With the
financial crisis and recession behind us, mergers and acquisitions have picked
up dramatically over the past several years. In 2015, more than 25,000 M&A
deals were announced in the United States, valued at trillions of dollars,
primarily involving companies in the hospitality, health care, pharmaceuticals,
energy, and technology industries. This year and next, most financial experts
foresee an increasing number of these transactions taking place.
In an M&A
transaction, the buyer must determine whether it will acquire only the assets
of the target company or acquire both the assets and liabilities of that
company. Based on that determination, the transaction can be structured as an
asset acquisition or a stock acquisition. In a stock transaction (including the
typical merger), there is no technical change other than pure ownership. The
new owner merely steps into the shoes of the selling shareholders and inherits
all assets and liabilities of the business.
In an asset
deal, however, a new owner may accept or reject specific assets and
liabilities. While this structure typically leaves the buyer free to terminate
many of the seller’s employees and bring in its own management team, there are
circumstances under which an asset purchaser may nevertheless be liable if care
is not taken.
Buyers and
sellers alike should carefully consider the labor and employment implications
of a proposed transaction and not merely focus on business and financial
issues. Otherwise, the parties may walk into multimillion dollar class and
collective action lawsuits, incur serious benefit plan obligations, and create
unnecessary employee morale issues.
Some of the more
serious issues facing hospitality entities might include employee misclassification
(as independent contractors or as exempt white-collar employees not entitled to
overtime pay), non-compete and trade secret agreements, union collective
bargaining agreements, immigration matters, discrimination in employee layoff
and retention, individual employment agreement issues, executive compensation
plans, and federal and state facility closing and mass layoff laws.
When an M&A
transaction is contemplated, in-house counsel and outside corporate counsel
must consider all employment and labor implications of the transaction early in
the planning process. As part of their due diligence, counsel for the buyer
should solicit and acquire copies of, among other things, all of the target
company’s individual employment contracts, executive compensation plans,
employee handbooks and personnel manuals, union collective bargaining
agreements, benefit plan documents, and information with respect to all of the
target’s pending federal, state and local governmental employment lawsuits,
administrative proceedings, and other matters.
From a hotel
buyer’s perspective, all of the employment and labor implications should be
considered quite early in the transaction process, while the buyer still has
the opportunity to withdraw from the transaction. A buyer must decide whether
it is willing to assume the target business’s labor and employment-related
liabilities and union obligations (if any), and how these considerations might
impact the purchase price. To accomplish its objectives, the buyer will have to
carefully negotiate with the seller and then draft the necessary purchase
agreement language to identify the significant assets.
Whether to buy a
unionized hotel or restaurant will depend upon the strength and weaknesses of
the unions involved, language in the collective bargaining agreements, and
collateral obligations that might arise under any currently outstanding orders
or from pending proceedings before the National Labor Relations Board (“NLRB”
or “Board”). Further, in some locations, with respect to certain industries
(e.g., the building service and maintenance industry in New York), local
governments have enacted laws, rules, and regulations requiring an acquiring
company to continue to employ the seller’s employees for 60 or 90 days.
Pursuant to those laws, prospective buyers might not legally be able to bring
in their own workforce to take over the acquired operations for many months, if
at all.
The Employee
Retirement Income Security Act (“ERISA”) creates significant potential
liability upon an acquiring company with respect to multi-employer pension
plans that have been created and maintained pursuant to the Taft-Hartley Act.
For example, upon a hotel or restaurant shutdown or mass layoff, ERISA imposes
upon buyers in some circumstances the obligation to absorb a withdrawal
liability that normally would attach to a seller. Buyer’s counsel in these
cases must carefully consider whether the buyer wishes to assume such liability
and whether to insist upon a reduction in the purchase price to cover the
potential cost of that liability.
And, counsel for the seller, of course, will
want to insure that any such liability is shifted to the buyer. In a stock
transaction on the other hand, aside from the change in ownership, there is no
legally cognizable change in the business. Thus, a withdrawal liability will
not be triggered (although the new stock owner will inherit ongoing pension
fund obligations). Once the decision has been made with respect to whether the
transaction will be a stock or an asset transaction, labor and employment law
counsel for both seller and buyer must pay careful attention to the drafting of
the purchase agreement, its representations and warranties, indemnities,
disclosures, and related matters.
Additionally,
employers intending to downsize a workforce after an acquisition must pay
particular attention to obtaining a census of employees to avoid allegations of
selective discrimination in the process. Once the dust settles after an
acquisition has been implemented, housekeeping and front-desk employees,
managers, and others may find themselves facing a brave new world. The
consequences of a restructuring often are unintended as to employee morale and
employment policies. Employees treated with dignity are less likely to become
class action plaintiffs than those quickly shown the door. In any subsequent
litigation, jurors tend to be less sympathetic to employers that fail to
consider the impact of the transaction upon employees and their families. Many
of these issues should be dealt with upfront early during the sale and
acquisition process.
As the U.S.
economy rebounds and corporations pick up the pace of restructuring,
acquisitions and mergers, it is essential that complex and subtle labor and
employment implications of these transactions be considered and dealt with at
an early stage, so as to avoid or limit potential liabilities.
What Hospitality
Employers Should Do Now
As part of the
due diligence process in any acquisition or merger, hospitality employers
should do the following:
·
Have your employment counsel request from the company
to be acquired or merged with:
·
all individual employment and union collective
bargaining agreements, confidentiality and non-compete agreements, employee
handbooks and personnel manuals, executive compensation plans, and benefit fund
documents, including summary plan descriptions;
·
all files pertaining to any currently open or pending
federal, state, and local governmental employment lawsuits and administrative
proceedings, as well as to recently closed matters;
·
a complete census of current employees, their job
titles, compensation levels, and, to the extent available in company records or
by visual observation, their ethnicities, ages, disabilities, and other legally
protected characteristics; and
·
information regarding the economic valuation of
different properties, facilities, and related assets in order to target asking
prices if a decision were to be made to dispose of any.
·
Assemble a team of legal and human resource professionals
to focus on the details of the acquisition or merger.
·
Consult with outside labor and employment law counsel
with respect to any or all of the above matters.
A version of
this article originally appeared in the Take 5 newsletter “Five Key Issues Facing
Employers in the Hospitality Industry.”
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