Asset purchases of businesses is a steadily increasing commercial practice. There were 5,185 such business transactions in 2018, according to Standard & Poor's reports, while 2019 is on pace for more with 5,254 projected based on the deals done through late June. For that many deals, it is time to start paying closer attention to the employment law liabilities that buyers may inherit.
Asset purchasers disclaim liability on claims against their sellers. While shedding those liabilities is intrinsic to the structure of every asset purchase, statutory employment laws impose an oft-overlooked limitation on that disclaimer. This is not new: It began with Golden State Bottling Co. v. National Labor Relations Board1 recognizing successor liability under the National Labor Relations Act. That doctrine now encompasses all federal employment laws.
U.S. Equal Employment Opportunity Commission v. Phase II Investments Inc.2 is illustrative. There, Maritime Autowash had sold its assets for $15 million, while employees had a pending charge of discrimination under Title VII of the Civil Rights Act at the EEOC. The buyer — Mister Car Wash — knew of this EEOC charge, which its due diligence identified, and explicitly provided in the asset purchase agreement that it was not assuming any liabilities of the seller.
When the EEOC later sued, it named not only Maritime but also Mister and Phase II, which had subsequently acquired Mister, as defendants. Mister moved to dismiss this lawsuit claiming that "it would be inequitable to apply successor liability in this case" because it "never employed" the individuals alleging discrimination; that "the discriminatory actions ... were not performed by Mister"; and that "there is no fairly traceable connection between the ... alleged injuries and Mister Car Wash."
Good points all, but unavailing. Successor liability under Title VII and other federal employment statutes is a judicially designed construct to ensure that constituents protected by those statutes are not left "without a remedy or with an incomplete remedy." Such successor liability precedents place notions of public policy interests ahead of both corporate formalities and certain rules of contract privity.
There are three focal points in every successorship case: (1) notice to the purchaser; (2) continuity of the business; and (3) the ability of the seller to provide relief. These are the contemporary counterparts of the three fates of Greek mythology: Clotho, who spun the thread of fate; Lachesis, who dispensed it; and Atropos, who cut that thread off. The ancient Greeks had a healthy regard for fate; 21st century lawyers have too little. That needs to change.
Reading the tripartite test for successor liability, it is enticing to conclude that a deal is safe. This is what the Greeks called hubris. Remember Oedipus, who also thought he could escape the prophecy of his fate? Even when it appears one of those factors ought to result in a buyer escaping successorship liability, any reading of those factors needs to be grounded in the case law because it sweeps more than a literal reading of those tripartite factors might suggest.
To see the full article click here
1. Golden State Bottling Co. v. NLRB, 414 U.S. 168 (1973)
2. EEOC v. Phase 2 Investments Inc., 310 F. Supp. 3d 550 (D. Md. 2018)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.