THE ACCIDENTAL SUCCESSOR: Asset Buyers Must Take Care to Avoid Unintentionally Becoming a “Perfectly Clear Successor”

Asset Buyers, beware.  If the Seller has union-represented employees, and you intend to hire some or all of those employees and operate the assets as a union-free employer, take care to avoid becoming an accidental successor.

As a recent decision of the D.C. Circuit Court of Appeals reminds us, the terms of the asset purchase agreement (APA) and all communications with Seller’s employees – by both Buyer and Seller – must be carefully managed.  Otherwise, Buyer can accidentally become a “perfectly clear successor” that is required to:

• initially honor the terms of the existing collective bargaining agreement (CBA),
• recognize the current labor union as the bargaining representative of the unionized Seller employees whom Buyer hires, and
• bargain with the union over the terms of a new CBA for those employees going forward.

THE ASSET BUYER’S OPTIONS

Under the National Labor Relations Act, if an asset Seller has union-represented employees, and Buyer wishes to hire some or all of them and operate the assets, Buyer has three basic options:

• Assume the CBA. Buyer will be bound by the terms of the CBA from the Closing Date and will be obligated to recognize the union as the bargaining representative of the employees covered by the CBA.  In most cases, the union will have no duty to bargain over changes to the CBA until the CBA is ready to expire – perhaps years after Closing.
• Try to remain union-free. If it declines to assume the CBA, Buyer will normally be free to set its own terms and conditions of employment at Closing but will become a “regular successor” if and when it reaches a point where a majority of its employees in an appropriate bargaining unit consist of former union-represented employees of Seller.  If that point is reached, Buyer will be obligated to recognize the union as bargaining representative and will be prohibited from changing the terms and conditions of employment for the union-represented employees until it bargains to agreement or impasse with the union.
• Become a “perfectly clear successor.” Buyer can do this intentionally by stating to Seller’s unionized employees that Buyer intends to hire all or most of them and that it will honor the terms of the current CBA temporarily until it can negotiate a new CBA with the union.  As a perfectly clear successor, Buyer will be required to recognize the union as bargaining representative and to honor the terms of the CBA initially – but will be immediately free (either before or after Closing) to negotiate a new CBA with the union.  The terms of Seller’s CBA will remain in effect only until Buyer has bargained to agreement or impasse with the union over new terms.

THE MISTAKE AND HOW TO AVOID IT

As the D. C. Circuit recently reminded us, an asset Buyer can become a “perfectly clear successor” accidentally.  In First Student, Inc. v. NLRB, 935 F.3d 604 (D.C. Cir. 2019), the court explained that an asset Buyer can become a “perfectly clear successor” simply by expressing a desire to make offers to most or all of the Seller’s unionized employees – unless the Buyer simultaneously makes clear to those employees (1) that it will not honor the Seller’s CBA and (2) that all offers of employment will be for new terms and conditions of employment established by the Buyer.  To avoid this mistake, the Buyer should make both points clear in its very first communication with Seller’s employees.

In addition, some past cases on this issue held that Buyer was a “perfectly clear successor” solely because the Seller informed its employees that the Buyer intended to make offers to some or all of them but failed to make those two points clear, and Buyer failed to correct the flawed communication promptly upon learning of it.  Therefore, Buyers should also ensure that the APA includes both (a) a representation that the Seller and its agents have made no such statements to employees and (b) a covenant that the Seller and its agents will not do so.

CAVEAT EMPTOR

When purchasing assets from a unionized employer, Buyer Beware.  Don’t become an Accidental Successor.

Bryan Cave Leighton Paisner LLP has a team of knowledgeable lawyers and other professionals prepared to help employers review their employee policies. If you or your organization would like more information on this or any other employment issue, please contact an attorney in the Employment and Labor practice group.