Acquirers of businesses often prefer to buy the assets of a seller, rather than the stock, to avoid assuming the seller’s liabilities. Indeed, the general common law rule is that a purchaser of assets does not assume the seller’s liabilities absent an agreement to do so, fraud or other inequitable conduct between the parties, whereas in a stock sale, the buyer steps into the shoes of the seller and assumes all assets and liabilities of the seller. In an asset sale, the seller, in turn, would typically use part or all of the sale proceeds to pay its liabilities. During the pre-sale due diligence process, the parties typically exchange information about themselves including, most importantly, information concerning the seller’s assets, actual and potential liabilities and claims, employee and employee benefits information and so on, and the acquirer often hires many of the seller’s employees in order to carry on the business.
Unwittingly, however, asset purchasers may, under recent decisions, actually assume liability for ERISA and other employment-related liabilities and claims despite an intention to the contrary. Federal circuit and district courts have departed from the general rule and expanded liability under the federal common law successorship doctrine. For example, in a 2011 decision in Einhorn v. M.L. Ruberton Construction Co., 632 F. 3d 89 (3d Cir. 2011), Ruberton agreed to purchase assets and hire employees of Statewide, a construction contractor. Ruberton took over several of Statewide existing projects as well. Under two collective bargaining agreements, Statewide was delinquent in making employee benefit contributions to a union’s pension and welfare funds and, as part of a deal struck among the parties and the union, Statewide agreed to remit the payments owed to the funds. After the sale closed, Statewide defaulted, and the funds’ administrator sued Ruberton to recover the delinquent funds contributions. See Reed v. EnviroTech Remediation Services, Inc. et. al., Civ. No. 09-1976 (D. Minn. July 1, 2011).
The Third Circuit Court of Appeals applied the successorship doctrine to hold Ruberton liable for Statewide’s debts to the ERISA funds to “vindicate important federal statutory policy” and because Ruberton had notice of the liability prior to sale and there was sufficient continuity of Statewide’s operations after the sale. Id. at 99. This same rationale has been used to hold an asset purchaser liable for claims of employment discrimination, FLSA wage and hour claims, and claims of unfair labor practices under the National Labor Relations Act brought against the seller of which the purchaser was aware at the time of sale. See Brzozowski v. Correctional Physician Services, 360 F. 3d 173 (3d Cir. 2004) ; Steinbach v. Hubbard, 51 F. 3d 843 (9th Cir. 1995) ; Golden State Bottling Co., 414 U.S. 168 (1973) .
The bottom line: Buyer beware if you are or may be a “successor” to the seller! Asset purchasers must pay careful attention to due diligence information and understand that they may be unable to legally avoid responsibility for ERISA and other employment/labor-related claims and liabilities of the seller. In order to best protect themselves against what happened to Ruberton and others in the cases discussed above, these issues must be factored into the negotiations of the purchase price, indemnification obligations, mandatory payments, reserves, and other terms of the deal.