This episode of Cascade Conversations discusses how labor regulations and labor union agreements affect all aspects of financial transactions. Join Cascade Partners Managing Director, Ron Reed, and Foster Swift Collins & Smith PC Attorney, Michael Blum, as they review stock sales and asset sales regarding labor regulations, the obligations and risks of assuming labor agreements, as well as how they affect due diligence, terms sheets, private equity, and benefit plans.
Michael has devoted his impressive career to Labor Law and its implications for employers while Ron brings his decades of financial and business operations experience to this lively and informative conversation.
Video Transcript
Welcome to Cascade Conversations! Join the team at Cascade Partners and their network of trusted advisers as they work to demystify details, terminology and strategies in the world of acquisitions, divestitures and financings.
Ron Reed – CEO, Managing Director of Cascade Partners:
Michael, I want to thank you and Cliff again for making the time for our team today and giving a great, hour-long Lunch & Learn with our team. And also, the most recent transaction you and I worked in together was really a great experience and I am looking forward to working with you again.
Michael Blum – Attorney at Foster Swift Collins & Smith PC:
Oh, good. Yeah, thank you so much. We really appreciated the opportunity to come out and speak with your team, and go through some of the labor and employment issues and transactions. So yeah, thank you for the opportunity.
Ron Reed: Well, today, I’m pleased to present on our Cascade Conversations, Mike Bloom, who works for Foster Swift. He’s the chair of their labor relations group from the Labor Employment Group, and would like to go through some of the topics related to labor and specifically labor unions as they relate to sale and buy-side transactions.
And today, I think you really made it clear that there’s a material difference between the labor relations issues in a stock sale and in an asset purchase. And maybe you could just touch on those a little bit.
Michael Blum: Sure. To look at it from the most simplistic way, there are two types of transactions. They get a little more complicated, but basically you have either a stock sale or you have an asset sale. And with the stock sale, the ownership of the corporate entity changes, but the ownership doesn’t change the obligations as the employer.
So, if I could use by way of example, if you bought into General Motors, that doesn’t make you an employer of the GM employees. You just own a piece of the business. That’s sort of what a stock sale is. You’re an owner, not necessarily the employer. Where in an asset sale, the buyer purchases the assets, not just ownership of the business.
So, the basic rule is that on a stock transaction, from a labor and employment standpoint, the buyer steps into the shoes of the seller as the employer, and all of the responsibilities and liabilities of the seller get transferred over to the buyer. In an asset sale, depending on exactly how it’s structured, there’s much more opportunity to negotiate between the buyer and the seller as to what is actually being purchased.
And that’s both on what assets are going to be purchased and what liabilities are going to be assumed by either the buyer or the seller. And there’s much more opportunity on an asset sale from a labor and employment standpoint for the parties to structure the deal that they’re comfortable with.
Ron Reed: And I think it’s important to note, as you say that—whether there’s a labor union involved or not—there are still, in an asset purchase, there’s a new entity that will be the employer of the employees and has to hire them anew the day the transaction transacts. So, on the first day of the new ownership, whether there’s a labor union involved, the new entity will hire the employees as it sees fit. So, I think that’s that’s a nuance, but I think that’s important.
The nuances of a labor union are materially different because the contract you’re buying—you’re not just offering employees new employment. There’s now collective bargaining agreement, or CBA for short, that we now have to address as well. So, maybe we could go into that because you and I, at our most recent transaction, had to address this because it’s important to know going into an asset purchase the buyer’s intentions around the CBA. Maybe you could talk a little bit.
Michael Blum: Oh, sure. And you’re absolutely right. I mean, if you could have a non-union employer or employees so there’s no union representing the employees of the seller, and then you have basically at-will employment, so you can offer employment on whatever terms the buyer chooses. Now, keep in mind that there are statutes in place. So if there’s violations of statutes you’re still going to have some successor liability issues even in a nonunion setting, but that’s just by statute.
What we’re talking here, Ron, is that when the seller is a union company, that means that there is a bargaining unit of employees employed by the seller that are represented by a labor organization. And that’s where some of the complications and nuances that we dealt with come in. And there’s two issues in any transaction when a union company is being purchased. One is does the new employer (the buyer) have an obligation to recognize that union as the exclusive bargaining representative of the employees. The second issue is. if the answer to that is “yes,” does the collective bargaining agreement, that was in place and negotiated by the seller and the union covering the bargaining unit employees, get transferred over and become a contract that the buyer needs to comply with?
So, you have both the union recognition issues and the obligation to accept the collective bargaining agreement.
Ron Reed: Right. And I’d say, from the negotiator standpoint and the issue for our firm and where we have to differentiate ourselves, is we can, in the due diligence process when we’re selling a company working with the Labor Council like yourself—as we did in the last transaction, make sure that we understand very clearly upfront the intent of the buyer, especially because there are obligations the buyer has.
So, if they are going to assume the union as they did in the last transaction you were in, we need to understand, are they going to change their CBA? So, some of the things we need to provide the buyer right upfront are the terms—how long is the collective bargaining agreement, when does it renew and when do we have to renegotiate those terms?
If the buyer’s going to accept those terms as is, fantastic. If they are not and they want to renegotiate—which is their privilege under the law—if they’re going to require, as a condition of close, that the union accept their new terms, that throws risk into the actual close. And we’ve dealt with that recently.
Michael Blum: Yes, we have. So, let’s separate the two issues one on the recognition of the union; the question becomes who, as employees, is the buyer going to offer employment to? Is it going to be everybody? Is it going to be some people? It can’t be for an illegal reason. We don’t want somebody because they’re represented by a union. That’d be illegal. I can’t do that.
But the needs of the new employer might be different. So, you look at the seller as a bargaining unit of employees, the buyer is going to have a new group of employees—there might be overlap, they might be the same, they might be different. But the general rule by Supreme Court decision is that if the new employer—the buyer—the new employer has, in its workforce, a majority of those employees who were represented by the union when the seller was the employer, then the buyer is going to have an obligation to offer to negotiate with the union.
So, that is a bargaining obligation. It’s the majority principle that is the American Labor Law is based on.
Ron Reed: Which is what governed the transaction you and I were just talking about. For instance, it’s the buyer absolutely wanted the entire employee base, so therefore, we knew going in that the assumption was that was going to be a majority.
But now the second issue.
Michael Blum: The second issue—this is where the complications come in and the term that is used in labor law is the “Perfectly Clear Doctrine.” And under the Perfectly Clear Doctrine, that determines whether the new employer—the buyer—not only has to recognize and negotiate with the union, but whether they also have to accept the collective bargaining agreement that was in place prior to the transaction closing. And the general principle is that if the buyer makes it perfectly clear that they are going to be the new employer and they’re going to offer initial terms and conditions of employment that fit with what they are willing to provide, then they do not need to adopt the collective bargaining agreement because they’re making it clear they’re the new employer, they’re going to set the initial terms and conditions of employment and the employees are free to accept those terms or not.
Until that moment comes, you’re not going to know exactly how many employees are actually going to go with the buyer. So, that’s how that Perfectly Clear Doctrine works. But the opposite side of that coin is if the buyer makes it clear that they’re not going to make any changes—that they want all of the employees and they’re going to accept all of their employees and offer employment, and nothing’s going to change—then, by law, they may have to accept the contract.
Ron Reed: So, I think the governing principle here, especially in the transaction—again, we’re going to move down the asset purchase, so, what you and I are talking about is an asset purchase—in an asset purchase, when you’re going to dissolve the prior employment and going to renew employment, there’s also some notice periods. Maybe you can talk about those, and then we have to address the risk.
So again, the new employer has the right to change the collective bargaining agreement. With that right, comes risk. Naturally, if the terms are not seen as complimentary or if the labor force is not satisfied with those firms or they’re not favorable, then naturally the new buyer and possibly the seller is at risk for some turbulence in their workforce. Maybe we talk about the notice periods and that turbulence.
Michael Blum: Right. Well, with respect to the duty to give notice to the union, there are two different types of notices. And keep in mind that you have to separate entities; the seller employer, and the new employer as the buyer. And so, with the seller on an asset sale there, that employer entity is being dissolved. And so, the question becomes, “What obligation do they have to discuss with the union this transaction?” And that is what’s called “affects bargaining.” What that means is that, as the seller, the employer has an obligation to let the union know that there’s a transaction in the works and offer to bargain with the union the affects that transaction will have and the employees that it represents.
So, that’s different from the obligation to negotiate with the union over whether the transaction is going to happen, that’s not required. But the affects of that transaction is required under federal labor law. And so, that is from the seller’s side.
From the buyer’s side, they’re going to—assuming on an asset sale—they want to set the initial terms and they hire a majority of the employees. Then the union says, “We want to represent the employees and we want to bargain.” So, the new employer would have an obligation to recognize the union and negotiate with the union any changes in the wages and benefits were set initially. So, once those terms and conditions of employment are set by the new employer, that becomes what must be in place until such time as changes to it are negotiated with the union.
I think, backing up to when these notices have to be given, with any bargaining obligation the question becomes, “What’s reasonable?” Because if you tell the union at 11:59 p.m. that a transaction is happening in one minute, are they going to have an opportunity to be effective in any discussions? Obviously, that’s an extreme example to make the point. You have to give enough advance notice so that the union has a meaningful opportunity to discuss the effects on the employees, and there’s no hard and fast rule on that. there is some case law that says if you don’t give any, the minimum amount of backpay you’re going to owe is two weeks. It’s a case called “Trans Marine,” and we talked about that. So, that is something that there’s going to be a penalty for not doing it.
How much notice actually has to be given? It’s what’s reasonable under the circumstances, but at a minimum, I recommend that it’s at least two weeks.
Ron Reed: And I think you and I address the subjective nature of that notice in the event that we believe that there will be either moderate to favorable changes from the new employer—as we dealt with—and what are favorable and unfavorable is in the eye of the beholder.
But, on a subjective basis, we’ve looked at that. I recall us looking at that, and we gave them ample notice. As it turned out, not only did we give them notice—and I think it’s instructive to kind of walk through the process here from the beginning of our process all the way to the close—and I think it kind of sums up everything we’ve just talked about.
So, when we work together on a transaction where we’re going to go to market, one of the valuable things we can do together—and I think you really reinforced this in our talk today—is due diligence. When we’re going to market as either a buyer or seller, there is a handful of due diligence items are related to labor unions that are really important to get on the table, whether you’re the buyer or the seller.
And I’ll say the reason for the seller—and I’ll take the seller’s side here for a moment because I think it’s very important to get the price that you want and make sure you’ve got certainty of close. So, maybe you can talk a little bit with the due diligence, but the top topic for me is if there’s a CBA, getting that on the table for the potential buyers quite soon with the terms and the timing is critical. You’ve got a couple of other items with that, but what are the other things in due diligence we really need to get on the table?
Michael Blum: Well, in your due diligence, you know, every transaction you’re going to use checklists. And the checklists are going to ask for all of the relevant documents. So, you’re going to have the employment documents, which are pretty much standard—either employment agreements, either policies or the handbooks and whatnot. From the labor standpoint, where I sometimes see holes in the due diligence, is there a collective bargaining agreement? If there’s a collective bargaining agreement, you’d better make sure that somebody is tasked with reading it because it’s going to have a number of provisions and 1) When does that expire? And the expiration date determines, is there going to be an automatic renewal clause in it? So, you have to know, is that going to expire? Is that going to automatically renew? When is the end date on that collective bargaining agreement?
There may also be, in that collective bargaining agreement, a successor clause and that is critical. Successor clauses are challenged in the courts frequently. Some are enforceable, some are not, depending on how they’re worded and you know what they’re requiring. But there may be obligations on the seller and the buyer with respect to a transaction that’s inside the collective bargaining agreement. You need to know that.
And the other thing, a big issue is pensions. Collective bargaining agreements are going to have a provision for retirement. Most of them do. It could be a DC plan, it could be a DB plan. And if it’s a defined benefit plan, then the question is going to become, “Is this for a multi-employer group or is this a standalone DB plan?” And, if it’s a multi-employer group—what they call Taft-Hartley plan—that gets a little bit complicated because that potentially could open up issues of withdrawal, liability and various things under the Pension Reform Act. So, those are some things that you’re not going to see inside the collective bargaining agreement, but if you see DB plan in a collective bargaining agreement, that should trigger a request for the participation plan in the retirement.
Ron Reed: And I’d say this is our standard procedure here, especially in the sell-side, is to make sure we have all those documents readily available. And then I’d say the reason, especially they’re important in the sell-side, is in the event we find ourselves in an asset purchase or an asset sale, and we are evaluating term sheets, as we discussed earlier, not all term sheets are just about the amount of money.
Michael Blum: Right.
Ron Reed: So, the particular thing we’re assessing when it comes to labor unions, you could have a term sheet for $100 million in one hand and the term sheet for $98 million in the other hand. The $100 million term sheet says, “We are going to take this opportunity to change the terms of the collective bargaining agreement. We naturally understand we want the employees. Additionally we’re going to make that a condition of close. We don’t want to buy this company unless your union accepts our terms.” That’s a very different term sheet than the $98 million term sheet that says, “We’re willing to pay you $98 million and we will accept the collective bargaining agreement as is.”
If you’re if you’re evaluating those two, you need to really understand what changes are going to be made to the collective bargaining agreement—as you said—to assess the risk of, “Is my union team going to actually accept these new terms?”
Michael Blum:
Absolutely. And to look at it in a more simplistic way, maybe is unlike the stock transaction where the liabilities and obligations are pretty much automatically flawed in an asset sale. The real question is, “What does the transaction involve? What is the buyer buying? What is the seller selling, and on what terms?” And usually, on an asset sale, substantially all of the assets—as the terminology used—so they’re buying most of it.
In the one we worked together, there was a significant piece of the assets that was not purchased and that can be carved out, spun off. But the question becomes, “What is the buyer willing to purchase? What is the seller willing to sell?” And that is the fundamental basis of an asset sale, much more flexibility in negotiations over that.
And then, once you determine what the seller is selling, what the buyer is willing to buy, then the question becomes, “At what cost?” And it’s that “at what cost?” this due diligence becomes critical. Because if you know all of the liabilities because you’ve done your due diligence, then you can allocate the liability in the purchase agreement—the asset purchase agreement—where you could really have some problems after the transaction is that something wasn’t known at the time of the closing. And for instance, withdrawal or liability on a pension plan that could be very, very expensive. All of a sudden that transaction has a whole different value to it. So, that’s the type of thing that needs to be explored thoroughly.
Ron Reed: And we’re selling a business right now that has a union, and the important evaluation we’re going through is they intend to change the CBA. And so, as part of our assessment of term sheets, we’ve asked them to redline the CBA—so, send us back your changes and then we can evaluate which terms we’re going to accept based on the risk assessment because, if we’re at risk of the union, suddenly we’ve added an additional negotiator to this process, and that negotiator is now the union. And if we’re going to address that risk, we need to address it right at the termination process.
Michael Blum: Oh, absolutely. And another thing you need to remember, when you’re looking at these deals, is we’re talking assets; what’s an asset? Well, one of the assets of any company is, if it’s a union company, its relationship with its unions and its employees because a company that has employees that are all pulling in the same direction—all satisfied with what’s going on, there’s good labor relations—that has value.
So, you need to look at the history of grievances, arbitrations, strikes, things like that. And if you have a company where the relations with the union are longstanding and they work together, that’s something that, as the buyer, you might want to buy that good labor relations. It might be something that you’re willing to pay a little more and not disrupt the applecart.
The opposite side is, if you have labor relations that just are not acceptable, then you got to figure out why. What needs to be changed and how to correct that? But again, that goes to the value of the company.
Ron Reed: And historically, private equity firms were reluctant to step into a union situation. We see that changing as the path becomes more well-worn, even for relatively smaller businesses—you know, $150 to $500 million businesses—private equity people, private equity funds are becoming much more sophisticated. And in learning that the fears they had of labor relations and unions are not quite as warranted as the movies might portray.
So, we’ve been very fortunate here because most of the firms which we’ve represented have had fairly strong relationships to the business we just worked on recently. They had a very good relationship with their union, and it was really not an issue at all. And again, we spent a lot of time addressing that right upfront in the terms sheet, and it was fairly nonevent, if you will, from the time that we announced this to the union all the way to the close. It wasn’t really that disruptive to operations.
Michael Blum:
Right. And that’s what you strive for, that’s what you want because what you don’t want is surprises. And the surprise, just by way of example, is you haven’t thought through some of the issues. You’ve exercised your right to set the initial terms and you show up on day one, starting up your new business, and the employees have all walked out and they all have picket signs in their hands or leaflets or whatnot. So, now all of a sudden you’re saying, “Oh, oh, boy, what I do?”
Ron Reed:
Well, I think that’s the purpose of this actual conversation is getting in front of these things is the difference between disruption and a nonevent. And we’ve been very fortunate, both the firm and working with you to make these really nonevents, but they take a lot of rolling your sleeves up during the terms and the purchase process to make sure they’re done right.
Michael Blum: Absolutely.
Ron Reed: So, last thing I wanted to talk about is the benefits plan a little bit more. Talk a little bit about some of the risks and the benefit plans you mentioned in the Lunch & Learn, that there can be some real “gotchas” there. Maybe you could talk a little bit about some of those.
Michael Blum: Well, the benefit plans—and that’s a little bit outside the labor and employment world—you have employee benefits lawyers that handle that specifically, and we worked with one in the transaction that we work together on. And the employee benefits brings in a risk claims for the most part in the private sector, the controlling statute. So, I don’t want to drill into that because I’m not an employee benefits lawyer.
But from the employee benefit standpoint, what are the benefits? There’s going to be plan documents in place. No matter what the plan or the benefit is, there’s going to be a plan that describes it. And so, if they’re standalone benefit plans, then you have to make sure you have all those plan documents. You have to see what the rights of the seller and what the rights of the buyer. By way of example, can a 401K plan be adopted by the buyer? That may be something that can be done, it may not be something that can be done. You have to take a look at that. If it is something that can be adopted by the buyer, is the buyer willing to do that? Or is the seller even willing to have that happen? Maybe they’re only selling a piece of it and they want to hang on to that plan. So, you need to look at what pieces of the plan or what plans are being adopted, and can they be adopted?
So, that’s all going to be controlled by the plan documents that your employee benefits lawyers need to take a look at. Where it gets more complicated is with the defined benefit plans and the multi-employer plans that we talked about, and that’s when you really need to look at what they call a “participation agreement,” which will set the requirements.
Now, let me just back up. The CBA a between the company and the union will say the employer must contribute X amount of money on behalf of each employee into the pension plan, or that pension plan is administered by trustees and the trust agreements are a separate legal entity. So now, you need to get into those participation agreements and see what the requirements are and the terms are.
So, that’s where you have yet another set of documents you’re going to need to look at, and that’s where you might potentially have issues of withdrawal, liability and whatnot.So, those are pretty complicated issues for a short discussion.
But the most important thing is make sure you look at what benefits are in place, what plan documents control and make sure that you have all of those plan documents in hand. It could be a policy, it could be an agreement or whatever, but you have to make sure you have them. And then, if it’s a DB plan—particularly a multi-employer plan—you need to look at your participation agreements.
Ron Reed: Well, I can say here at Cascade Partners, we really enjoyed working with Foster Swift Team and I’m forever grateful. And thank you for showing up.
Michael Blum: It was our pleasure. Yeah, we really appreciated the opportunity.
Ron Reed: And with that, we’ll end this Cascade conversation. Okay, thank you.
Get more expert insight by tuning into our other episodes of Cascade Conversations.