Labor issues are a key factor in mergers and acquisitions (M&A), especially when distinguishing between stock sales and asset purchases. These two transaction types have different impacts on employers and employees from both a legal and financial perspective—particularly in unionized environments.
It is vital for a buyer to seek professional legal and investment banking advisors to help understand and navigate the complexities involved in the process.
Stock Sales vs. Asset Purchases
In a stock sale, while ownership of the business changes hands, the employer’s obligations remain the same. The buyer essentially steps into the seller’s shoes and assumes all their responsibilities and liabilities, including:
- Maintaining employment terms
- Collective bargaining agreements (CBAs)
- Union representation
Employees continue working under the same terms with no major changes.
In contrast, with an asset sale, the buyer purchases specific assets rather than the entire business. This allows more flexibility to choose which assets and liabilities to take on. With an asset sale, the buyer will typically hire employees as new hires, creating an opportunity to renegotiate employment terms. In unionized settings, the buyer must decide whether to recognize the union and continue to adhere to existing collective bargaining agreements (CBAs).
The Role of Due Diligence
M&A lives and die on due diligence. It is the seller’s responsibility to provide buyers with all relevant documentation, including CBAs, in the spirit of transparency and to help facilitate negotiations.
The buyer’s responsibility is to thoroughly review all supplied documentation to understand the obligations and risks they stand to inherit with the business—including examining employment contracts, policies and union agreements. This is where professional advisors can help buyers understand exactly what their potential legal and financial liabilities could be, as well as offer suggestions on how to structure the sale to help minimize those potential liabilities.
Key Union Considerations
Union-related issues typically fall into two categories:
- Union Recognition: The buyer must determine if they are required to recognize the union as the employees’ bargaining representative. This usually depends on whether most of the workforce under the buyer consists of union-represented employees from the seller.
- Collective Bargaining Agreements: The buyer must decide whether to adopt the existing CBA. The “Perfectly Clear Doctrine” is significant here. If the buyer makes it clear they will set new employment terms, they may avoid adopting the CBA. However, retaining employees under their existing terms could require honoring the current agreement.
Again, it is critical to have professional advisors help the buyer understand the short—and long-term ramifications of decisions made during the transaction process to avoid costly pitfalls later.
Notice Periods and Potential Risks
Labor unions require adequate notice about transactions to conduct meaningful discussions regarding the deal’s impact on employees. Failure to give reasonable notice—typically at least two weeks ahead of time—can lead to penalties and disruptions to the transaction itself.
Changing CBAs is also risky. If the new employment terms are viewed unfavorably by employees, it can cause labor disruptions, affecting operations and business transitions.
Benefits Plans
Benefit plans can become critical during transition, so a detailed review of employee benefits is imperative. Defined contribution and multi-employer plans often come with significant liabilities, so buyers must closely examine participation agreements and plan documentation to avoid unexpected costs and other obligations.
Takeaways
Labor considerations in M&A transactions require careful planning and a deep understanding of the nuances of stock sales versus asset purchases. Professional legal and investment banking advisors can ensure a smooth transition by helping with critical matters, among them:
- Conduct thorough due diligence
- Address union obligations
- Provide proper notice
- Review benefits plans
- Advise whether a stock or asset sale is best
By having M&A professionals proactively manage these factors, buyers and sellers can reduce risks, preserve value, maintain operations and achieve successful transaction outcomes.
For more information, join Cascade’s managing director, Ron Reed and Foster Swift Collins & Smith attorney, Michael Blum, as they discuss this subject in depth during our Cascade Conversations episode on Labor Considerations in M&A.