From employment to employee benefit liabilities, the federal common law of successor liability has the potential to surprise those who intend to buy only assets in purchase transactions. Citing 7th Circuit ERISA precedent, the 9th Circuit recently expanded that successor principle to hold that an asset purchaser could be subject to withdrawal liability from a union pension fund when there is a combination of –
- notice of the potential liability, and
- “substantial continuity in the business operations between the predecessor and the successor, as determined in large part by whether the new employer has taken over the economically critical bulk of the prior employer’s customer base.” [fn 1]
The risk of potential successor withdrawal liability is particularly significant in cases where the asset purchaser essentially “picks up business” where the predecessor left off. Because an employer’s multiemployer plan contributions depend on the total hours worked by union employees, the 9th Circuit held in the Resilient Flooring case that “a measure of the billings on the jobs worked for continuing customers by the old and new companies is more useful [than the number of clients served].” [fn 2]
The court noted that five of eight union employees worked in the same business location for the predecessor and successor companies, with the hiatus of some not being dispositive. [fn 3]
Sellers often seek protection from withdrawal liability through a mechanism established by section 4204 of ERISA, which provides that no withdrawal occurs if a transaction with an unrelated asset purchaser is structured to meet certain conditions. One condition is that the purchaser agree to be primarily liable, and the seller agree to be secondarily liable, if the purchaser withdraws from the plan within five years and does not pay its withdrawal liability. Purchasers often do not want to agree to 4204 commitments, in order to avoid the potential withdrawal liability associated with multiemployer plans. This case indicates that refusing a seller’s 4204 request may not be sufficient to avoid such withdrawal liability risks.
Overall, those who purchase assets need to beware of ERISA liabilities – whether from underfunded pension plans or from withdrawal liability from union plans. In each case, declining interest rates and recent changes in pension funding laws make the risks tough to quantify, and ever escalating. Purchase structures that involve less than an 80% ownership level may wall-off ERISA liability exposure. Consequently, early attention to transaction structures and pension diligence could not be more important.