In light of a recent Third Circuit decision (Einhorn v. M.L. Ruberton Construction Co.), investors considering an asset purchase in the United States have new reason to perform due diligence not only against the targeted assets, but also against the seller. Failure to do so could result in unanticipated liabilities if the seller has unpaid multiemployer benefit plan contributions or potential withdrawal liability.
A benefit plan is generally a "multiemployer plan" if it is maintained by more than one employer in connection with an agreement with one or more labor organizations. Under ERISA and the terms of a multiemployer plan, an employer is liable for its regular contributions to fund its employees’ benefits. Additionally, an employer that withdraws from a multiemployer plan may have "withdrawal liability" imposed based on the employer’s share of the plan’s unfunded vested benefits.
If the assets of an employer that contributes to a multiemployer plan are sold, such sale will often trigger a withdrawal unless the buyer assumes the contribution obligations and other technical requirements are satisfied. If a sale of assets constitutes a withdrawal, or if an asset seller is delinquent on its contributions to a multiemployer plan, the common law rule of successor liability applies unless the parties have specifically allocated the liability before the completion of the transaction.
The general common law rule of successor liability provides that, in a sale of assets, the liabilities of the seller do not automatically transfer to the buyer. However, courts have developed exceptions to the general rule, including:
- the express or implied agreement to assume the selling company’s liabilities
- an asset sale that constitutes a de facto merger
- an asset sale that is for the fraudulent intention of avoiding liability for the seller’s debts
- a sale in which the purchaser corporation is simply a restructured or reorganized form of the seller’s corporate entity, and
- when necessary, as considered in Einhorn, to protect important employment-related policies.
The Third Circuit held that a purchaser of assets, like the purchaser in the Einhorn case, may be liable under ERISA for delinquent pension and welfare plan contributions of the seller in cases in which the buyer had notice of the liability for those contributions before the sale and there exists sufficient evidence of continuity of operations between the buyer and seller. The Third Circuit court further held that the notice inquiry centers on whether the buyer knows about the debts, not whether the buyer knows that the funds intend to seek recovery. The Third Circuit noted the following relevant factors with respect to the continuing operations requirement:
- continuity of the workforce, management, equipment and location
- completion of work begun by the predecessor, and
- constancy of customers.
The Einhorn decision, together with several other relevant cases, highlights the increasing scope of successor liability in the context of asset sales. Asset purchasers may be unable to avoid withdrawal liability or liability for a seller’s delinquent contributions to a multiemployer plan, even if the purchase agreement expressly provides that the seller will retain such liability. Asset buyers should therefore perform due diligence and assess risk accordingly in cases in which a seller has multiemployer plan liabilities. To the extent such liabilities exist, buyers could consider that the purchase proceeds be applied in part to satisfy them as a condition to the sale. We encourage any clients considering an asset purchase or other investment in the United States to contact us for further information on issues to be addressed in order to achieve your objectives.