.

This article is intended to highlight the common labor and employment issues that arise in transactions where the target entity has a unionized workforce. The analysis is set forth from a buyer’s perspective, starting with due diligence review of the target entity and its workforce, considerations in structuring the deal to avoid potential liabilities, and the buyer’s obligation to adopt the predecessor corporation’s collective bargaining agreement, as well as its ability to relocate the workforce following the sale. Finally, this article touches upon issues that can arise when purchasing an entity through a bankruptcy sale.

Issues for Consideration During Due Diligence

Discovery of undisclosed liabilities and/or obligations of the predecessor may severely impact the buyer’s strategy in structuring the deal, as well as justify an adjustment in the negotiated price.

As part of this due diligence review, a prudent buyer should analyze the seller’s potential liabilities, including but not limited to, any claims, litigations or administrative charges filed with a local, state or federal agency. In addition, the buyer should consider the composition of the workforce, including the identification of both union and non-union members, exempt and non-exempt employees and independent contractors. For instance, an improper classification of employees may expose the buyer to extensive liabilities following the acquisition, including potential wage and hour violations. Furthermore, by identifying the target business’s workforce, a buyer will have a better understanding of the pension, benefit and severance pay obligations that may arise from the acquisition. Contractual agreements with third-party vendors and employees should also be considered by the buyer, as these too may survive the acquisition. The impact of these considerations will likely affect the buyer’s position with respect to negotiation.

In addition, a buyer must conduct a review of applicable collective bargaining agreements. Certain provisions may make it easier to organize the buyer’s employees in other facilities (i.e., neutrality or card-check provisions); obligate the buyer to maintain certain benefits, pensions, and other fringe benefits and obligations; and hinder the buyer’s ability to relocate, close, and/or sell the entity, as well as the ability to layoff employees for legitimate business reasons. In addition, the language of any ‘zipper’ or ‘management-rights’ provisions may raise red flags for a buyer. For example, a zipper clause may prevent a buyer from negotiating and/or implementing terms and conditions of employment that were otherwise omitted from the existing collective bargaining agreement.

Similarly, a management-rights provision should be specific and expressly identify issues and rights the buyer seeks to retain as part of the transaction. Moreover, the buyer should conduct a review of any union-related activity, such as grievances, arbitrations, unfair labor practice charges, strikes and lockouts, and settlement agreements. This will provide further insight into the seller’s relationship with the existing union, thereby forecasting any issues that may arise following the transaction. A company with a long history of multiple arbitrations each year will be a very different target than one that has little or no such experience.

Structuring the Transaction to Limit Exposure

When a company is in transition between owners (employers), a union is in a vulnerable position. The union has not yet developed a relationship with the new employer and its representatives may be unsure of whether the new employer must bargain with it.

A buyer’s obligation to bargain with the union may be determined by the structure of the transaction. Thus, a duty to bargain may be predicated on the express terms and conditions of the purchase agreement. Alternatively, a buyer’s obligation may arise from its conduct (i.e., assumption of the collective bargaining agreement) and/or its hiring of all or some of the seller’s employees.

Initially, the buyer must carefully consider the type of transaction to be proposed to the selling entity. For example, following the due diligence review period a buyer may consider restructuring the deal from a stock purchase to an asset purchase to avoid assumption of certain liabilities and obligations.

Should a buyer wish to adopt the goodwill and certain known debts of a business, a stock purchase may be the best strategy for structuring the acquisition. In a stock acquisition, the buyer assumes the labor and employment-related liabilities and obligations much in the same way as it assumes the debts, assets and goodwill of the selling entity.² This assumption by the buyer includes any liabilities stemming from the seller’s employment and labor practices, as well as any unresolved and pending litigations. The buyer also assumes contractual and statutory obligations for current and former employees, clients and vendors, such as severance payments and pension, health and benefit obligations. Essentially, the problems of the target business most often become the problems of the buyer of stock. With regard to a unionized workforce, the buyer would most often be bound by the terms and conditions of any existing collective bargaining agreement.

Conversely, an asset purchase provides more flexibility to the buyer than a stock purchase, enabling the buyer to negotiate the liabilities and obligations it chooses to assume as part of the transaction. When a buyer merely acquires the assets, as opposed to stock, of another company that signed a collective bargaining agreement, the acquiring company normally has no obligation to honor the predecessor's collective bargaining agreement or bargain with the union unless it is found to be a ‘successor employer’ or ‘perfectly clear successor’ under the National Labor Relations Act (NLRA).³ Therefore, if the existing collective bargaining agreement is not favorable and/or hinders a buyer’s ability to make substantive operational decisions that are adverse to the buyer’s intentions, it would generally be beneficial to structure the deal as an asset purchase. At a minimum, it would enable the buyer to set its own initial terms and conditions of employment and then bargain with the union for a more favorable collective bargaining agreement.

Regardless of the label utilized by the parties in the transaction, a buyer may still be obligated to recognize and bargain with the union in the instance it is found to be a successor employer or perfectly clear successor. The issue of successor liability usually arises in the case of an asset purchase deal because a stock purchase buyer generally has already agreed to assume the liabilities and obligations of the target business.

In essence, a successor is required to recognize and bargain with the union representing the predecessor’s workforce.⁴ Nevertheless, a successor, unlike a buyer in a stock purchase deal, is not required to adopt the predecessor’s collective bargaining agreement and may instead establish its own initial terms and conditions of employment. Once the purchaser is determined to be a successor employer, it must then recognize the union and negotiate a new collective bargaining agreement.

Additionally, in certain circumstances, a successor may be obligated to remedy a predecessor’s unfair labor practices where: 1) it had notice of the predecessor’s liability; and 2) there is a sufficient continuity between the two companies.⁵

In determining whether a buyer is a successor for purposes of assuming the liabilities and obligations of the predecessor business, courts and the National Labor Relations Board (NLRB) consider “whether the new company has acquired substantial assets of its predecessor and continued, without interruption or substantial change, the predecessor’s business operations....Hence the focus is on whether there is substantial continuity between the enterprises.”⁶ Under this approach, the factors to be examined include:

1)         whether the business is essentially the same;

2)         whether the same employees are doing the same jobs, in the same working conditions, under the same supervisors; and

3)         whether the new entity provides the same services and has the same customers.⁷

The most significant consideration is the continuity of the workforce.

In contrast, a ‘perfectly clear successor’ is required to abide by the terms and conditions of the pre-existing collective bargaining agreement until it negotiates a new agreement with the union and/or reaches an impasse in its negotiations with the union. In such a situation, the successor is not entitled to unilaterally implement new terms and conditions of employment without first “consulting” with the union.⁸ Courts and the NLRB will find a buyer to be a perfectly clear successor when the agreement affirms the buyer will retain the seller’s employees and waives the right to alter the employees’ conditions of employment.

A buyer also should be mindful of any existing ’successorship’ clauses in the target business’s collective bargaining agreement. A distinct and specific successorship clause that expressly requires the target business to sell to a buyer that agrees to assume the collective bargaining agreement may be enforceable. Generally, a boilerplate successorship clause will be deemed unenforceable against buyers. However, if a buyer agrees to adopt or assume the terms of a collective bargaining agreement—either in a purchase agreement or in a communication to its employees or the union representing the predecessor's workforce—then it would be obligated to do so. Further, a buyer may be found to ‘adopt’ the parties’ collective bargaining agreement where it has maintained and applied the substantive terms of the agreement. As such, buyers should be mindful of these considerations.

Additionally, a buyer will be precluded from establishing new terms and conditions of employment in the instance it is determined to be an ‘alter ego’ or ‘single employer.’ An alter ego status will be found “where the two enterprises have ‘substantially identical’ management, business purpose, operation, equipment, customers and supervisors, as well as ownership.”⁹ Similarly, a single employer is a consolidation of several nominally separate business entities that comprise an “integrated enterprise.” ¹⁰ In this latter scenario, one entity’s collective bargaining agreement will be applied to the other’s employees if the employees of each constitute a single appropriate bargaining unit.

Accordingly, merely labeling the deal as an asset purchase will not necessarily avoid the obligation to bargain. Nevertheless, a buyer that wishes to retain sufficient control and establish its own terms and conditions of employment at the outset should consider structuring the deal as an asset purchase because the buyer, at a minimum (i.e., even if found to be a successor), would be entitled to establish its own initial terms and conditions of employment with the union.

Relocating the Bargaining Unit Work

Potential buyers often seek to relocate the bargaining unit work to a more financially favorable location. A buyer’s decision to relocate the bargaining unit work may be a mandatory subject of bargaining if it is shown that the “employer’s decision involved a relocation of unit work unaccompanied by a basic change in the nature of the employer’s operation.”¹¹ An employer may rebut this prima facie showing by establishing the following:

1. that the work performed at the new location varies significantly from the work performed at the former plant;
2. that the work performed at the former plant is to be discontinued entirely and not moved to the new location; or
3. that the employer’s decision involves a change in the scope and direction of the enterprise.¹²

Alternatively, an employer has no bargaining obligation if it can demonstrate that even though labor costs were considered in its decision to relocate unit work, it would not remain at the present plant because, for example, costs of modernization of equipment were greater than any labor cost concessions the union could offer.¹³

On the other hand, an employer does have an obligation to bargain if the union could and would offer concessions that approximate, meet or exceed the anticipated costs and/or benefits that prompted the relocation decision, since the decision would then be amenable to resolution through the bargaining process.¹⁴

An employer can enhance its chances of establishing the above-described defense by articulating to the union its reasons for relocating, fully explaining the underlying costs and/or benefits motivating its decision, and asking whether the union could offer concessions that would enable the employer to meet its profit objectives without resorting to relocation.

Successor Liability in Bankruptcy

Purchasing an entity and its assets becomes significantly more complex when the seller files for bankruptcy. In this instance, the seller’s assets are encumbered by security interests in the property, including petitions filed by general unsecured creditors for satisfaction of their claims from the same pool of assets. Therefore, a buyer should be cognizant of the claims and security interests filed in the bankruptcy court and its effect on the potential value of the entity and its assets. A buyer’s ability to purchase a debtor’s assets through a bankruptcy sale is typically governed by Section 363(f) of the Bankruptcy Code. Pursuant to Section 363(f), a bankruptcy court has the power to order a sale of some or all of the assets “free and clear” of any “interest” in the property.

A critical issue when analyzing a sale under Section 363(f) is the court’s interpretation of ‘interest’ in property. Bankruptcy courts have reached different interpretations of what constitutes an interest in property under Section 363(f). For example, in the Third Circuit's seminal decision in In re Trans World Airlines¹⁵ (TWA), the court applied a more expansive reading of interests in property under Section 363(f). In TWA, the court extinguished the liability of American Airlines as a successor of TWA with regard to TWA’s settlement of a sex discrimination class action asserting discrimination as well as claims related to a travel voucher program. Under Section 363(f), the court approved the sale of the assets to American Airlines “free and clear” of the outstanding claims and settlement, reasoning the claims against TWA were connected to or arose from the assets sold, and thus constituted interests in property. Thus, because the claims had a direct relationship to the TWA assets, they constituted interests in property within the meaning of Section 363(f).

This expansive approach has not been adopted by all jurisdictions. As an example, in Teed v. Thomas & Betts Power Solutions,¹⁶ the Seventh Circuit affirmed the imposition of successor liability for the predecessor’s pre-sale violations of the Fair Labor Standards Act. In extending the reach of successor liability in suits to enforce federal labor and employment laws, the Seventh Circuit shirked the implications of Section 363(f) and the meaning of interests in property, choosing instead to impose successor liability absent “good reasons” to withhold such liability.¹⁷

These cases highlight the varying approaches to imposing successor liability in a bankruptcy sale. Accordingly, a buyer considering an asset purchase in bankruptcy court should carefully review the applicability of Section 363(f) of the Bankruptcy Code to the assets at issue. A buyer also may consider designating funds to an escrow account pending the bankruptcy court’s final sale order; in particular, whether the assets would be discharged free and clear under Section 363(f). Additional safeguards should also be considered when structuring a bankruptcy sale, such as an indemnification clause for claims based on liabilities not expressly assumed in the asset purchase agreement.

Conclusion

Buying a business can give rise to a host of challenging labor and employment issues that mandate careful review. A fundamental conflict exists between the rights of buyers that wish to conduct business without restriction and the rights of employees seeking stable employment conditions with or without union representation. This tension has resulted in the expansion of the buyer's and seller’s duties to the employees. Proper planning and due diligence can directly impact fair market value, dictate the structure of a transaction, and help minimize unanticipated liabilities.

Martin W. Aron is a shareholder and litigation manager in the Morristown office of Jackson Lewis P.C. Eric G. Guglielmotti is an associate of the firm.

Endnotes

1.         Importantly, the authors note that although this article addresses and focuses on the labor and employment-related implications of such a transaction, there are a multitude of other factors that should be considered by legal counsel; in particular, the potential tax implications for structuring a corporate transaction.
2.         TKB International Corp., 240 NLRB 1082, 1085 (1979).
3.         Fall River Dyeing & Finishing Corp. v. NLRB, 482 U.S. 27, 40 (1987).
4.         NLRB v. Burns Int'l. Security Services, Inc., 406 U.S. 272, 80 LRRM 2225 (1972).
5.         Golden State Bottling v. NLRB, 414 U.S. 168 (1973).
6.         Fall River Dyeing & Finishing Corp., 482 U.S. at 43.
7.         Id.
8.         Canteen Corp., 317 NLRB 1052 (1995), enforced, 103 F.3d 1355 (7^th Cir. 1997).
9.         Crawford Door Sales Co., 226 NLRB 1144 (1976).
10.       Radio Union v. Broadcast Service of Mobil, Inc., 380 U.S. 255 (1965).
11.       Dubuque Packing Company, Inc., 303 NLRB 386, 137 LRRM 1185 (1991), enforced, 1 F.3d 24 (D.C. Cir. 1993), cert. granted, 114 S. Ct. 1395 (1994).
12.       Id.
13.       Id.
14.       See id.
15.       In re Trans World Airlines (TWA), 323 F3d 283 (3^rd Cir. 2003) (affirming the bankruptcy court's order approving the sale "free and clear" of successor liability).
16.       Teed v. Thomas & Betts Power Solutions, 711 F.3d 763 (7^th Cir. 2013).
17.       Id. at 769.