Insight

CONSIDERATIONS IN PURCHASING A UNIONIZED BUSINESS

CONSIDERATIONS IN PURCHASING A UNIONIZED BUSINESS

Gary R. Pannone

Gary R. Pannone

March 28, 2022 10:25 AM

When a buyer decides to acquire a unionized business that is subject to the terms of a collective bargaining agreement (“CBA”), it is important for the buyer to take steps prior to the closing so that it can protect its rights vis-à-vis the unionized employees of the seller.

Structuring the Transaction

Structuring the transaction as a stock acquisition versus an asset transaction could make a difference for the buyer as it relates to the status of the seller’s obligations to the union. If the acquisition is structured as a stock transfer, the acquiring company “steps into the shoes” of the target and is obligated to abide by the terms of the existing collective bargaining agreement. This means that the buyer is not able to change the terms and conditions of employment for the employees covered by the existing CBA for the remaining term of the union agreement. If, however, the acquisition is structured as an asset transaction, it is possible that the acquiring entity may not be obligated to assume the existing CBA, or even recognize the union.

In an asset transaction, the buyer may be obligated to recognize and bargain with the predecessor’s union under the following circumstances: (1) the majority of the company’s workforce was previously employed by the seller, and (2) there is substantial continuity of the two companies’ business operations. If the buyer is not acquiring the employees as part of the transaction, or union-represented employees of the seller will be merged with the buyer’s group of employees, it is arguable that there may not be any continued obligations between the buyer and the union.

Important Questions & Considerations

One of the determinants as to whether a buyer is obligated to recognize the seller’s union as the collective bargaining representative of employees is the degree to which the buyer has hired the seller’s employees and continues to operate the business as the seller did. In other words, is there substantial continuity of business at the new business? If the buyer hires none or a small minority of the seller’s employees, there could be an argument that the buyer has no obligation to recognize the union because the buyer is not a successor to the seller. There are a number of factors that are taken into account in determining whether a buyer in an asset purchase is a successor, including:

• what percentage of the seller’s employees are hired by the buyer;• whether the wages, benefits and working conditions are different from those of the seller;• whether the equipment and products manufactured by the buyer are the same as those of the seller;• whether management has changed, and

• the amount of integration between the seller’s other employees and the employees hired to work in the purchased facility.

If the buyer’s business is substantially different than the seller’s business and the employees are performing different jobs, there also may not be an obligation for the purchaser to recognize the union. It is important for the buyer to carefully analyze how it intends to operate well before the company takes over the operations, so it can potentially make strategic decisions and not inadvertently waive any rights.

Even in situations in which the buyer becomes the successor for the seller’s employees, the buyer generally has the right to elect, not adopt, the CBA that was in place between the seller and the union. Instead, the purchaser may set different initial terms and conditions of employment and then bargain with the union for a new CBA. Taking this step is important in that the CBA is the contract that governs the terms and conditions of the bargaining unit employees’ employment. The buyer will want to craft a CBA specific to their business and operations, not the seller’s.

Buyer’s Risks of Being a Successor

It is important to note that the buyer could lose its right to establish terms and conditions different from those contained in the predecessor’s CBA if the buyer is deemed a successor to the seller as it relates to the CBA. This could occur if the buyer misleads the seller’s employees into believing they will be retained or hired after the acquisition without changes to their wages, hours, or terms and conditions of employment.

In this case, it could be determined that the buyer has waived its right to establish new terms and conditions of employment and is obligated to follow the predecessor’s CBA as the status quo until the company can potentially negotiate new terms. To avoid being considered a successor to the seller as it relates to the terms of the CBA, the buyer should make clear that it will not be adopting the existing CBA, but instead, that any offers of employment post-acquisition will be under new terms and conditions.

Special care should be taken at every step of the transaction, including in the transaction documents, in all announcements and employee communications, and in any offer letters or hiring documents provided to the employees. The buyer should be careful in deciding to adopt the terms of the seller’s CBA as it relates to the impact over time from a financial and an operations perspective.

Evaluating the Existing CBA & Negotiating a New CBA

An important starting point is to evaluate the CBA’s economic provisions, including wages, bonuses and benefits. Even if the employees’ current wages are not higher than what the company is willing to pay, many CBAs include automatic annual increases with little or no consideration for employee performance. There can also be significant costs associated with medical benefits and other benefits, especially if the company does not have the ability under the CBA to change those benefits mid-contract. If there is an existing pension plan, the employer also would be responsible for any required contributions thereunder.

Possibly an even larger liability relates to multi-employer pension plans. Many multi-employer pension plans are underfunded, and employers that withdraw can be responsible for significant withdrawal liability costs. This alone would be reason to not adopt the predecessor’s CBA. A company should also strongly weigh whether the CBA’s noneconomic provisions fit with its own specific business and operations. Important provisions to consider include the CBA’s procedures regarding how employees are promoted, how overtime is assigned, employee hiring and layoffs, employee grievances and arbitration, company neutrality provisions, no strike clauses, subcontracting and management rights provisions.

Once a CBA is in place, it establishes all of these items for the term of the CBA, which is typically three to five years. Furthermore, the provisions then serve as the starting point for the next CBA negotiation, and it can be extremely difficult to reduce or pull back on provisions once they are established. Because of this, most companies will want to invest the resources to negotiate a new CBA at the time of the acquisition, rather than adopting the predecessor’s CBA.

Deciding to Move Forward as Union vs. Non-Union

It is important for the buyer to weigh the differences in operating a union versus non-union facility as it relates to everyday operations relative to interactions with the bargaining unit employees. One of the main differences in operating a unionized facility is that often, the company has less flexibility with a number of matters. For instance, in a non-union setting, the company has wide discretion in hiring, promotions and employee terminations. In union facilities, hiring decisions can be limited by recall rights of previously laid off employees or by requirements to first offer the position to an existing bargaining unit employee.

Similarly, many CBAs have strict procedures on how employees may be promoted. Where the company otherwise might be able to promote based on merit, many CBAs rely on seniority. Employee terminations also are typically limited. Generally, in the non-union setting, employees are at-will, and the company has wide discretion to act as it sees fit. Most CBAs, though, restrict terminations to those “for cause” and violations of established work rules. This can make it difficult to dismiss underperforming employees.

Although there are many unionized facilities with excellent employee-management relationships, it is not uncommon for

an adversarial “us versus them” culture to arise, especially during contract negotiations, in situations of discipline and terminations, and even with larger business decisions.

Depending on the worksite, employee grievances can be commonplace, and the handling of these grievances often requires multiple steps of management involvement and review, written responses and appeals. Failure to correctly follow the steps can result in a decision against the company and in favor of the employee. Companies also have to be mindful of the precedent created by grievance and arbitration decisions, as final decisions can arguably govern similar matters in the future.

In Closing

When acquiring a unionized business, the buyer must be mindful of these differences. Even outside the terms of the CBA, operating with a union can affect how the company communicates, interacts and even motivates its workforce. Failure to consider the differences before the transaction is closed could result in unnecessary tension in the workforce that have long-lasting effects on the successful operation of the business. For further information about buying or selling a business with or without a unionized workforce, or other business matters, please contact PLDO Managing Principal Gary R. Pannone at 401-824-5100 or email gpannone@pldolaw.com.

Related Articles

IN PARTNERSHIP

Beyond Business: The Personal Touch in M&A Transactions


by Justin Smulison

The stakes are always high in a business transaction because real people are often embarking on a once-in-a-lifetime event. Tiffany & Bosco M&A/Business Solutions Practice Group co-chairs Jim O’Sullivan and May Lu discuss their approach to helping business leaders make life-changing decisions and how professional partnerships strengthen their results.

Headshot of male lawyer in dark suit and red tie, and headshot of female lawyer in dark suit and gla

From Russia, With Law


by Best Lawyers

The bite of U.S. sanctions aside, Cleary Gottlieb partner Yulia Solomakhina sees great promise for commerce and the law as Russia increasingly embraces markets and technology.

An Interview With Cleary Gottlieb

How Corporate Law in France Is Navigating the Trade Wars


by Best Lawyers

Bertrand Cardi and Cyril Bonan discuss M&A, protectionism, and the trade wars' impact in France.

An Interview With Darrois Villey Maillot Broc

Merging Business and Responsibility: Gilbert + Tobin


by Best Lawyers

Attorneys Costas Condoleon and Sam Nickless from the Australian firm Gilbert + Tobin discuss the firm's 2020 award, how Australia’s Corporate Law practice is preparing for the world’s transforming economic landscape, and the international community’s demands of its businesses.

Gilbert + Tobin 2020 LFOTY Interview

"Lawyer of the Year"


Headshot of the D.C. Lawyer of the Year Honoree

Adam J. August

Corporate Law

Washington, D.C., VA

2024

Mergers and Acquisitions Law in Texas: Top Legal Considerations for M&A Deals


by Best Lawyers

Mergers and acquisitions are major events for many stakeholders involved in businesses. Learn more about mergers and acquisitions law in the state of Texas.

Two animated figures shaking hands and divided by red and white space

A Consumer's Guide to Business Litigation: Protecting Your Rights and Interests


by Best Lawyers

Business litigation is not limited only to organizations. It’s a potentially useful option for consumers as well. Learn more about business litigation below.

Three animated businessmen review a contract on top of a magnifying glass

Protecting High-level Executives With the Apex Doctrine


by Sara Collin

The Apex Doctrine, developed to shield high-level executives from inappropriate depositions, is a beneficial asset to lawyers and clients, at least in the states where it’s been adopted.

Apex Doctrine Protects Executives

Announcing the 2022 Best Lawyers: The Corporate Law and Commercial Litigation Issue


by Best Lawyers

The first edition of Best Lawyers: The Corporate Law and Commercial Litigation Issues features thought leadership articles from attorneys around the nation, as well as listings in more than 70 practice areas.

Corporate and Commercial Issue

Will Recent Boeing Settlements Create Tailwinds In Corporate Law?


by Justin Smulison

Prominent litigation against Boeing is setting a precedent of accountability, professionalism and commitment among company boards as well as ushering ESG further into the courtroom to help monitor and prevent safety issues.

Recent Boeing Settlements and Corporate Law

Hollywood Union Strike Threat is Playing Out Under Different Environment


by John Ettorre

Workers in Hollywood are threatening to strike if a deal with studios cannot be reached.

Hollywood Workers Threatening to Strike

Working With Changes


by Best Lawyers

Carolyn Pugsley, the Joint Global Head of Practice for Corporate, Australia at Herbert Smith and Freehills, discusses policy changes affecting the M&A market in Australia as well as the impact of the pandemic on the practice.

An Interview With Herbert Smith and Freehills

Guidelines for Acquisitions of Infrastructure Assets


by Posse Herrera Ruiz

A Colombian firm gives merger and acquisition insights to assess risks in the purchase of potentially tainted assets.

Acquisitions of Infrastructure Assets

Leading the Evolution in Workplace Law


by Best Lawyers

Colin G.M. Gibson discusses workplace safety, issues such as raising the minimum wage, and job-protected leaves. 

An Interview With Harris & Company

How Technological Advances Can Help Corporate Law


by Best Lawyers

Dieter Gericke and Benjamin Leisinger discuss how being aware of technological advances helps them provide corporate financial advice.

An Interview With Homburger

How This Firm Is Shaping the Economic Future of Ukraine


by Best Lawyers

Denis Lysenko discusses how AEQUO has helped build a new business environment.

An Interview With AEQUO

Trending Articles

2025 Best Lawyers Awards Announced: Honoring Outstanding Legal Professionals Across the U.S.


by Jennifer Verta

Introducing the 31st edition of The Best Lawyers in America and the fifth edition of Best Lawyers: Ones to Watch in America.

Digital map of the United States illuminated by numerous bright lights

Unveiling the 2025 Best Lawyers Awards Canada: Celebrating Legal Excellence


by Jennifer Verta

Presenting the 19th edition of The Best Lawyers in Canada and the 4th edition of Best Lawyers: Ones to Watch in Canada.

Digital map of Canadathis on illuminated by numerous bright lights

Legal Distinction on Display: 15th Edition of The Best Lawyers in France™


by Best Lawyers

The industry’s best lawyers and firms working in France are revealed in the newly released, comprehensive the 15th Edition of The Best Lawyers in France™.

French flag in front of country's outline

Announcing the 13th Edition of Best Lawyers Rankings in the United Kingdom


by Best Lawyers

Best Lawyers is proud to announce the newest edition of legal rankings in the United Kingdom, marking the 13th consecutive edition of awards in the country.

British flag in front of country's outline

Announcing the 16th Edition of the Best Lawyers in Germany Rankings


by Best Lawyers

Best Lawyers announces the 16th edition of The Best Lawyers in Germany™, featuring a unique set of rankings that highlights Germany's top legal talent.

German flag in front of country's outline

Celebrating Excellence in Law: 11th Edition of Best Lawyers in Italy™


by Best Lawyers

Best Lawyers announces the 11th edition of The Best Lawyers in Italy™, which features an elite list of awards showcasing Italy's current legal talent.

Italian flag in front of country's outline

Combating Nuclear Verdicts: Empirically Supported Strategies to Deflate the Effects of Anchoring Bias


by Sloan L. Abernathy

Sometimes a verdict can be the difference between amicability and nuclear level developments. But what is anchoring bias and how can strategy combat this?

Lawyer speaking in courtroom with crowd and judge in the foreground

Things to Do Before a Car Accident Happens to You


by Ellie Shaffer

In a car accident, certain things are beyond the point of no return, while some are well within an individual's control. Here's how to stay legally prepared.

Car dashcam recording street ahead

The Push and Pitfalls of New York’s Attempt to Expand Wrongful Death Recovery


by Elizabeth M. Midgley and V. Christopher Potenza

The New York State Legislature recently went about updating certain wrongful death provisions and how they can be carried out in the future. Here's the latest.

Red tape blocking off a section of street

Find the Best Lawyers for Your Needs


by Jennifer Verta

Discover how Best Lawyers simplifies the attorney search process.

A focused woman with dark hair wearing a green top and beige blazer, working on a tablet in a dimly

Key Developments and Trends in U.S. Commercial Litigation


by Justin Smulison

Whether it's multibillion-dollar water cleanliness verdicts or college athletes vying for the right to compensation, the state of litigation remains strong.

Basketball sits in front of stacks of money

Is Premises Liability the Same as Negligence?


by Jeremy Wilson and Taylor Rodney Marks

In today's age, we are always on the move, often inhabiting spaces we don't own. But what happens when someone else's property injures you or someone you know?

A pair of silhouetted legs falling down a hole with yellow background

Prop 36 California 2024: California’s Path to Stricter Sentencing and Criminal Justice Reform


by Jennifer Verta

Explore how Prop 36 could shape California's sentencing laws and justice reform.

Illustrated Hands Breaking Chains Against a Bright Red Background

Woman on a Mission


by Rebecca Blackwell

Baker Botts partner and intellectual property chair Christa Brown-Sanford discusses how she juggles work, personal life, being a mentor and leadership duties.

Woman in green dress crossing her arms and posing for headshot

Why Backlinks Matter for Law Firm SEO


by Nancy Lippincott

The key ingredient to a law firm's online search visibility could lie within backlinks, a driving factor in the industry's efforts to build an SEO-based future.

Collection of search bars, menus and posts in front of gray background

Best Lawyers Celebrates Women in the Law: Ninth Edition


by Alliccia Odeyemi

Released in both print and digital form, Best Lawyers Ninth Edition of Women in the Law features stories of inspiring leadership and timely legal issues.

Lawyer in green dress stands with hands on table and cityscape in background