Regardless of the number of employees involved, M&A transactions raise a number of important business and legal issues centered on the employment relationship. For example, the parties must consider which, if any, of the seller’s employees the buyer will retain or hire after the transaction closes. For those employees who do remain, buyers will also typically identify whether certain key employees require a contractual arrangement to vary the default at-will employment rules. The parties also are likely to negotiate the handling of accrued vacation days and sick leave as well as other important benefits issues.

One such benefits issue relates to the Consolidated Omnibus Reconciliation Act of 1985, more affectionately referred to as COBRA. A federal law, COBRA generally gives U.S. employees who lost their health benefits the right to choose to continue group health benefits provided by their previous employer’s group health plan for a limited period of time following termination of employment. The coverage afforded an employee under COBRA is known as “continuation” coverage, and the rights and obligations of employers and employees with respect to continuation coverage are governed, in part, by detailed regulations promulgated by various federal agencies.

Fifteen years ago the Internal Revenue Service issued a helpful set of regulations addressing COBRA continuation coverage in the M&A context. The regulations—which are as relevant in today's active M&A market as they were at the dawn of the Millennium—are complex and deserve careful consideration in the context of a specific transaction (i.e., stock sale or asset sale), but several general principles emerge that can be helpful when planning for a business transaction.

To begin, an employee is generally entitled to COBRA continuation coverage if the employee experiences a "qualifying event" in connection with a business transaction. In a stock sale, a qualifying event occurs only when the employee loses his or her job as a result of the transaction. In an asset sale, a qualifying event occurs when the employee either (i) loses his or her job as a result of the transaction, or (ii) loses coverage under a group health plan of the selling group and the employee is not employed by the buying group as a successor employer after closing. If there are employees who will experience a qualifying event in connection with the planned business transaction, the parties should consider the allocation of responsibility as between them for providing the required COBRA continuation coverage.

In that regard, the general regulatory rule provides that so long as the selling group maintains a group health plan after the transaction, the group health plan maintained by the selling group has the obligation to make COBRA continuation coverage available to qualified beneficiaries. If the selling group does not maintain a group health plan after the transaction, then the buying group may be considered a successor employer and assume the obligation to provide COBRA continuation coverage to any employees who experience a qualifying event in connection with the transaction.

Finally, and perhaps most importantly, the regulations specifically provide that the selling group and the buying group are permitted to contractually allocate the responsibility to provide COBRA continuation coverage to qualified beneficiaries. Note, however, that if the party assigned this responsibility under the contract fails to perform its obligations, the duty still falls on the statutorily designated party. In light of this, and as a precautionary measure, the parties may desire to incorporate appropriate indemnities into their contract to reach the desired allocation of responsibility.