Considering a Merger or Acquisition? Make Sure You Think About Withdrawal Liability
By Bryan D. LeMoine - McMahon Berger, PC
June 25, 2018
Companies in growth mode often consider acquiring another business. Dangers lurk beneath any merger and acquisition for a variety of reasons, but many times companies do not consider the type of workforce in the middle of negotiations over value. One of the first questions in any merger or acquisition discussion should always be whether the workforce is represented by a union. If so, the next question has to be whether the employer has contributed to a multiemployer pension plan on behalf of the workforce. If so, the possibility of withdrawal liability is real.
In recent years, courts have been more willing to impose withdrawal liability on successors in the context of an asset purchase. What is withdrawal liability you ask? Withdrawal liability attaches to an employer (or a successor) if the multiemployer pension plan has unfunded vested benefits that can be allocated to the employer. Sometimes, companies miss this key liability when negotiating over value. A quick glance at the Pension Benefit Guarantee Corporation’s website will tell you that withdrawal liability can happen in two ways – (1) a partial withdrawal or (2) a complete withdrawal. This blog focuses on complete withdrawal (ceasing contributions entirely to a multiemployer pension plan) in the context of an asset purchase. However, partial withdrawal is an issue to consider whenever an employer downsizes a union workforce and reduces contributions to a multiemployer pension plan.
Typically, asset purchasers include all sorts of language in an asset purchase agreement disclaiming all liabilities except those that are expressly assumed. However, all the way back to 1990, courts have held that an entity purchasing assets can be a successor for purposes of assessing withdrawal liability. One case that acquiring entities should pay attention to comes out of the Seventh Circuit, titled Indiana Electrical Workers Pension Benefit Fund v. ManWeb Services, Inc. Decided on March 12, 2018, the Court of Appeals for the second time faced the issue of whether ManWeb was a “successor in interest to a defunct employer that owes withdrawal charges to a multiemployer pension plan.” The Court was faced with a district court decision that had held that ManWeb was not a successor in interest because it did not have sufficient continunity of business operations to support successor liability. Successor liability “requires two distinct components: notice of the potential liability and substantial continuity of the business.” The Seventh Circuit had already decided in a prior opinion in 2015 that ManWeb had notice. Now it faced the issue of continuity of the business. While not deciding whether ManWeb had substantial continuity of the business, the Court of Appeals reversed the district court’s decision that there was none.
Importantly, the Seventh Circuit focused on “the totality of the circumstances” in reversing the district court’s decision and shut down the so-called “Big Buyer” loophole. The “Big Buyer” loophole would have allowed ManWeb to avoid liability simply because it had acquired a business that was so small compared to its overall business, and because ManWeb had not been in quite the same business that it acquired before this asset purchase. The Seventh Circuit saw it differently, holding that “ManWeb’s purchase of and use of Freije’s intangible assets—its name, goodwill, trademarks, supplier and customer data, trade secrets, telephone numbers and websites—and its retention of Freije’s principals to promote ManWeb to existing and potential customers as carrying on the Freije business under ManWeb’s larger umbrella, weigh more heavily in favor of successor liability than the district court recognized.”
In other words, buyers of assets beware – substantial continuity of the business is a totality of the circumstances test, meaning that a court will scrutinize the whole transaction with this thought in mind – “[s]uccessor liability extends throughout federal employment law to protect federal statutory policies from corporate artifice.” In the Seventh Circuit, buyers cannot hide from successor liability by structuring an asset purchase just so or because the value of the assets compared to the buyer’s total assets is insignificant.
More recently, another court addressed the notice issue. In Heavenly Hana v. Hotel Union & Hotel Industry of Hawaii Pension Plan, the Ninth Circuit Court of Appeals held that the acquiring entity had constructive notice of potential withdrawal liability because a reasonable purchaser would have discovered their predecessor’s withdrawal liability. Wow. The lesson here is clear – during due diligence in an asset purchase, if you are not asking questions about the nature of the workforce and whether there had been contributions to a multiemployer pension plan, ignorance will not insulate you from withdrawal liability due to the constructive notice doctrine.
Many attorneys in the context of asset purchases do not recognize the dangers of withdrawal liability and the impact on valuations if withdrawal liability goes unpaid. The St. Louis employment attorneys at McMahon Berger have been representing employers across the country on issues related to withdrawal liability. When it comes to withdrawal liability, contact a lawyer who understands the issues before it is too late. As always, the foregoing is for informational purposes only and does not constitute legal advice regarding any particular situation as every situation must be evaluated on its own facts. The choice of a lawyer is an important decision and should not be based solely on advertisements.