Getting More than You Paid for in an Asset Purchase
Let me paint a picture: Acquire & Company had been targeting Picture Perfect Co. for acquisition in order to expand its market. After some negotiations, Acquire decided not to purchase Picture Perfect’s stock and, instead, decided to purchase its assets. Acquire made the decision because it discovered that Picture Perfect had pending claims against it for violations of the Fair Labor Standards Act (FLSA) and other federal labor law statutes. Acquire knew that if it purchased Picture Perfect’s stock it would also be assuming its liabilities. Acquire believed this could be avoided if it only purchased Picture Perfect’s assets.
But several months later, Acquire was served as a successor to Picture Perfect’s liability under the federal labor law statutes. Needless to say, Acquire was surprised and now wonders how it could be held liable for something with which it had nothing to do.
Acquire was correct in concluding that if it purchased Picture Perfect’s stock it would also be assuming its liabilities. When a purchasing company acquires a target company through the purchase of its stock, the purchasing company is generally buying everything the target company owns, including the name, goodwill, accounts, receivables and liabilities.
However, when the target company is acquired by purchase of its assets alone, the general rule is that the purchasing company (the successor) does not assume the liabilities of the target company (the predecessor), but wait for it because here it comes—unless an exception applies.
Over the past few decades, in the employment context, the federal circuit courts have been actively eroding the general rule that a purchaser-successor does not assume the liabilities of a target-predecessor by acquiring the predecessor via an asset purchase. The Ninth Circuit, for example, has extended liability for FLSA violations of the predecessor where the purchasing company is a bonafide successor, had notice of the potential liability, and where the predecessor cannot provide adequate relief directly.
More recently, the Seventh Circuit made the exception to labor and employment successor liability even easier for a plaintiff to meet. In Teed v. Thomas & Betts Power Solutions, the Seventh Circuit suggested “that successor liability is appropriate in suits to enforce federal labor or employment laws—even when the successor disclaimed liability when it acquired the assets in question—unless there is a good reason to withhold such liability.” To put it another way, the Seventh Circuit essentially stated a new rule: successor liability will arise from an asset purchase unless the successor can articulate a good reason that it should not be held to the liabilities of the predecessor.
Oregon state law has also had recent movement in the context of employment successor liability. In last year’s Blachana v. BOLI decision, the Oregon court of appeals considered whether the purchaser of a sports bar and restaurant business was a successor for purposes of state wage laws when the successor acquired some of the predecessor’s assets and where the successor business provided similar services out of the same location as the predecessor business.
The court of appeals reasoned that “the employer that received the benefit of the claimant’s services should be held liable for the obligation it incurred.” Further, the court concluded that “successor,” under the applicable state wage laws, is one that assumed the legal rights and obligations of the predecessor. The Blachana court ultimately concluded that the purchasing company was not a true “successor” because it had not assumed the legal rights or obligations of the predecessor, the predecessor and purchasing companies were different entities, there was no ongoing contractual relationship between the entities, and only some, not all, of the assets were transferred.
Whether the court of appeals is correct or not will be determined in the near future, as the Oregon Supreme Court has heard argument of the matter and an opinion is expected soon. At this point, it is unclear how the Oregon Supreme Court will rule.
Amidst the growing number of court opinions expanding the reach of federal labor and employment laws to asset purchasers, business owners need to be vigilant. Any business that purchases the assets of another entity must consider the possibility of being characterized as a successor and try to guard against the imposition of successor liability.
First, purchasers should review the purchasing company’s litigation history to determine if there are outstanding claims that have not been fully satisfied, whether there are any pending claims with any state or federal agencies and whether there are any current suits in court. Upon finding such a claim or pending suits, steps should be taken to have those claims settled or otherwise concluded prior to finalizing the asset purchase. The asset sale contract should include clauses and representations by the selling company indicating that no suits or claims are pending. The purchaser should also make it clear that it is not assuming any liabilities of the selling company.
Finally, purchasers should also consider having an indemnity, hold harmless and an obligation to defend clause in the asset sale contract. Having such a provision can save a business owner some heartburn down the road should a claim or suit pop out of the sky.
Samuel Hernandez is an attorney with Barran Liebman LLP. He provides compliance advice to employers and represents management in employment law litigation. Contact him at 503-276-2175 or shernandez@barran.com.
